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Brexit and its implications for Hudson Investors

Well the momentous Brexit vote last Thursday (U.K. time) has come and gone and left a political, long run economic, and (importantly for investors) an immediate financial market tsunami in its wake.

The media coverage has been extensive but a brief recap is in order to put the event in context.

So what was and is Brexit all about?

The British PM David Cameron, in response to a growing political issue, announced before last year’s British general election that if re-elected his Tory government would work with the European Union (EU) to garner more favourable terms for British involvement in the EU. 

He was going to press for more favourable treatment around areas such as immigration and controls of laws effecting British trade.  Then at the end of the negotiation he would hold a referendum to give the British public a simple yes or no referendum to stay or leave the EU.

It all sounded great at the time and a good option to “kick the can of EU participation” down the road a bit. However in the negotiations that followed the EU did not play ball and gave the PM little in the way of substantial changes to British membership of the EU.

So he went ahead with the vote as promised and it was put to the British people and the result was a very much unexpected 52% to 48% vote in favour of the leave camp.

So what will happen now?

Well under the laws of the EU if a member country wishes to leave it needs to invoke what’s known as Clause 50 of the Lisbon Treaty which then begins a two year negotiation with the EU on the exact terms of an exit from the EU. 

This is where we are now!

So why the huge volatility in financial markets over recent days for an event that will take at least two years, if not longer, to eventuate?

Bottom line is uncertainty.  Financial markets hate uncertainty above all else and this event was effectively un-expected and so investors have reacted – as they are wont to do – in a very volatile manner.

This provides canny investors opportunities – more on that below…..

The current events are really more political than economic events.  The Brexit event has turned UK politics on its head. The PM has resigned as he said he should not be the one negotiating the terms of the exit with the EU when he promoted the Remain side of the argument.  

The Labour opposition sided with the stay campaign as well and its lacklustre campaign leading to a poor turnout of its voters for the Remain has led to calls for the Opposition Leader Jeremy Corbin to follow the PM out the door – at the time of writing his resignation appeared a very live possibility.

And just to add more fuel to the political fire the Scottish nationals have said the results showed that most Scottish people wanted to remain in the EU and so they are agitating for either a second referendum on Brexit or a veto to disallow the British parliament ratifying the exit vote. Failing this they will push for a second Scottish Independence vote that was held only 20 months ago.  

Oh and SINN FEIN (an Irish republican political party) has likewise said the pro Remain vote in Northern Island means they should have a vote there to re-join the Republic of Ireland.

So the political fallout behind a 52 to 48 Brexit yes vote could well mean the breakup of the U.K. itself.  Talk about shooting one’s self in one’s own foot!

David Cameron was asked during the campaign about the chance of a second vote in the event the referendum produced a close result; he had this to say;

 If we vote to stay, we stay, and that’s it. If we vote to leave, we leave, that’s it. You can’t have neverendums, you have referendums.”

So why is this a buying opportunity for Hudson investors?

When events like this present themselves the financial markets go into turmoil and all sorts of flights of fancy enter the mind of traders.   But it is good to stop and think about what this all means in a rational manner and see if the current turmoil presents opportunities? It does present a great buying opportunity for rational investors with a long term outlook.

So when will a Brexit actually occur?  Minimum two years if the UK government enacts Clause 50 but it likely won’t be in any hurry to start the clock running, so the time frame moves further out.

The immediate financial fallout is excessive.  The U.K. has its own currency and its own central bank.  The U.K. is not Greece and is not beholden to the powers of Brussels for its currency.  The UK has the world’s fifth largest economy. The rules relating to Financial Institution will not be changed any time soon so it is business as usual for (on some measures) the largest financial centre in the world – The City of London.

The U.K. Pound collapsed ten percent against the U.S. dollar on announcement of the vote, which if sustained, just made U.K. goods ten percent cheaper than their competitors in all sorts of markets.  

Want to have that long dreamed of trip to the mother country? Well it just got ten per cent cheaper due to a referendum decision. 

Local shares fell heavily last Friday in the wake of Brexit but not as much as offshore markets where investors fell over themselves to run for the exits.  

Japanese shares fell eight percent (due to a vote in the UK about an event that will take two plus years to play out).  Is that rational investing or are emotions running wild?

So how will Brexit impact the U.K. economy over time?

Well it won’t have unfettered access to the EU as it does now but it will negotiate access over talks in the next two years as other European countries (like Switzerland and Norway) that are not in the EU but have access to its markets.

The EU will likely play hard ball during these negotiations to try and deter other exit votes in countries where the EU is more on the nose than in Britain, such as France and The Netherlands, (anyone for FEXIT or NEXIT?) but this will take time and the markets can judge the progress over the next two years and not immediately assume the worst.

The whole European project appears set for a change or other nationalist forces will try and push for other countries to face their own exit challenges; but this is for their people to decide.

For Hudson investors this event presents opportunities to get set in long term well managed companies directly or through Managed and Index Funds that will provide growth for your portfolios for years to come.  Don’t miss the opportunity and call your adviser to discuss.

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