BREXIT: MARKETS ARE RIGHT TO BE NERVOUS
Mark Lister , 21 June 2016
The “Brexit” vote is the biggest event for financials markets we’ve seen in a while, one that will be fascinating to watch as votes are counted on Friday (for our time zone).
Financial markets have ignored the Brexit issue for most of this year, but complacency has now been replaced by extreme unease after big swings in the polls.
This has led to a sell-off in UK and European shares, and sharp falls in the pound and the euro. Investors are worried about the consequences of a potential Brexit on the UK, including faltering economic activity and rising unemployment.
The reasons for such anxiety over Europe are more interesting, and are political as well as economic. People believe that a Brexit might give other countries similar ideas, reigniting fears about the future of the Eurozone group and starting a “whose next?” spiral of uncertainty.
While the UK is part of the broader 28-country European Union, they are not a member of the Eurozone, a much more integrated subset. The 19 countries that belong to the latter use the euro as their currency, while the UK has always retained the Pound Sterling.
As a result, it would be much more difficult for Spain or Italy to leave the Eurozone than for the UK to leave the European Union. The effects of such a decision would also be far greater, which is why Greece is still there, despite all the economic and financial handcuffs imposed on them.
Still, markets are right to be nervous. A Brexit would certainly hurt the UK, dent sentiment in the already fragile Eurozone, and provide another worry to add to an already crowded list.
Luckily for New Zealand, Britain isn’t what it once was. In the 1950s the majority of our exports went to the motherland, but today its only 4.4 per cent of our total goods and services. Australia, China, the US and Japan are much more important markets for us, taking over half of our exports between them.
For some sectors, the UK is very important though, and we’d be foolish to assume we’d get away unscathed. The UK punches above its weight in tourism, as our fourth largest market providing 13 per cent of visitor expenditure. It’s also very important for sheep and wine exporters.
If I had to put money on it, my guess would be that the UK will choose to stay, but not by much. That would spell a modest relief rally, particularly for those share and currency markets that have been sold off the most. If they do go, the moves we have seen during the last few weeks will continue, but with more vigour.
Understandably, most investors are happier on the sidelines at the moment, rather than trying to pick the outcome of what will be a very close contest.
This article was originally published in the New Zealand Herald on 20 June 2016.