While the decision to leave the EU is a political, social and cultural one, it will also have an economic impact. Some of the recent sharemarket volatility can be linked to investor concern around the potentially negative impacts should Britain vote to leave the EU.

The range of predicted outcomes has been wide, from a negative 10 per cent Gross Domestic Product (GDP) impact to a positive 10 per cent GDP impact. The actual outcome cannot be predicted with certainty before the event.

A detailed report released last year by Capital Economics provides a more balanced assessment of the risks the United Kingdom (UK), and to a lesser extent the world, could face following a vote to leave the EU.

In its report, Capital Economics said the overall economic outcome of the UK leaving the EU is uncertain. It contends that a bigger issue facing the UK is productivity and business investment, as the pros and cons of leaving the EU would cancel each other out.

What are the potential outcomes of a leave vote?

According to the Capital Economics report, a leave vote could:

• See a shortage of low wage unskilled labour, much of which is currently imported via inward migration. Sectors with shortages of high skilled labour could benefit as the UK would have greater control over its own immigration policy.
• See little change in trade for the UK. Currently the value of all UK goods and services exported to the EU and to countries due to the EU free trade agreement total around 63 per cent of the overall UK economy. However due to the key importance of Britain to the larger countries of the EU, it is likely that a favourable trade agreement would be reached post a leave vote. There are advantages for both sides to maintain close commercial arrangements.
• See a short term negative impact on the financial sector in the City of London. However, freed up from the confines of the EU rules and regulations, the City could potentially prosper in the longer term (as it did pre EU) as its competitive advantage is founded upon more than just unfettered access to the single market of the EU.
• See savings in the UK from a reduction in the EU regulations that currently apply to all UK based businesses, not just those exporting to the EU. The impact of the top 100 most costly EU regulations for British businesses has been estimated at £33 billion annually. The productivity impact of an exit from the EU however is limited, and a major impact on productivity would come from increased business investment which has little connection with the political exit from the EU.
• See a period of weaker foreign investment in the UK while new tariff structures are negotiated. However successful negotiation of favourable terms could see lost foreign investment ground recovered. The concerns over foreign investment drying up seem to be overblown.
• See an improvement to the UK public finances, but not significantly. While the UK currently contributes around £10 billion per annum to the EU, these savings could be eroded by the economic impacts of leaving, reduced inward migration as well as the potential need to pay the EU to maintain access to the single market.
• See an overall positive impact on consumption in the UK, despite many claims of the extreme opposite. There is a concern that the property market in the City of London could be adversely impacted due to lower occupier demand.

What does it mean for Australian investors?

Considering the above, the current Australian share market volatility being attributed to the UK leaving the EU this week seems somewhat a knee-jerk reaction.

Long term investors should remain focused on the long term cash flows provided by their portfolio, as well as the fundamentals of the companies in which they hold shares. Short term issues such as the Brexit, our election, the US election and other geopolitical events will always provide noise to the markets. The key is to ignore the irrelevant noise and remain focused on the long term cash flows that can be provided by quality investments.

As always, the advisers at Hewison Private Wealth remain available to discuss your concerns and continue to rebalance portfolios as required to achieve each client’s objectives.

The information provided above is general information only and does not take into account your personal circumstances. Individuals should seek specialised advice from a qualified financial adviser prior to implementing a strategy based on the above information. Please contact Hewison Private Wealth for more information.