Bad year for ASX as Brexit takes toll

Volatility continued yesterday, putting the ASX on track for one of the worst yearly performances since the GFC.

Volatility continued to haunt ­investors yesterday, putting the Australian sharemarket on track for one of the worst financial year performances since the global ­financial crisis.

Ructions from Britain’s Brexit vote on Friday continued to ripple through financial markets as capital fled into safe havens and away from UK-exposed firms.

The British pound continued to get short shrift from traders last night, sliding back more than 3 per cent to $US1.32 during the European session.

Sharemarkets also shrugged off attempts by Britain’s Chancellor of the Exchequer George Osborne to reassure businesses and financial markets that the British economy remained resilient after Britons chose to exit the European Union.

London’s FTSE 100 slipped more than 1.6 per cent by midday, amid falls of 2 per cent on German and French exchanges. British 10-year bonds fell below 1 per cent for the first time.

Mr Osborne said there were robust contingency plans in place, and the Bank of England was ready to support financial stability.

Earlier the Australian sharemarket tumbled 1.2 per cent at the opening, following on from Friday’s plunge of more than 3 per cent, before traders helped steer the S&P/ASX 200 index to close 0.5 per cent higher at 5134 points.

The Nikkei and the Shanghai Composite closed in positive territory, while Hong Kong’s Hang Seng was flat.

Speaking to reporters in London before markets in Britain opened, Mr Osborne said the British economy was strong and its banks and ­financial system were healthy.

“Britain is ready to confront what the future holds for us from a position of strength. That is because in the last six years the government and the British people have worked hard to rebuild the British economy,” Mr Osborne said.

But he warned there could be “an adjustment” in the economy as uncertainty over Britain’s future trading arrangements with the EU dented spending and investment.

The comments followed a relatively upbeat day across Asian bourses, but the ASX is still on track to deliver one of its worst ­financial year performance since 2008.

The benchmark index is down about 6 per cent since June 30 last year. “I was surprised at how well the Australian and Asian markets did,” Geoff Wilson, chairman of the $1 billion Wilson Asset Management set of funds, told The ­Australian.

“When these types of things happen you get a fracturing of confidence — you either try to buy things incredibly cheaply or wait for a degree of uncertainty to pass. We were putting bids on the screen to see how desperate ­people were for liquidity,” Mr Wilson said.

While yesterday’s action lacked the panic of Friday, it retained much of the tension as traders became selective in their selling. Defensive sectors performed well, while the financials continued to see a rush for the exit.

Macquarie Group, which generates 10 per cent of its earnings from Britain, notched up its worst two-day loss since the global fin­ancial crisis, tumbling 13 per cent to $67 a share. The Britain-exposed BT Investments slumped 16 per cent while Henderson Group fell 10 per cent. The Australian banking sector has significant exposure to Britain and the EU, but while there are concerns about European banks’ solvency as credit default swaps blow out, Australian banks are thought to be solid. “Westpac is well funded, and ahead of our funding targets,” a spokesman for the bank said.

“It is too early to comment on the impact on funding costs. However, it is something we are alert to and we are in a strong position to manage any market disruptions.”

Still, the big four banks were sold down again yesterday, as analysts tipped the market volatility would stretch into the near term. Credit Suisse analyst Hasan Tevfik downgraded his year-end target for the ASX 200 by 8.3 per cent to 5500 points due to the global ructions. “For now at least we believe volatility and uncertainty will keep investors out,” Mr Tevfik said.

Chief economist for BT Financial Group Chris Caton said the market was entering uncharted territory.

“Volatility in financial markets is likely to remain high as sentiment waxes and wanes,” Mr Caton said.

Principal Global Investors chief economist Bob Baur said the key move still playing out was “a massive flow into safe assets”.

The yield on 10-year US Treasuries has plunged to near the historic lows of 2012, below 1.5 per cent, as investors grapple with the long-term uncertainty.

KPMG Australia chief economist Brendan Rynne said a likely downturn in exports sparked by a Brexit could knock as much as 1.4 per cent off Australian GDP growth over the next 15 years.

Gold rose as much as 1.5 per cent, near a two-year peak, while the Japanese yen retained its strength against all currencies.

ASX-listed fund manager PM Capital Global Opportunities Fund said the value of its portfolio had dropped 5 per cent in the wake of the Brexit vote.

ADDITIONAL REPORTING: Daniel Palmer