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Written by Matt Kirk Published: August 21 2020 Innovation
If we ever needed an example of how financial markets hate uncertainty, the reaction to Brexit has provided it.
Billions of dollars were wiped off the value of investments globally as soon as Britain’s vote in favour of leaving the European Union (EU) was announced. This was even though no one really knows what Brexit will mean for Britain and the exit will probably take a couple of years to put into effect.
Coming months will bring endless speculation about what the vote means, and whether other EU states will face “leave” movements, or Scotland and Northern Ireland will seek independence so they can rejoin the EU.
Investors are likely to move out of shares in companies, and other assets, that they decide will suffer from Brexit consequences. We have already seen a flight to gold, government bonds and some currencies that are considered safe havens.
What is the ordinary investor to do faced with such uncertainty?
There will be money to be made by taking a risk when others are panicking but most investors want to allocate some of their assets to cash, knowing the value will not fall and their money will be available when they need it.
Banks are still competing for funds by offering a range of term deposits and interest rates are currently comparatively high for three to six month terms. Australian term deposits look particularly attractive to foreign investors facing negative or minimal interest rates in their own countries and pessimistic economic outlooks.
Many analysts expect global interest rates to drop further in coming months. This may not happen, but investors have the security of earning a higher rate on a short-term deposit now while waiting out Brexit-induced gyrations, with the choice of simply switching to another term at maturity.
Nobody knows what the coming months will bring but it’s reasonable to expect further volatility. Investors have to consider how exposed they want to be to shock movements and whether it is a good time to seek a safe haven for their cash.