Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 163

Britain, Brexit and Australia

Countless articles have been written on Brexit, but most focus has been on the immediate panic selling after the vote. This commentary adds more context to the debate.

Britain’s long history of trading with Australia

As a British colony, Australia was heavily reliant on Britain for investment capital and export revenue. Prior to Federation in 1901, Britain bought virtually all of our exports (mainly wool and gold), making Australia one of the richest countries in the world per capita.

Britain remained our largest export partner until 1940, when it fell to second behind the United States. After the War our export mix changed dramatically, playing a vital role in the reconstruction and reemergence of Europe and Japan. By 1967, Japan’s hunger for our iron ore and coal made it our largest export partner, remaining in that position until it was superseded by China in 2010.

The chart below shows the declining role of Britain in Australia’s export revenues since the 1800s.

When Britain entered the European Community in 1973, it dismantled its preferential access system for former colonies such as Australia. By that time, however, its impact was relatively minimal given that Britain was buying less than 10% of Australian exports. This was less than the percentage of our exports going to Europe, and less than a third of what Japan was buying. Today, Britain accounts for just 1% of Australia’s export market.

Where to from here?

Britain was a late entrant into the European Community and never adopted the Euro. What was surprising about the Brexit vote, however, was the way in which voters rejected the pleas from both major parties to remain. The final result defied opinion polls taken in the days and even hours before the vote.

This surprise may explain the knee-jerk reaction of financial markets. Globally, ‘risk assets’ like shares, high-yield bonds and commodities (with the exception of gold) were gripped in a wave of panic selling. The money went into ‘safe havens’ such as cash, government bonds and gold.

Markets have since calmed, leaving investors to digest what it all means. The implications for Britain in the long term may well be benign or even positive. An exit would remove a seemingly unnecessary layer of bureaucracy that interferes with every aspect of daily life and costs tax-payers money. In addition Britons will win back some control of immigration, which was the catalyst for the sudden upsurge in dissatisfaction with Europe’s open borders policy. This renewed sense of independence and self-determination may boost spending, investment and employment.

Britain has always been a major source of investment capital for Australia and this may well increase if the Brexit proceeds. The impact of a British exit on trade should be minor in the medium to long term. As Europe accounts for half of British trade, the lower pound will help British exports. The pound fell 10% against the Euro after the vote, and is down 17% since this time last year. But it is still 5% higher than where it was three years ago, so it may need to fall considerably further to provide any real benefit for British exporters.

A more likely impact will be on British companies that operate in Europe under the EU passport system that allows firms to function across the EU without extra licensing in each country. Obtaining new licences should not be a problem for most companies but there will be inevitable disruption in the transition. Some very successful economies operate in Europe outside the EU, like Switzerland and Norway.

Fragmentation may accelerate

While Britain negotiates new treaties, short-term disruption and uncertainty will probably cause an economic slowdown and it may also slow growth rates in Europe, which has been stagnant since the GFC. The Brexit may also accelerate the end of 'Great' Britain. Scottish and Northern Ireland voters overwhelmingly voted to remain in the Union, leading to renewed calls for Scottish independence and the reunification of Ireland.

Another result of the vote is that it may accelerate fragmentation of the EU and Eurozone. It will certainly embolden anti-EU parties across the continent and there are already movements in France (Frexit) and the Netherlands (Nexit). It may also provide more impetus to internal independence movements such as Catalonia in Spain, Flanders in Belgium, Basque in France, and many others. Further political unrest could delay investment spending, leading to slower economic growth and higher unemployment.

More worrying is if the Brexit is seen as a backward step in the globalisation of trade and investment. The European experiment was undoubtedly good for the European recovery after World War 2, but since the GFC we have seen increasing signs of protectionism and currency wars between the big players – the US, China, Japan, and Europe.

 

Ashley Owen is Chief Investment Officer at independent advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities.

 


 

Leave a Comment:

banner

Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

How not to run out of money in retirement

The life expectancy tables used throughout the financial advice and retirement industry have issues and you need to prepare for the possibility of living a lot longer than you might have thought. Plan accordingly.

Latest Updates

Investment strategies

Investors are threading the eye of the needle

As investors cram into ever narrower areas of the market with increasingly high valuations, Martin Conlon from Schroders says that sensible investing has rarely been such an uncrowded trade.

Economy

New research shows diverging economic impacts of climate change

There is universal consensus that the Earth is experiencing climate change. Yet there is far more debate about how this will impact different economies across the globe. New research sheds more light on the winners and losers.

SMSF strategies

How super members can avoid missing out on tax deductions

Claiming a tax deduction for personal super contributions can end in disappointment if it isn't done correctly. Julie Steed looks at common pitfalls and what is required for a successful claim.

Investment strategies

AI is not an over-hyped fad – but a killer app might be years away

The AI investment trend looks set to continue for years but there is only room for a handful of long-term winners. Dr Kevin Hebner also warns regulators against strangling innovation in the sector before society reaps the benefits.

Retirement

Why certainty is so important in retirement

Retirement is a time of great excitement but it is also one of uncertainty. This is hardly surprising given the daunting move from receiving a steady outcome to relying on savings and investments.

Investment strategies

Have value investors been hindered by this quirk of accounting?

Investments in intangible assets are as crucial to many companies as investments in capital equipment. The different accounting treatment of these investments, however, weighs on reported earnings and could render ratios like P/E less useful for investors.

Economy

This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.