Brexit Effects (1)

New Zealand resides at the bottom of the planet as a mostly unknown and insignificant player in world economics. Our political decisions barely cause a ripple in international circles (our best effort was probably banning nukes from NZ ports in 1984 and in the grand scheme of things this was no more hurtful to the US than a single flea on a non-allergic dog).

So why – when the United Kingdom decided in a non-binding referendum to exit the European Union – did the NZ stockmarket fall, KiwiSaver balances take a hit and more uncertainty around mortgage rates result?

Firstly, no one saw it coming.  Yes, the world knew the referendum was going to take place but few believed the “Leave” campaign would actually be successful.  Global financial and investment markets had an expectation that it would be business as usual. When the shock result was delivered, financial markets were caught out.

The official view of the IMF is that that markets did not panic. According to IMF director Christine Lagarde – central bankers “did their job” by ensuring that ample liquidity was available.

Panic or not, we quickly saw:

  • a sudden plunge in the value of the British Pound
  • $2 trillion wiped off the value of global equities
  • a two notch credit rating downgrade from AAA to AA for the UK by Standard & Poor’s
  • the resignation of David Cameron as the British Prime Minister (not to mention resignation carnage within the UK labour party)
  • Trading halts in British banks Barclays and Royal Bank of Scotland due to extreme selling

Secondly, we live in a global economy. When a financial shock wave is triggered, the ripples inevitably reach our shores.

We, and the rest of the world, are now in a position of extreme market uncertainty.  Will Britain really leave?  (After all, the referendum is not actually binding). When will it happen? What sort of exit deal will be negotiated with the EU? Will markets recover quickly or is this the portent of worse to come?  Will more countries seek to depart from the EU?  Will Scotland seek independence from the UK (again)? Will there be a second Brexit referendum? (David Cameron says not).


But the question you are probably most curious about is…

How Will Brexit Affect Me?

Your Mortgage

If you have fixed your mortgage, Brexit will have no impact on your mortgage interest rate and repayments.  However, any amount which is not fixed may be affected.

While economists warn it is far too soon to tell what the broader financial impacts might be, most are united in the view that an Official Cash Rate (OCR) cut in August is now much more likely. However, that may not necessarily translate into lower mortgage rates. Jittery financial markets could increase banks’ funding costs, meaning mortgage rates to consumers will not be cut, even if the Official Cash Rate is lowered. Some banks are already increasing their variable interest rates.

So in short?  It’s too soon to tell!

Your KiwiSaver Balance

Depending on your KiwiSaver provider and the type of fund your savings are invested in, you are likely to see a drop in your KiwiSaver balance in your next statement.

Around US$2 trillion was erased from the value of global sharemarkets immediately after the result was announced. Roughly $2.8 billion was wiped off New Zealand’s stock exchange alone.

Most KiwiSaver funds hold shares, and riskier, more growth-focused options generally invest more heavily in stocks. Bond and currency markets have also been shaken up by the volatility caused by the result.

Sharemarkets, including New Zealand’s, will continue to be volatile for quite some time. But don’t panic. KiwiSaver is a long-term investment, so don’t let short-term volatility put you off. Nor should you stop contributing or suddenly switch providers.

If you don’t need to withdraw your KiwiSaver savings in the near future, you won’t suffer an actual loss. When markets pick up again (and they always do), those losses may well turn into gains.

The key is to ensure you are in the right Fund that fits your investment time frame and risk appetite. If you have concerns, contact Sam Kodi to make sure you are in the right fund for your age and risk appetite.

Your Investments

Any stocks, shares, bonds or foreign currency investments will have taken a hit.  The same “don’t panic” advice as given for KiwiSaver investors prevails.  If you have concerns, talk to Sam.

Your Travel Plans

The British pound has plummeted to its lowest value in 31 years. So, if you need a silver lining in all this it’s this – travel to the UK is a lot cheaper now!  Time to see a travel agent?