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Brexit: Surviving the fallout

Anthony Fensom  |  05 Jul 2016Text size  Decrease  Increase  |  

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Global stock markets have bounced back after losing some US$2 trillion in value on Britain's shock referendum vote to exit the European Union (EU).

But while Britain and the EU are facing the biggest impact, Australia is not immune to the fallout.

Britain's 23 June vote known as "Brexit" stunned financial markets, after having staged a mini-rally ahead of the result on expectations voters in the world's fifth-largest economy would back the "Remain" camp.

Instead, the 52 percent to 48 percent victory of the "Leave" side caused a rapid plunge in stocks and currencies, including Australia's, while also having implications for Australia's trade and investment flows.

The Economist Intelligence Unit has predicted leaving the EU would trigger a recession and cause a 6 per cent drop in British GDP by 2020, weakening Australia's largest individual EU trading partner and eighth-largest export market.

The European Central Bank (ECB) has also forecast a negative 0.5 per cent hit to Eurozone GDP, dampening growth prospects in Australia's second-largest trading partner and largest source of foreign investment.

Australia's Asian trading partners have also suffered, with the Chinese renminbi falling to its lowest level against the US dollar since 2011.

Mizuho Research Institute has warned GDP in Japan, the world's third-largest economy, could contract by up to 0.8 per cent due to the damaging effects of a stronger yen on Japanese exports, company profits and business investment.

Funds, stocks hit

Morningstar fund analyst, Andrew Miles, has highlighted fund managers most exposed to the British market, including IFP Global Franchise [12160] and Templeton Global Trust Fund [5291], with 23 per cent and 16 per cent respectively of their assets in British firms.

Other managers exposed to Brexit include MFS Global Equity Trust [4532], PM Capital Global Companies [6828] and Stewart Investors W Worldwide Leaders [4672], all with around 25 per cent invested in Britain.

Among stocks listed on the ASX, Miles points to regional British bank Clydesdale Bank (CYB) as the most at risk.

Other stocks with European exposure include fund manager Henderson (HGG), investment bank Macquarie Group (MQG) and conglomerate Wesfarmers (WES).

Deutsche Bank has also nominated small-cap stocks such as software provider GBST Holdings (GBT), online education firm 3PL Learning (3PL) and market data company Iress (IRE) as being highly exposed, along with large caps such as share registry company Computershare (CPU), travel group Flight Centre (FLT), insurer QBE Insurance (QBE) and wine maker Treasury Wine Estates (TWE).

Nikko Asset Management's Roger Bridges warns Brexit has put the spotlight on existing tensions within the EU, with the migrant crisis bolstering the recent rise of right wing, anti-European populist parties throughout the region.

Brexit has also sparked a "flight to safety" which has driven the Japanese yen higher--against the policy aims of Japan's "Abenomics"--and also resulted in a stronger US dollar, potentially leading to weaker commodity prices and negative impacts for many emerging markets.

BetaShares chief economist David Bassanese says Brexit has added to a "pretty sluggish outlook for risk markets in general over the coming year".

He expects the Bank of England, the ECB and the Bank of Japan to undertake further stimulus measures, while the next US rate hike could now be postponed until as late as November or December.

For Australia, Bassanese says the main impact will be via global markets, "although it will add to the case for an August rate cut" by the Reserve Bank of Australia.

Bassanese pointed to cash, gold and US dollar exchange-traded funds as offering potential "safe havens" for investors, including the BetaShares Australian High Interest Cash ETF (AAA) and the BetaShares Gold Bullion ETF--Currency Hedged (QAU).

For more bullish investors eyeing a longer-term recovery, he suggested the BetaShares British Pound ETF (POU) or the BetaShares WisdomTree Europe ETF--Currency Hedged (HEUR).

The Brexit drama could play out for two years or more, while the British government negotiates over the terms of its departure from the world's largest economic bloc.

For now, though, Morningstar's head of equities research Peter Warnes has suggested investors continue focusing on moat-rated companies with sustainable businesses that generate sustainable cash flow, earnings and dividends.

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

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