What Brexit means for NZ investors

Nikko Asset Management provides it take on what Brexit means for New Zealand investors.

Monday, June 27th 2016, 5:32PM

In our view, it is important to remember that Britain remains a member of the EU for at least the next two years so there is no need for knee-jerk reactions. Markets had, perhaps complacently, assumed a Remain vote and it is not unexpected that some volatility should arise. In the short term, we can expect this market volatility to continue as uncertainty prevails, but this does not mean that investors should panic.

Negotiating an exit will take time

Over the coming months, Britain will need to negotiate trade agreements not only with Europe but also its other global trading partners. As those negotiations take place, we’ll learn more about what this may mean for business and finance.

The worst case will be that the World Trade Organisation’s minimum rules apply and the best case that all parties negotiate to maintain status quo trading benefits for their mutual advantage. The final outcome is likely to fall somewhere in between these two scenarios, but the precise details will only start to emerge in several months’ time.

During this period of uncertainty, markets may price in more of the downside than will eventuate in practice.

The sharp drop in the British pound sterling is not necessarily a bad thing for Britain. Many central banks around the world would love to see a 10% devaluation in their currency –
Britain’s exporters have just had a boost to earnings and it should help offset any fall in domestic demand. On the other hand, imports will either reduce or there will be some price inflation for the British consumer.

Implications for New Zealand should be minimal, although market volatility is inescapable

The direct impact on New Zealand is likely to be minimal, although market volatility is global and our markets won’t be immune. In our view, currency movements are likely to have the most significant influence.

Although much of the media appears to be relishing predictions of doom and gloom, it’s significant to note that 52% of Britain’s populace envisages a brighter and more prosperous future outside the EU with more control over their own policies.

For many, this is a time of hope and expectation, not a time for sackcloth and ashes.

As always, one of the cardinal rules of investing is not to panic

Despite current volatility, we should remember that investing in currency, stock and bond markets is a long-term game. Now is not the time to make significant reactionary portfolio or investment changes. We cannot predict when the volatility will end, but panic-selling usually leads to investors missing out on any subsequent relief rallies. When the market comes back, as it always does, long-term investors that look through the noise and hold their nerve should benefit.

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