Brexit still got you on edge?

BNZ Private Bank Analyst Chris Stephens, takes a closer look at the impact of Brexit on global financial markets and some of the other key issues that could affect investment returns going forward.

In the week that followed the UK’s referendum vote to exit the European Union (EU), global financial markets fell heavily, but quickly recouped their lost ground. In fact, during the three months since the vote, investors have been quick to shift their focus away from Brexit to other issues that may impact investment returns.

What has happened since the UK voted to exit the EU?
The short-term panic and volatility that shaped global financial markets immediately following the referendum announcement, gave way to a strong rally across most regions. For many, the market’s resilience has been surprising. This rally came on the back of a belief that central banks will keep interest rates lower for longer, in an effort to stimulate economic growth and to prevent financial contagion from Brexit.

The UK Prime Minister is yet to trigger Article 50 of the Lisbon Treaty, which would set in play its exit from the EU, and when she does, the UK will have two years to exit. Therefore, investors have remained relatively composed as it’s become clear that the UK Government is in no hurry to start negotiations on an exit deal. This process, which may not be completed until 2019 or after, could result in increased economic and political uncertainty for the UK and EU.

That said, at this current point in time, the UK economy has not ‘fallen off the tracks’ as some commentators had predicted. In fact, the drop in the pound has helped to boost the UK equity market. This is because many of the UK’s largest listed companies generate a significant proportion of their earnings from outside the UK. In addition, economic data suggests that the ripple effects of Brexit on the EU economy have been more limited than initially feared.

The impact of Brexit on other key regions has also been relatively contained. In particular, the US economy continues to demonstrate steady growth, and it does not seem to have been directly impacted by Brexit. Similarly, the impact of Brexit on the New Zealand economy, at this stage, appears to have been minimal.

What are the other key issues that may impact investment returns?
Currently, financial markets are focused on monetary policy decisions from the key central banks, particularly those in the US, EU and Japan. Of particular interest is the timing of another increase in US interest rates. The robustness of the US economy and its labour market has led to a growing view that the US Federal Reserve (‘Fed’) will need to increase interest rates this year. The deeds and words coming from these central banks are more likely to impact investment returns than the fall-out from Brexit.

Investors are also being urged to think about political and geopolitical risk factors. In many developed countries, a growing number of voters are feeling increasingly disenfranchised by globalisation and growing inequality. Brexit, and the popularity of US Republican candidate Donald Trump, can be attributed to these trends. The US Election in November, an Italian constitutional referendum scheduled for later this year, and the German and French elections next year are also important events that may lead to an increase in market volatility.

What could this mean for your BNZ KiwiSaver Scheme funds and future returns?
The investment returns of the BNZ KiwiSaver Scheme funds have benefitted from the rise in financial markets since the announcement was made. Our funds that have a greater exposure to growth assets (such as International Equities and NZ Equities), have enjoyed strong returns. Those with a greater exposure to income assets (such as NZ Cash and Fixed Interest), have also generated solid returns.

While it helps to understand how the BNZ KiwiSaver Scheme funds have performed since the UK voted to leave the EU, it is equally important to view Brexit within the bigger picture of what else is going on in the world, both economically and politically.

Despite the uncertainties that we’ve highlighted, we believe the global economic outlook, and the prospects for future returns, remain relatively favourable. Economies, globally, will continue to benefit from easy monetary policy, even if the US Fed decides to raise interest rates in the near future. That said, investment returns since the 2008-2009 Global Financial Crisis have been very strong, and it would be unrealistic to believe that returns will be sustained at these levels in the future.

It is our belief that increased economic and political uncertainty will continue for as long as it takes for the UK to legally separate from the EU. Until then, we also expect there to be some periods of short-term volatility in your investment returns, so it is important to stay focused on the long-term benefits of investing in a diversified portfolio.

When the news first broke about the UK’s decision back in June, we told you to expect some market falls given the initial declines we were seeing immediately following the announcement. If you held on as the markets recovered, you would have benefitted from the market’s resilience – and that’s what’s happened. As a long-term investor in a well-diversified portfolio, take comfort from the fact you are well positioned to ride out these periods of volatility.

BNZ Investment Services Limited, a wholly owned subsidiary of Bank of New Zealand (‘BNZ’), is the issuer and manager of the BNZ KiwiSaver Scheme.  A copy of the BNZ KiwiSaver Scheme product disclosure statement is available on  Investments made in the BNZ KiwiSaver Scheme do not represent deposits or other liabilities of BNZ or any other member of the National Australia Bank Limited group, and are subject to investment risk, including possible delays in repayment and loss of income and principal invested. None of BNZ or any other member of the National Australia Bank Limited group, the Supervisor, and any other director of any of them, the Crown or any other person guarantees (either fully or in part) the performance or returns of BNZ KiwiSaver Scheme or the repayment of capital.

This blog is solely for information purposes [and is only for BNZ KiwiSaver Scheme members who are New Zealand residents]. None of the matters in this blog are personalised financial advice. We recommend that you seek financial advice specific to your personal situation and goals from an Authorised Financial Adviser. No representation or warranty is made as to the accuracy, reliability or completeness of any statement made in this blog. Neither BNZ nor any person involved in the preparation of this blog accepts any liability for any loss or damage arising out of the use of, or reliance on, all or any part of this blog. The information and recommendations are the personal views of the author and do not necessarily reflect the views of BNZ.

BNZ Authorised Financial Advisers’ Disclosure Statements are available on request and free of charge. Past performance is not an indication or guarantee of future performance.