Brexit – The Impact on SA?

I was caught by surprise.  I had not invested a large amount of time studying the issues related to Great Britain voting to leave the EU.  “Surely they would never do it” was the extent of my thinking.  The referendum result on Friday has left me playing catch up.  Here are my current thoughts.

Those who voted to Leave are generally older, live away from the big urban centres, are more likely to not have a passport and be less educated.  The UK clearly consists of two different groups of people and they have vastly different views.  Tim Hartford, columnist for the Financial Times and author of the Undercover Economist books, admitted that he doesn’t even know someone who would vote to Leave.  The Planet Money podcast, that interviewed him on Friday about Brexit, is well worth a listen.

The process of leaving the EU will take years and will have all of us learning a lot more about Article 50.  Like you, I am a student of this process, but I do think I can offer some perspective on what the impact will be for SA.

Impact on SA?

A huge disclaimer upfront – none of this constitutes investment advice.

In the long-term, SA has bigger problems than Brexit.  We need to reduce economic inequality by growing our economy.  How do we do this?  Greater economic policy certainty in mining and land rights.  Less restrictive laws to help small business.  Better performance from State Owned Enterprises.  The list goes on.  Sadly, all of this is unlikely to happen before the weakening economy prompts a downgrade to junk status for SA government debt.

In the short-term, anything could happen, but here are some themes that might emerge.

I would imagine that the “risk off” investment environment would result in our currency weakening in the short-term as investors return funds to safe havens like gold and the Swiss Franc.

Interest rates in South Africa are unlikely to rise for some time.  The global economy will not do well with this increased uncertainty.  That should be enough for the SARB to not want to cause additional pain via interest rate hikes.

The stock market will see resources do better than any other sector but any stocks exposed to the UK (think property companies especially) will be under pressure.  Overall though the “risk off” theme will mean overseas investors pulling out.  That does mean that local value investors should be licking their lips however.

One SA company, Brandseye, has come out of Brexit with a growing reputation.  It correctly predicted the outcome by monitoring social media posts.  They can expect much more work from businesses, especially asset managers, for future elections.

We might also see a return of many nurses, IT experts and others who had made the UK their home.  The Leave camp consists of some who are anti-immigration and they might have their way with stricter rules.

Personal lessons

  • Your perspective is limited by your worldview. Things you think are improbable might not be.  Others could interpret the same facts very differently to you.  Listening to those who hold different views will help of course but the long-term key is working towards less economic inequality.
  • There is no excuse for political apathy. Big decisions are made at the voting booth – the people of SA have the power to make important decisions by appointing those that govern.
  • Economic inequality needs to be addressed. How to do this is the hard part.
  • Situations of panic present opportunities. High volatility in exchange rates and stock markets will be present and those that are patient and take a long-term view will find some good opportunities.

This winter, Brexit will provide much better viewing than any other series on TV.  What are you learning during this time?  Were you also caught by surprise?

Paul Maughan

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