WHAT HAS HAPPENED?
- The United Kingdom (“UK”) in somewhat of a surprise has voted to leave the European Union (“EU”). The referendum turnout was 72.2%, of which 51.9% voted to leave the EU and 48.1% voted to remain in the EU.
- This outcome potentially represents the most significant step backwards for the European Union since its foundation six decades ago.
- We are now seeing various views expressed in markets on what the result could mean for the UK (the world’s 5th largest economy), Europe, and the global economy.
- Some believe it will be significant, others not so much. The bottom line is that no one can confidently say how events will transpire from here as it depends on a number of highly uncertain elements – politicians and voters.
- What is clear however is that the uncertainty alone from the UK’s exit from the EU is not positive for the near-term global growth outlook – albeit the quantum is difficult to calculate.
- The real victims of Brexit may in fact be Europe and globalisation. The UK is a net contributor to the EU budget and this will have a direct cost on the remaining EU members – particularly Germany. The populist revolt we have seen in the UK against the political class will find sympathy in other EU members and we could be witnessing the ultimate demise of the European project. Additionally, the movement of people, goods and capital will all face increasing barriers to movement in coming years, and not just in the UK.
- There is clearly much speculation (including our comments above) at present and only time will allow the future to unfold.
HOW DOES THIS AFFECT NEW ZEALAND?
- The direct impacts appear modest and manageable.
- The UK is not as large a trading partner as it once was, although it is still our 5th largest export market at NZ$ 3.1bln (as at September 2015).
- It is the indirect implications particularly on commodity prices, credit markets and the NZ Dollar that one has to watch. There would obviously be growth implications from weaker commodity prices, tighter credit markets and a strong NZ Dollar.
- Again, we will have to wait and see here with regard to any flow-on effects in terms of monetary policy by the RBNZ.
HOW DOES THIS IMPACT YOUR UNDERLYING INVESTMENTS EITHER IN THE ELEVATION CAPITAL VALUE FUND OR IN A SEPARATE ACCOUNT?
- Clearly, any slowdown in global growth will have an impact on consumer sentiment / demand and flow through to underlying company earnings.
- Our underlying investments are mostly global companies with operations in many jurisdictions including the UK. Earnings generated within the UK on translation back to their home market will be worth less than they were given the depreciation in the value of the £ (“GBP”). In many cases hedging programs will smooth the earnings impact to enable appropriate business adjustments / restructurings to occur.
- Our UK investments, are all beneficiaries (to varying degrees) of a lower GBP on their foreign earnings. For example, in the case of Diageo PLC – that stock actually traded higher (+2.46%) on Friday on the London Stock Exchange (“LSE”) to reflect the improvement in reported earnings that can be expected. (www.elevationcapital.co.nz/diageo)
- In terms of our European investments these were generally lower. However, it is important to understand in the majority of cases these businesses are global enterprises and they too can adjust accordingly. The sell-off on Friday (24/6) afforded us the opportunity to add selectively to several names - Tod’s in particular across all accounts – a global luxury goods company domiciled in Italy.
- Our cash balances continue to afford us opportunity should it present itself and leave both the Value Fund and all Separate Accounts well placed.
- The underlying equity investments in the Value Fund and all Separate Accounts while showing negative returns month-to-date continue to outperform global indices at this time.
While there are many unanswered questions, it is inescapable that Brexit will be a feature of the press for years to come, one positive aspect is that travel to the UK just became a lot more affordable for all New Zealander’s.
Finally, it is important to reiterate we welcome periods of volatility such as these as it enables the prepared to invest for the future.
Should you have any specific questions please contact:
09 307 6741 or 021 92 82 62