It's incredible how quickly investor sentiment can turn.
One minute, the share market is on fire. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) recently recorded seven consecutive weeks in the black, hitting a nine-month high above 5,400 points in what The Australian Financial Review reported as being a $140 billion rally.
The next minute, it seems the earth is crumbling below our feet. The ASX 200 is now languishing below 5,150 points following three shocking sessions in a row (over which it has dropped a total of 4%). It's trading marginally lower again today even after it lifted by roughly 1% earlier in the session.
While falling commodity prices and nerves ahead of the US Federal Reserve's decision on interest rates will have had some impact on the market's sentiment, Brexit fears are to blame for most of the anxiety currently spreading through global financial markets.
On 23 June, 2016, Britain will hold a referendum vote to determine whether to stay in, or leave, the European Union. The perceived probability of a 'leave' decision has increased in recent weeks, leading to heightened uncertainty among investors.
Yes, Australia would seem more insulated from Brexit than many other nations. But the fear relates more to Britain's economic future and the sustainability of the European Union itself, which could have a contagion-like effect on markets around the world.
It could also impact the bottom lines of businesses heavily exposed to the United Kingdom, including Henderson Group plc (ASX: HGG), BT Investment Management Ltd (ASX: BTT) and CYBG plc (ASX: CYB). The latter is the holding company of Clydesdale and Yorkshire Bank in the United Kingdom after being spun-off by National Australia Bank Ltd. (ASX: NAB) earlier this year.
Westfield Corp Ltd (ASX: WFD) may also be impacted. It owns a number of major shopping centres in the United Kingdom and, if its shares are sold off, investors may want to take that as an opportunity to begin building a position in the shares.
Of course, it would be naïve to say there is nothing to worry about. Should Britain elect to leave the European Union, it's impossible to tell exactly what impact that would have on global markets – including the Australian economy – nor is it possible to tell how the share market would react. A selloff is possible.
The very notion of a selloff may seem scary. And in the short term, it may be! But investors also need to remind themselves that volatility and uncertainty are two normal aspects of investing. In fact, they are the very reason that the share market has historically generated such strong returns for investors as compared to 'risk-free' assets such as bonds or term deposits.
The volatility will pass. While it would be wise to ensure you are not overly exposed to any one geography or industry (that is, you should remain well diversified), it may even be a good idea to put some more cash to work in the market if shares do experience a pull back. After all, the biggest gains are made in the long-run by buying when shares are low and selling when high!
