“There are decades when nothing happens, and then there are weeks when decades happen.” – Vladimir Illyich Ulyanov, alias Lennon

THE shock waves which emanated from Britain’s surprising decision to leave the European Union last week was similar to that of a surprise nuclear explosion in financial terms. At the core, global financial markets imploded as the shock news broke: the pound sterling plummeted to 31-year lows against the US dollar and the euro while bank shares plunged by almost 30%.

The decision by the Brits to vote 51,7%-48,3% in favour of leaving they EU will one day go down as a pivotal day in world history. The full ramifications of this surprising decision will only be fully understood 20, 30 and even more years into the future.

Britain is unlikely to be the last member country to leave the European Union. Rumblings of discontent, which have been apparent for some time in several other EU-countries, will now develop into full-scale thunderstorms. Other countries which could consider a similar vote to leave include Holland, Denmark and possibly even France. Will this mean the end of the EU-dream?

What impact will this have on South Africa, a far-distant country but with more than just a curious interest in what is happening?

The answer to this question, while nowhere purporting to be 100% accurate and prescient in any way, is massive. Anyone else who wants to claim otherwise is being reckless, at best or deceitful at worst.

It is worth noting that both Pravin Gordhan, SA’s minister of finance together with Treasury, released a joint media statement last Friday, 24th June 2016 to the effect that everything is under control and that “SA’s financial institutions have the capacity to man-age all external shocks that could emanate from this decision by the Brits.”

This was followed by full-page adverts in the Sunday newspapers by Old Mutual, one of SA’s largest investment companies, telling its clients and the public at large to Keep Calm and Carry On. Old Mutual Plc., the parent company itself is listed on the London Stock Exchange and was one of the biggest casualties in the sell-off of SA companies with deep ties to Britain. Other companies in the same boat include Investec, Discovery, Mediclinic and Tradehold.

This reflexive reaction by the authorities and the large financial institutions, while understandable, does not serve the long-term interest of their clients, only themselves.

As independent investment advisors and custodians of the wealth of our clients we feel somewhat different. The Brexit-decision already has had an immediate short-term impact on financial markets while longer-lasting damage can also be done to investment portfolios. What follows is a summary, firstly of the likely impact on Britain and thereafter on SA.


The vote is expected to deliver at least a short-term hit to growth in Britain and might push it into a recession. It could prompt the Bank of England to cut interest rates to zero and test the willingness of creditors to keep funding Britain’s current account deficit.

Further ahead, the next two years will see a flurry of trade negotiations with individual countries in Europe (as well as the rest of the world) and much will depend on the type of deals that can be struck. More than 50% of Britain’s exports go to countries in the European Union.

Britain’s economy would grow more slowly outside the EU than had it stayed in, according to several projections done before the referendum by the IMF, World Bank and the Bank of England.

Britain’s finance minister George Osborne has warned of a DIY recession and the BoE has warned of a “material slowdown” should the Leave vote wins.

A small group of pro-Brexit economists has said leaving the EU will boost growth in the years to come although some at least predicts a shallow downturn first.

The fall in sterling, which is at lowest level against the US dollar since 1985, could help exporters-although demand in many countries around the world remains weak at present.

The OECD has said there could be deeper economic fallout if Brexit undermines confidence in the future of the EU, a scenario not included in its forecasts.

US Federal Reserve chairperson Janet Yellen said last week the referendum could have consequences for the global economy and financial markets. If it does so, it could have consequences in turn for US economic outlook that will be a factor in deciding on the appropriate path of policy,” she said, referring to US policy. This could mean that the long-anticipated and long-feared increase in US interest rates will be postponed once again, perhaps indefinitely.

BoE Governor Carney has said it’s too simple to assume that the Bank will cut interest rates from what is already a record low of 0,5% to cushion the economy after a Brexit vote. The Bank said it had to weigh up slower growth against higher inflation caused by a weakening pound.

Seventeen of 26 market economists polled by Reuters in April expected the BoE’s next move after an exit from the EU would be to cut interest rates rather than raise them.

Britain racked up its biggest current account deficit on record last year, equivalent to 5,2% of GDP. The shortfall reflected higher flows of dividends and debt payments to foreign investors than similar flows into the country as well as its trade deficit. Britain, like South Africa, is dependent on the “kindness of strangers” who fund the balance of payment deficit.

Most forecasters think Britain’s unemployment rate-now at 10-year lows of 0,5% – will rise after leaving the EU, although after the financial crisis Britain managed to avoid job losses on the scale seen in other countries.

By contrast, Economists for Brexit has said Britain’s labour market could become more dynamic through the repeal of onerous EU regulations and the elimination of EU’s high import tariffs such as on food, boosting productivity and living standards.

World leaders from the United States, Japan, Germany and France have warned Britain that leaving the EU would hurt its standing as a global trading power.
US President Barack Obama warned that Britain would “join the back of the queue” for talks with the United States.

Despite the risk premium already built into sterling, analysts predicted before the referendum that the currency would fall further in the event of Brexit, with a possible target of $1,35. George Soros, the philanthropic billionaire, famous for “breaking the pound in 1992”, predicts it will fall to $1,15.

In bonds (gilts) strategists think that gilt yields could fall to all-time lows of 1% and that the US Treasury yield could drop as much as 30 basis points to around 1,35%, which could also be a record low.

Brexit could not have come at a worse time for South Africa. With its politics currently inwardly focused on the fall-out from the Nenegate-scandal, the position of its leader pres. Jacob Zuma and the forthcoming municipal elections on 3 August, the country is ill-equipped to handle the global uncertainty created by Brexit. It also comes at a time when Foreign Direct Investment (FDI) has fallen to a 10-year low while the current account, showing a deficit on the current account in excess of 5%, needs to be funded to the tune of more than R240 billion per year.

It is our view that Brexit will add substantially to the uncertainty in local financial markets, which could see further, substantial pressure on the current account and ultimately the rand. The global flight out of sterling into the US dollar will probably weaken the rand to between R17 and R18 by the end of the year, possibly even more if our currency gets downgraded by global credit ratings Moody’s as well as S&P Global Ratings in December this year. Both agencies left SA’s ratings unchanged in June this year, but changed the outlook from stable to negative.

Barclays Africa was one of the few local financial institutions to venture an opinion on the outlook for the currency.

Brexit would result in a fundamental shift in SA’s trading partners, the UK (its 5th largest trading partner) as well as the European Union (largest). More than 25% of SA’s exports are destined for countries in the EU. Any turmoil and economic stagnation in this area will hit SA exports particularly hard.

The political fall-out from Brexit was immediate and brutal. UK prime minister David Cameron, who called the referendum during his campaign in the 2013 general election, has lost his gamble and has already resigned.

British politics is in turmoil and the leader of the second largest political party in the UK, Jeremy Corbyn, is also facing the sack at the time of writing.

But the post-Brexit economic landscape is even more disturbing. News of the UK decision wiped $2 trillion off the markets globally and the turmoil could spread even further.

Gold and gold shares could be a the major beneficiaries of the current flight to safety. For the first time in seven years we are advising a small 5-10% exposure to gold within our global investment portfolios.

We also urge clients who do not have sufficient foreign currency exposure to seriously consider increasing their outward investment.

What’s more, about 20% odd foreign tourists who visit South Africa are from the UK and the UK and the EU are major sources of both portfolio and direct investment in South Africa, accounting for sizeable number of jobs in SA.

Chances are that the fall-out from Brexit could just tip the SA economy, already stumbling along at growth between 0 and 1% annualized, into a recession for a protracted period of time.

We are currently spending a great deal of time analysing trends in global markets and will be communicating our de-risked global and local investment portfolios later this week.