Global markets expect the period of volatility to continue in the short-term, and overall uncertainty to persist for some time in the wash-up from the UK’s referendum vote to leave the European Union (EU) last week, analysts say.
However, some of them said that the Brexit vote was highly unlikely to put the global economy even close to the “Lehman moment” of September, 2008.
So far, the Brexit vote has pushed regional share markets down, with the sterling plummeting to a 30-year low against the US dollar and fears of the larger risk for the region about the long-term sustainability of the EU, as a number of other member states now demand their own referendums.
Brexit will also see the UK Prime Minister, David Cameron, resign effective in October.
Australian stocks with high UK exposure were particularly hard-hit and in currency terms, the Australian dollar fell about two US cents, with the EU being currently Australia’s second largest export market and its biggest source of foreign investments
Acting head of equities at Mason Stevens, Tom Bignill, warned that, most of all, the implications of the Brexit vote might see a discontinuation of the UK as a political entity.
“The continuation of the UK as a political entity cannot be taken for granted. Scotland and Northern Ireland voted to remain in the EU but will now be forced to leave it if they remain in the UK. Calls for independence referenda in Scotland and Northern Ireland are being heard again,” he said.
However, most analysts agreed that the process of leaving the EU would take years which might add to uncertainty for business. It also risked a deterioration in new investment opportunities and the position of UK’s large corporates as they might now face a struggle to raise debt which would force them to relocate.
Eaton Vance director of global equity and portfolio manager, Chris Dyer, said the UK now has two years to negotiate the terms of its exit from the EU.
“During this period, we believe that companies will reduce investment and hiring, as they await the new rules to be written. Consumers in Europe will likely curtail spending in the uncertain environment and this will lead to a recession in Europe as a base case, while it is premature to predict whether this predicates a global recession,” he said.
However, AMP Capital’s head of investments strategy and chief economist, Shane Oliver, said it was highly unlikely the leave victory would send Europe into immediate recession, and given that only 2.7 per cent of Australian exports go to the UK, the main impact on Australia would be on financial markets.
“While the Brexit outcome knocked the $A lower, it’s still higher than it should be and the longer term downtrend looks likely to continue as the interest rate differential in favour of Australia narrows as the RBA continues cutting,” he added.
The only thing that was certain at this point was that investors were entering ‘unchartered territory” with Brexit, according to majority of the analysts
“We don’t know what the full implications of Brexit are. They may blow overs fairly quickly or they may trigger further political, market and economic chaos. Caution is probably still warranted until the picture becomes clearer,” Bignil said.
