On Thursday 23 June 2016, the UK voted in a referendum to leave the European Union (EU). This was an unexpected event for financial markets, which had increasingly expected the UK to vote to remain.
The UK will now undergo the process of leaving the EU, which provides for a two-year period to negotiate an exit, taking into account their obligations and future relations with the EU.
Approximately $2 trillion dollars was wiped off the value of stock markets across the globe on Friday 24 June 2016, with major markets stock prices dropping to levels last seen in March/April.
To date, equity moves have been relatively minor, however, the British pound dropped substantially to its lowest level against the US dollar in 30 years.
Bond prices further strengthened on the news, particularly in perceived safe havens such as the US, Australia and Switzerland, but also in the United Kingdom itself. However, with equity and currency price movements dwarfing those from bonds, the overall effect is negative for balanced portfolios.
The UK and European economies are likely to suffer in the short term, with businesses holding back investment until they are certain of the impacts of UK’s exit.
In addition, Europe will be somewhat politically weaker as the probability of other nations leaving the EU is growing - although it remains unlikely that other countries will take action in the short to medium term.
The UK is faced with the prospect of Scotland leaving the UK, and London’s position as the global financial capital may also be threatened.
The UK economy had begun to slow due to the uncertainty around the referendum before this week, and this is likely to continue.
While the UK economy will probably be the biggest casualty from this result, it is a relatively small player in the global economy compared to the USA, China, Japan and the Eurozone itself. In 2014 it comprised of less than 5% of global GDP, so unless their exit decision leads to further departures from the EU, it is unlikely that it will have a major impact on the global economy.
What position has Vision Super taken?
In the week of the UK referendum, Vision Super took some equity positions off the table. In our view, the exit result is negative for markets both in the short term (which we are already seeing) and long term. While equity returns are likely to lower, they remain attractively priced compared to fixed income securities which have historically low yields.
We will closely monitor the risks from this decision and will take further risk off the table if it appears that they are growing, or if markets appear too confident about them. We will also consider investing further if markets become too fearful and equities become attractively priced.
In the short term, central banks around the world are likely to take measures to make sure financial markets work effectively, which should help stabilise markets, perhaps even seeing a bounce back in equity prices.
The outcome of the UK referendum is negative for markets, but on its own, it is a comparatively minor for global markets over the medium to long term.
If you have any concerns about the effects of the UK’s exit from the EU on your super, please call our Member Services team on 1300 300 820 or email email@example.com.