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Five questions on Brexit—
June 2016
Video transcript
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Natalie Eden (NE): Hi, I'm Natalie Eden, Private Client Adviser of UniSuper. As you'd know by now,
the British people have decided to leave the European Union, also known as Brexit. So I'm here with
John Pearce, our CIO, to address some of the questions that people might have front-of-mind at the
moment.
So John, obviously we've seen the impact of the announcement, and some of the reports that are
coming out are comparing this to the beginning of another global financial crisis. Do you think that's
realistic? Are we facing another GFC??
John Pearce (JP): Categorically not. And let's put things in perspective here. During the GFC,
financial markets basically ceased. Banks stopped lending to each other, industrial production pretty
much fell off a cliff, tens of millions of people were left unemployed. The Brexit has no comparisons to
this. In fact, if you look at Brexit, it's not going to impact the vast majority of people in the world. And
even people living in Europe and the UK—unless you are a policymaker or a politician involved in the
implementation of Brexit, your daily life is going to go on as normal.
Now let's be clear here, Nat—it's in the interest of both the UK and Europe to effect an amicable
divorce here, and it's going to take a while. If you look at Greenland, a country of 55,000—they exited
the European Union and it took them two years. I'll also make the point that the UK has its own
currency, sterling, and its own central bank. It's not actually attached to the euro, the currency of the
Euro, so the UK departing Europe—paradoxically—would even be simpler than Greece departing the
Euro.
NE: Well, that's somewhat comforting, John, but with the Australian share market losing $50 billion on
Friday, it's obvious that Australian investors are fearing the worst.
JP: Look, $50 billion is a big number, but it is a 3% fall in the stock market. You might recall that last
time we were sitting here, I actually discussed how I was a bit surprised, quite frankly, that the market
was reasonably sanguine about Brexit. Well it's happened, it was unexpected, and hence why the
market is falling 3%.
Now, typically you find during these times the market is quite indiscriminate in the stocks that it sells,
is across the board selling, despite the fact that some companies won't have any connection to Brexit.
And if you look at some of our major holdings and major holdings in Transurban, toll roads, our major
holdings in APA gas pipelines, or the holdings we have in the major shopping centres in this country,
there's no connection there. You know, are Australians going to stop using toll roads? Are they going
to stop using gas? Are they going to do less shopping? Of course they're not. So here you can see is
a classic case where the fundamentals have been disconnected from the share market.
I'll also add that over the last few decades, our relationship with Europe and the UK has steadily
declined. And as a percentage of net exports, it's minute compared to our exports to Asia, for
example. So we do have to put those things into perspective when we're looking at our holdings,
particularly in Australian companies.
NE: And so overall, John, what do you think this is going to mean for members' returns this year?
JP: Well, Nat, the reality is that all growth options would be adversely impacted by the falls on Friday.
And all our diversified options have a growth component to them. If you look at our Balanced option,
we estimate that that fall has brought month-to-date returns to around about down 2.4% or
thereabouts. Let's put that in context. The year-to-date is still slightly up, and that follows six very
strong years in the Balanced option. I think it's also important to point out that losses are actually
paper losses until you sell, and Brexit alone is certainly not giving us cause to sell. As a matter of fact,
we're looking for opportunities. But of course individuals have to take their own circumstances into
account when they’re thinking about their investment strategy.
NE: And do you think this will—Brexit in general—will change our overall investment strategy?
JP: The short answer to that is it won't, Nat. But it does confirm some of our strong convictions about
the market and I'll outline just a few. The first one, we've always felt that interest rates are going to be
low for a very long time, and this has reinforced that view, and in fact if you think about the Federal
Reserve, the U.S. central bank, they were potentially on a tightening cycle. I think that has been
delayed… you know, for at least three months, possibly to the end of this year. Now, share markets
will overall find that a positive, but there will be sectors won’t benefit from that—banks, for example,
would benefit from rising interest rates and they're not going to get that now. Also those people that
are relying just on interest income to fund their retirement are not going to be particularly happy about
low rates for a long, long time.
The second point is—relative to Europe's weighting in the global share market index, we are actually
underweight. In other words, we own less shares in European companies than the index would
dictate. Even though some European markets are starting to get quite cheap, the political instability in
that region is going to continue, so we'd rather avoid the volatility, quite frankly.
Finally, I think it once again reinforces the importance of diversification for the average member. I
talked about the returns in the Balanced option. When you're eeking out a positive return in a year
when pretty much most of the stock markets around the world are in negative territory—some are in
deeply negative territory—to get a positive return is really evidence of the importance of
diversification.
The other thing I'd like to add is the importance of biasing your portfolio of shares to quality
companies. And I mentioned some of ours. These are the companies that have got very robust
earnings. Now, we're not saying that the share prices won't fall because they have fallen. But their
earnings, because of their fortress-like qualities—we do expect the earnings to continue to grow, and
over time their share prices should reflect that growth and earnings.
NE: Well, that's good. And do you have any further comments or thoughts about Brexit at the
moment, or anything else in general for that matter?
JP: Well, Nat, the bookmakers and the polls did not predict this outcome. The bookmakers and the
polls are not predicting a Trump presidency. We can't rule out anything. Look, it is a cliché but we
have to expect the unexpected, and market volatility will persist. But in any of these situations, it's
important that people look through volatility and gauge the impact on real economic activity. Is this
going to fundamentally change people's behaviour? Is it going to suppress the production of goods
and services? People tend to jump at these situations and say ‘another GFC’. GFCs don't happen
very often, and this is certainly not a GFC situation. In fact, I would say with Brexit, I know that
Australians are not going to change their daily lives. And for that matter, most people in the world—life
will go on. Their daily routines are not going to change.
NE: That's excellent. Thanks very much for your insights, John—always appreciated.
JP: Thanks, Nat.
NE: We hope you found this insight helpful. If you do have further questions, please email us at
[email protected].
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