June 2016

Creating, Managing & Protecting Your Wealth


June 2016

In this special edition we look at the impact of Britain's 52% to 48% vote to leave the European Union (EU) on your investments.

Britain votes to Leave the EU

The Brexit vote was a total surprise to the financial markets and the Bookies who are usually more accurate at predicting such events than opinion polls and economists.  Britain entered the European Union 40 years ago but kept its pound rather than adopting the Euro.

The exit vote has already caused major stress to the financial markets, with pretty much every market down. The pound and UK share markets dropped around 10% on the announcement, even oil prices were down 5%. 

The UK Government has said the long term impact on the UK economy could mean the UK economy could be 3.5% to 7% smaller by 2030 and the economy may tip into recession in the short term.

Northern Ireland, Scotland and London voted strongly to stay.  It appears  that most of the younger voters, those under 25, voted to stay. The free open immigration policy of the EU seems to be a major reason that swayed the older voters. There are currently two million EU workers residing in the UK which may have caused a resentment to them having jobs that Brits could do; even though a lot of those jobs are ones that Brits don't want to do. 

While a lot of the uncertainty had already been factored into the exchange rate and share prices there will be an additional downward trend in the short term.  It's important not to react to the noise.   Some rationale should come through over the next few weeks. It's not an immediate pull out by the UK from the EU. The process could take up to two years but I see EU leaders are saying Britain should exit quickly to cause the least disruption.   Over the next week the markets will head down, but whenever an unexpected event occurs (general expectation in financial markets was that the vote would be close but Brexit 'couldn't' happen)  there is usually a bit of an over-reaction and then a recovery.  

Markets that have already reacted are European and Asian equities in particular emerging markets. 

Its important to note that a number of the absolute return fund managers, that we use in portfolios, had increased their level of cash holdings due to the uncertainty and volatility in the markets.  For example, Magellan was holding 16% cash and Platinum Europe 22%. Managers holding a higher than normal cash holding will see this downturn as an opportunity to buy into these markets.

Why would Britain voting to leave the EU affect shares markets in New Zealand, Australia and Asia?

Britain is the 5th largest economy in the world and London is the financial centre of Europe. The impact on Europe could be significant and may catalyse other EU countries to leave the Union. 7.5% of European exports go to the UK. Even with the appreciation of the Euro versus sterling a mild UK recession should be manageable for Europe

The UK economy makes up only 2.5% of the world economy, so is this really a significant world event? Share markets will be volatile over the next week or so but should come back once the dust has settled.

The UK takes around 3% of New Zealand’s merchandise exports (meat, wine, lamb) and 9% of services (tourism). The sharp drop in sterling and possible near-term recession in the UK will be an obvious negative for trade. Its likely the New Zealand Reserve bank will drop interest rates from 2.25% to 2.0% in August, but will have minimal impact on mortgage rates as the cost of borrowing on world credit markets may rise.

The Brexit vote was not anticipated by the financial markets so it has caused some major reactions but it is important to now stay the course.

Further UK Pension Transfer Rule Changes

Further changes in the rules for transferring a UK pension to New Zealand will come into effect on the 1st December 2016. If you haven't transferred your pension take action now before the rules change again. Refer to the home page of our UK Pension Transfer website

If you have been considering transferring your pension funds or are already in the process of doing so and are now worried about the exchange rate do no despair.  You can transfer your pension funds and keep them invested in Sterling until the markets settle.  It is probably better to wait a few weeks to see the GBP settle rather than convert at a time of a sudden market reaction.

New Look Web Site

We have updated our main web site which I first designed in 1998. Since then it grew to more than 140 pages which was a tad excessive and there were other things to do than review dated website pages.  Have a look and if you have an idea to make it even better please tell us

Lyford Financial Services
174 Hutt Road, Petone, Lower Hutt 5012
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Alison Renfrew FSP35961 and Richard Renfrew FSP35821 are authorised financial advisers (AFA) and registered to give financial services advice including investments. They are directors of Lyford Financial Services Ltd and Lyford Investment Management Ltd trading as LYFORDS. The information is given in good faith and has been prepared from published information and other sources believed to be reliable, accurate and complete at the time of preparation but its accuracy and completeness is not guaranteed. Information and any analysis, opinions or views contained herein reflect a judgment at the date of publication and are subject to change without notice. To the extent that any such information, analysis, opinions or views constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax, accounting or other nature to any persons.
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