How will Brexit affect you?
Britain voted to leave the European Union in the referendum referred to as the Brexit. This decision has far reaching impact on global politics, economies and financial markets, and has an impact on the consumption and investment of the people in Hong Kong.
Exchange rate movement of the British pound
The British pound experienced much volatility in light of the referendum. After the announcement of results, exchange rate of the British pound fell as much as 10% against the US dollar to a 31-year low. Investors should be cautious about spending, investments and borrowing against exchange rate fluctuations.
- Consumer spending: Depreciation of the British pound would make British products less expensive. With lower exchange rates vis a vis the Hong Kong dollar, holidaying in the UK, tuition fees and costs of living for overseas studies, professional examination fees, etc. will see some savings.
- Investment: Investors holding sterling might suffer loss. Investing in other pound-denominated assets such as deposits, stocks, bonds or local properties would also suffer exchange losses due to the depreciation. It would result in a negative impact on overall investment returns.
- Mortgage: If you have properties in the UK and have taken up mortgage loans in local currency, the depreciation would lower your repayment expense. Yet, you still need to beware of uncertainties in the property market such as drop in house prices or rise in interest rates.
Global financial markets have been very volatile due to the referendum. The tight race of "leave" and "remain" on voting day triggered volatile movements in the Hong Kong stock market, and hence affected the performance of derivatives, e.g. futures and callable bull/bear contracts. Additionally, the capital flows also affected the exchange rates of major currencies like the US dollar and Euro, and the prices of commodities.
The impact of Brexit will continue after the vote, including whether the US Federal Reserve will delay rate hike and other major central banks will embark another round of market stabilization measures, as well as the reactions of the other EU member states. All these spark huge uncertainty to the global financial markets.
Lesson from the Black Swan
Some people regard Brexit as a Black Swan event, which revealed that financial markets vastly underestimated the possibility and outcome of Brexit. The investment market is not easily predictable, so watch out for market risks and be aware of reaction from financial markets, prevailing market sentiment and political and economic events. You should invest prudently and diversify your portfolio appropriately. Speculating on events, in particular using leverage will increase your investment risk.