Brexit impact on stock market moving forward


UK n EU

The US market has tricked many on 23 Jun with a huge rally in anticipation of a "remain" for the Brexit polling one day ahead of time. It followed suite with a big crash the next day when the voters pushed for "exit". It was an unfortunate event for those who had jumped on the wagon when the market was rallying one 23 Jun, but what's done is done. It is time to plan for what will be coming up on the stock market moving forward. Before that, you may want to first understand what the short term and long term impacts will be on the economy to get a better feel of how the markets will react.

 

Pros and Cons of the exit

The EU membership allows access to trade agreements to members of the EU but it comes at a cost to the members as well. One of the key reasons for voting for the exit was that people in the UK felt that they were not benefiting as much from the EU membership than they are contributing.  As the model of the EU requires stronger economies to contribute more, the UK in this case, will be contributing more than what it will get back in return.  On one hand, UK gets to save up the cost of membership while on the other hand, loses the access to the free trade agreements in the short to medium term.

A large part of the reason why on a per head basis that UK is getting lower returns from the contributions is due to the the Common Agricultural Policy which takes up about 40% of the budget. The heavy emphasis on one area of the economy is also a reflection of the inefficient policies. Not every member gets benefit directly from the policies implemented. With the exit, UK will stand to gain more flexibility in implementing policies that will have direct impact on their own economy.

The UK will stand to gain more control over their net migration. This has poised a problem in the past where the EU supports free movement of labour which in turn cases overcrowding in the UK. The overcrowding, inflation in housing, availability of jobs, etc.. contributes to the frustrations of the locals.

 

Impacts

With this exit, the immediate impacts seen are those related to import and export trades. There will possibility of duties and taxes applied to import and exports, making trades more expensive across the EU. UK will be busy in the short term working out their trade agreements with the rest of the EU.

Companies within the EU will be impacted by the exit. Those who used to house their headquarters in London but deal a large part of their businesses within EU will be making tough decisions on whether or not to relocate their headquarters. Many of such are financial institutions. This will not be an immediate impact but we will stand to see the changes coming in the mid term. Some business may find it inefficient to operate in London and may relocate to Frankfurt instead. This will mean less funds flow through the UK.

The exit has immediate impacts on the foreign currency exchange with the pound plummeting. This may be good news for tourism and for exports, however, imports will immediately become more expensive. The net effect will not be seen in the short term and will be unfolding in the mid term. Fiscal policy may kick in with interest rates adjusted to stabilize the currency.  Should the interest rates rise, business will be impacted with higher cost of borrowing and people affected with higher borrowing costs for housing loans. The balance to maintain stability will be tested.

 

What you can do moving forward on the stock market

In the short term, volatility in the stock market will definitely be felt. Last Friday, European stock exchanges fell around 7-8%, London stock exchange fell 3.2%, Asian markets fell between 2-7% with Japan affected the most, US stock markets fell around 3-4%. Industry wise, financial sector was hit heavy on the exit. The fear will continue in the short term and stabilize after, until further progress unfolds.

A few things you can do to position yourself in this uncertain period. If you are aggressive, you may short the markets. If you are already in a short position before the Brexit, good for you. Ride out the short term down swing. However, do be cautioned on high volatility and braise yourself on a quick rebound. Alternatively, you may choose to move to a safe haven like gold or stay liquid on cash. If you have cash on hand, wait for an opportunity to capitalize on the low stock prices. Allow the storm to calm and start accumulating your positions. It is always hard to catch the bottom, so it will be wise to accumulate in smaller positions.

The old saying is always right, buy low sell high. Toughest part of this is detaching your emotions from market noise. This is a good opportunity to test your ability to make rational decision during market turmoil. Good luck!

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