How do global market events such as Brexit affect the Australian investor?

By Gregory Harris

Brexit

The world is a small place these days. Technology advancements and the globalisation of large companies and industries means there is a high correlation between global economies and investment markets worldwide.

The effect of the UK exiting the European Union (Brexit), is not just limited to the countries directly affected by the union. The consequences of Brexit will influence the entire global market by causing uncertainty of outcome.

Let’s look at the effect that the Greek debt crisis in 2012 had on the stability of other EU countries. This event had global markets fearing that it could escalate into a global financial crisis. The markets do not like uncertainty!

Brexit was initially intended for the UK to 'take back it's borders'. However as a result of Northern Ireland’s decision to remain a constituent of the EU, this effectively defeats the initial primary purpose of Brexit. 

Along with this, the UK's currency has depreciated, meaning imports have become more expensive. With the UK being the US's fourth largest export customer, this has a negative effect on the world's largest economy. Increased trade tariffs for goods entering and exiting the UK means goods become more expensive (which reduces their demand) both into and out of the UK.

As the UK is the second largest contributor to the EU, it will have a significant impact on the Eurozone as trade deals are re-negotiated. These re-negotiations could even be the beginning of the end of the EU.

The US-China trade negotiations are also integral to the stability of global markets as you have the world's two largest economies negotiating trade deals, adjusting tariffs and changing the way global trade occurs across industries. 

The outcome and timeline of these negotiations is unknown. As investment markets do not like uncertainty, there is an increase in volatility as investors attempt to pre-empt outcomes of the negotiations and adjust for the unknown. As the US and China tussle for global dominance across certain industries, the global confidence waivers. 

As Australia is largely an export economy, it is heavily reliant on the Asian nations purchasing our commodities. This means we are not immune to these trade negotiations. 

These global issues affect investment in Australia (both shares and property) as there is a high level of foreign investment here locally. The local affect is also due to the correlation that the Australian markets have with the global markets. That's why you often hear, when 'China or the US sneeze, we catch a cold'.

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Greg is a Certified Financial Planner®. He enjoys simplifying the many complexities around investing and assisting his clients to meet their financial needs and objectives.

If you would like to learn more about diversifying your investments, you can contact Greg on 02 6583 1735 or gregory.harris@morgans.com.au.