No relief from Brexit ahead as global investors assess $2trn market carnage.

Vesna Poljak, James Chessell, James Thomson - Australian Financial Review - June 27, 2016


An independent United Kingdom's first export to the world could be a second financial crisis, warns Geoff Wilson, chairman of Wilson Asset Management.

The UK's break with the European Union sets markets up for months of uncertainty, as investors figure out the scale of damage inflicted by the historic Brexit vote and whether it drags the region back into recession.

As more than $2 trillion was wiped off global sharemarkets on Friday and the British pound fell to the lowest level since 1985, the banks were the worst hit. While the FTSE 100 losses were trimmed to 3.15 per cent by the close, the bourses of Italy, Spain and Greece each fell more than 10 per cent, the equivalent of a bear market, in a single session. Italian lender UniCredit lost 24 per cent, Banco Popolare 23 per cent and Bank of Ireland 21 per cent. Europe's bank index is now down 34 per cent this year after the 18 per cent rout on Friday.

An independent United Kingdom's first export to the world could be a second financial crisis, warns Geoff Wilson, chairman of Wilson Asset Management. Dominic Lorrimer "Just what Europe needs, when a lot of countries in Europe are incredibly weak at the moment, is uncertainty," Mr Wilson said sarcastically. "The interesting thing is it appears that besides it being a total shock to the market, the big question is maybe the market is not pricing in the geopolitical risks and [a Donald] Trump presidency could be another one."

The strengthening of the US dollar, its potential impact on China, and the unwinding of globalisation as we know it, were some of the threats investors now had to get a grip on, he added. The "fracturing of confidence" will take "a reasonable period of time to repair".

"It is an act of economic self-harm between these two regions," said Miles Staude, London-based manager of the ASX-listed Metage Capital Global Value Fund, "I don't believe this is a Lehman or Greek debt crisis moment."

At a minimum there is months of uncertainty ahead and hiring and investment will be held back, he said. For the next few weeks, markets will have to gauge whether they are looking at "Brexit lite" versus "Brexit full". Spreads between German bunds and peripheral European bonds widened significantly in the aftermath as bunds rallied and Italian, Spanish and Portuguese bonds sold off. Under a full Brexit scenario, "the places that worry me greatly are the EU peripheral economies", Mr Staude said, at a time when most investors are still fixated on the minutiae of what it means for Britain.

"It will be grim in the UK, with the country likely experiencing a recession and lower future trend GDP growth. But the UK is in far better shape than much of Europe. Currency depreciation, an independent central bank and full employment all provide the UK with at least some buffer. Outside of Germany, the EU is suffering from chronic unemployment, low or no growth and dangerously persistent deflation.

"For highly indebted EU economies this is a toxic mix and there is little or no buffer to fall back on," the fund manager said. "If, say, Italy, Spain or Portugal were to fall back into recession their outlook could start to become very scary."

He is hopeful access to the single market can still be maintained.

Randal Jenneke, Australian equities portfolio manager at T. Rowe Price, disagreed Brexit had delivered the world a fresh financial crisis. "This is a political issue and a political crisis, this is not an economic crisis," he said. "It's in the interests of Europe and the UK to strike a sensible deal."

If pro-Brexit Conservative Boris Johnston becomes the next British Prime Minister, Mr Janneke saw this as positive because he is not anti-immigration and could secure the City of London's status as a financial hub. "He acutely understands the linkages with Europe, particularly as it applies to financial services," the fund manager said. Outgoing PM David Cameron has not yet invoked Article 50, which triggers the dissolution of the UK's EU membership. European Commission President Jean-Claude Juncker has urged the departure process to begin quickly, but German Chancellor Angela Merkel said there was no rush, and that Britain would remain a "close" partner. "I've been in financial markets for 30 years and these are knee-jerk reactions that are mainly trader driven," said Anton Tagliaferro, founder of Investors Mutual, who described the Australian market reaction as "nonsense".

"In terms of the underlying fundamentals of many companies in Australia – nothing has changed. It's just the sentiment." Most ASX-listed companies were not tied to trade with the UK, the fund manager argued. "It makes no sense for Australia to panic. Financial markets move in unison. Things are short term. I think when people sit down and look at companies on a stock-by-stock basis in a week's time or a month's time they will sit down and go, 'well, is Suncorp really impacted by the UK? No. Is AGL really impacted by the UK? No'."

The real fear, Mr Tagliaferro said, was "whether this leads now to a series of independence votes in the longer term", but the nature of the UK's severance with the single market has not been determined. "We have to see what it means. Leaving the EU is one thing. What they actually end up signing is another."

Mr Wilson said: "If things get really beaten up that's when you want to be a net buyer. You want to be buying when the blood runs in the streets," he said, citing Baron Rothschild. "Let the negativity be absorbed into the market and we'll see that over the next week."