Brexit shocks and opportunities

    It has been two weeks since Britain’s shock vote to leave – or Brexit – the European Union and while equities markets around the world are beginning to demonstrate signs of recovery, the Bank of England is warning more economic consequences are already emerging.

    While the UK has two years to negotiate a ‘withdrawal agreement’ as stated under Article 50 of the Lisbon Treaty, the effects of the shock “yes” result were immediate. Equities markets, highly sensitive to change and instability, reacted swiftly and decisively.   The ASX posted its worst day since August 2015, with the S&P/ASX 200 ending 3.2 per cent lower, a slight drop in comparison to Japan’s Nikkei, which dropped almost 8 per cent. [1]

    Less than two weeks later most markets had recovered from the shock.  In Australia, by July 5 the benchmark S&P/ASX 200 Index had climbed within three points of the pre-referendum close.[2]

    However, the story isn’t as positive for Britain.   Prior to the referendum, the Bank of England reported a quarterly downturn of 40% in Commercial Property transactions and investors were including exit clauses to execute in the case Britain decided to leave the EU[3]. Executive Director for the Bank of England, Alex Brazier also expressed concerns about open-ended property funds that allow investors to withdraw money at short notice[4].

    Unfortunately, these concerns were founded.  On 5 July the British pound plunged to a fresh 31-year low against the US dollar, as three commercial property funds worth approximately 10 billion pounds ($17.4 billion) put a freeze on investors pulling out their money.

    What does this mean for Australia?

    While most of the potential consequences of the referendum being discussed are negative, there are several potentially positive outcomes for Australia.  Overseas investors may turn to the Australian property and funds management markets as they look for more stable investment locations. According to REA Group’s Chief Economist, Nerida Conisbee, Australia has a reputation for offering a high level of economic growth and stability with a low level of sovereign risk. She continues to assert that when there is a fall in the price of equities and increased volatility in the share market, investors tend to turn to physical assets such as property[5].

    Trilogy Funds currently has three property-based investments forecasting a return of between 8.0%pa and 9.0%pa*.  To find out more, please visit Trilogy Funds’ website. 

    The long-term impact of Brexit remains speculative; however, the Centre for Economic Performance suggests a 22% fall in British Foreign direct investment over the coming decade is likely[6]. The potential operational ramifications, lack of access to the EU market, and increased cost of trade could see foreign firms operating in Britain and their investment monies go elsewhere – including Australia.

    *Past performance is not an indicator of future performance. Net rates are net of fees and management costs and assumes no reinvestment of distributions.  The rate of return or the return of your capital invested is not guaranteed.  All investments carry risks.  A detailed explanation of the risks involved when investing with Trilogy Funds is contained in the relevant PDS.

    Disclaimer: While every effort is made to provide accurate and complete information, Trilogy Funds Management Limited does not warrant or represent that the information in this article is free from errors or omissions or is suitable for your intended use. Subject to any terms implied by law and which cannot be excluded, Trilogy Funds Management Limited accepts no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omissions or misrepresentation in information. Note: All figures are in Australian dollars unless otherwise indicated. This information is issued by Trilogy Funds Management Limited (AFSL 261425) and provides general information only. It does not provide financial product advice nor is it an offer of securities. Applications may only be accepted by completing the applicable application accompanying the relevant PDS. If you require personal advice on the suitability or other aspect of this investment, consult a licensed adviser, who will conduct an analysis based on your circumstances. Past performance is not a reliable indicator of future performance.

     

     

    [1] http://www.smh.com.au/business/markets/brexit-vote-driven-by-emotion-panic-australian-business-leaders-20160624-gpr8ux.html#ixzz4DbMlsoHy 

    [2] http://www.afr.com/markets/did-brexit-even-happen-20160701-gpw8wy#ixzz4DbHuilt2 

    [3] http://www.reuters.com/article/us-britain-eu-property-idUSKCN0YR0EH

    [4] http://www.ft.com/cms/s/0/520bbbbc-298c-11e6-8ba3-cdd781d02d89.html#axzz4DaE2nd86

    [5]  http://www.realestate.com.au/blog/brexit-impact-australian-property/

    [6]  http://cep.lse.ac.uk/pubs/download/brexit03.pdf