It is very difficult to ascertain what the real economic impact may be as there is uncertainty around the political process, the timeline, and the legislative changes required. The latter are unimaginably complex and will require bargaining with the European Union powerbrokers (mainly Germany and France), which itself is uncertain and will be driven by an array of interests. We have read widely and our feeling is that there will be further volatility, but that the experience on both local and international markets on Friday and earlier this week might be an over-reaction.
To this point we note that there has been minimal media coverage on the Spanish election which was held on Sunday and was arguably was more important than the British Referendum. With some surprise the incumbent party has won the largest share there and Podemos, the far left equivalent of Greece’s Syrizia who were not that far behind in the polls, has had their seat numbers significantly eroded from the initial election result late last year. The ability of Prime Minister Mariano Rajoy to be able to seal a coalition this time around and continue to drive a recovery in Spain is very important for broader stability in Europe. It does feel a little peculiar that there has been so much focus on Britain by the media and markets in recent months and so little on this risk.
Whilst we hope that the above view regarding the British Referendum turns out to be correct we point out that we cannot be certain. We do take comfort, however, in reductions/ containment of exposure to risk assets in portfolios over the past 6 months due to a range of issues and heightened market valuations and are well positioned to take advantage of any deeper contraction in asset prices.
For a more detailed explanation of the possible outcomes and challenges we suggest viewing the following video (dated 28/6/16) by Hamish Douglass of Magellan Financial Group.