28/06/2016 – Last week we saw an unusual and significant event of which the political and economic affects will not become apparent for a period of several years however we wanted to outline a couple of key points for Australian expats that will hopefully assist them in digesting last week’s events.
What are the political ramifications?
While there is no precedent for an EU withdrawal, there is a template for how European countries, such as Norway and Switzerland maintain a beneficial economic relationship with the EU. The resignation of UK Prime Minister David Cameron has forced the incoming Prime Minister to invoke Article 50 which is the legal measure by which the UK can leave the EU.
What Are the Economic Ramifications?
We know that this is a political event and not a liquidity event. Sure there will be market volatility however a liquidity event, like we saw in the GFC, is where markets freeze up and we may see the opposite with both the Bank of England and the European Central Bank committing to ensure that financial markets remain liquid with extra funding available. This event is fundamentally different in nature to the Lehman Brothers event which caused liquidity to freeze and market efficiency to suffer. 5. Trade negotiations between the UK and its various trading partners will take some time to settle. The EU has a process known as Article 50, which outlines what happens next. Once the article is invoked, negotiations take place and ties are severed officially, regardless of where talks stand, in two years. The actual unwinding of the many EU trade and financial agreements to which Britain is bound likely would take years, as the agreements would be phased out rather than simply terminated. Britain has to renegotiate 60 additional trade agreements outside of the ones that it has negotiated through the years through the EU. That’s going to take a long time and we believe that wont be achieved in the next 2-4 years.
How does it affect the Australian economy?
Department of Foreign Affairs and Trade (DFAT) 2015 report shows that Australian exports to the UK made up of only 2.8% of total exports and for the European Union as a whole, only 7.4%. The total direct exposure to UK earnings for the ASX300 index is in the region of 5%.
What the biggest risks for Australian expats?
The two biggest risks for Australian expats is currency and the ability to gain the requisite visa approvals to work in the UK and Europe. In previous videos and articles we have always attempted to highlight to Aussie expats that currency risk is one of their, if not the largest risk that affect their ability to manage not only their finances but potential migrations either between countries or back home to Australia. As we saw with the movement in the Pound, as we record this video it is currently down approximately 8.0% against the Australian dollar and US dollar from last week’s trading range. Now put yourself in the shoes of an expat who is about to move from the UK and repatriate back to Australia. If they have funds sitting aside, in pounds, and they’re ready to make that move then suddenly those funds are worth 8% less than they were a week ago. It doesn’t sound a lot but if you have been doing the right thing and putting aside money for retirement then it can add up to a lot. We always recommend taking a dollar cost averaging approach to moving funds because you don’t know what the exchange is going to be in the future. No one does. We’ve since found out that even George Soros, the famous hedge fund trader, was long the pound last week so even veteran traders got this one wrong.
The other point is that because we don’t know what the exchange rate is going to be in the future you need to ensure that your investments are well diversified and I don’t just mean by company or sector. I’m talking about currency exposure. We had an interesting talk with an expat last month where he was very proud about the diversification in his portfolio but there was one problem. Even though he had investments in Hong Kong Dollars, US dollars and UAE Dirhams they are essentially revolve around the US dollar. Great if the US dollar is strong but not so good if its weak.
The second risk for Australian expats is in their ability to live and work in the UK as a gateway to Europe. A lot of Australians, by virtue of their heritage, have been able to gain British citizenship and this has in turn provided them with the opportunity to also work in Europe. Now that the Leave vote has been cast it appears that the allure of this rite of passage for many Australians may decrease not only because the ease of working and travelling throughout Europe has decreased but also the economic confidence in the UK may decrease which may lead to higher unemployment whilst the economic ramifications are played out over the coming years.