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Brexit and Share Market Volatility

Posted: June 24, 2016 at 5:45 am   /   by   /   comments (0)

There has been a lot of coverage in the press regarding the UK Referendum on leaving the European Union over the last few weeks. Today we find out the result and as I write, it looks like they have voted to leave. This is playing havoc with share markets, with Australian shares down 3.4% and futures markets are currently pointing to a whopping 7.8% decline in UK shares and 4.8% for US shares tonight. The UK pound is also dropping sharply, currently down 11% versus the US dollar. Our own Australian dollar has even been caught up in the storm, down 3.6% versus the US dollar.

The irony of this, is that Britain’s status in the European Union has little relevance for Australian companies or most other companies around the world. It is a significant event for the UK and the consensus among economists is that the UK will end up in a recession if the ‘Brexit’, is confirmed. However an exit from the EU will not happen straight away. It will be a process that will carry on over a period of years and it has been suggested in some of the commentary I have read, that Britain’s politicians may ultimately use the result to try and re-negotiate better terms with the EU rather than leaving altogether.

While the impact on the UK’s economy is likely to be drawn out over a long period of time, the ructions on world share markets are immediate. This has nothing to do with the long-term value of shares. It is simply a result of some investors making short-term decisions to try and make a quick profit. It is a dangerous game, akin to gambling.

There are suggestions that the UK vote could lead other countries to follow their lead and this could result in the eventual destruction of the European Union. I think this is a real possibility. However this is something that will unfold over a long period of time and it is important to remember that the underlying value of shares is linked to human activity and consumption. Every time we put petrol in our car, buy groceries, use our phone, buy clothes, watch movies and many of the other things we do every day, there is normally a large, publicly listed company making a profit somewhere. While the share prices may rise and fall at the drop of a hat, the underlying pattern of human activity which supports the value of shares, is unlikely to change dramatically as a result of whether European countries work under a common set of rules, or break away for greater independence.

Closer to home, we have our own election coming up in 8 days followed by the US election in November. These events will provide more reasons for short-term speculators to meddle with our markets. I find it immensely frustrating that regulators allow hedge funds to ‘short-sell’ shares and use derivatives to bet on the share market, currencies and commodities. Long-term investors are belted around the ears while hedge funds and wealthy investors treat the markets like a day out at the races. However no matter how this plays out over the days, weeks and months ahead, the markets will eventually settle down and long-term investors should be rewarded over time.

In the meantime, my advice is to watch history unfold and try not to be distracted by the short-term market movements and the negativity in the press.