It is nearly a fortnight since the fateful referendum which resulted in Britain’s vote to leave the European Union. Many have asked why this should affect us here in South Africa? The answer to that is quite simple:
The EU which comprises 28 countries, soon to be 27, with a population of some 500 million, is a hugely important player in this interconnected world. The EU is South Africa’s largest trading partner. Although it is not our wish to diminish the UK’s importance to the world, it is really the continued existence of the EU which is most probably of greatest concern.
Uncertainty is the bane of investment markets and this reflected in the sharp declines experienced in the aftermath of the referendum with the value of the British Pound leading the way. Nonetheless, last week we have seen considerable recovery (except the British currency), which has been quite gratifying. However, the uncertainty, which has been exacerbated by the British political turmoil, remains. Quite clearly this will be a long, drawn-out process as events unfold. Nothing, it seems, will be decided in the short term, not least the timing of Britain’s formal exit from the EU when Article 50 of the Lisbon Treaty is invoked.
Amidst all this, it is obviously important for us to know what approach to take regarding investments. From our perspective at Maximus, we have been listening carefully to the advice being given to us by our associates. Morningstar have had this to say on the current situation:
[blockquote]Capital markets have entered a period of extreme volatility. While such episodes always create opportunities for investors who are prepared to think independently and adopt a long-term, valuation-driven approach, they nevertheless contain dangers for investors too. Chief among these dangers is the temptation to react too quickly or with too much confidence in the wake of the outcome of this significant event.
Consequently, we are prioritising research over reaction, and would encourage our clients to do the same. As our team carefully assesses the fundamental impact on the fair value of the asset classes that we monitor we expect to uncover new investment opportunities that should improve the long-term expected returns of our portfolios.
We are also in contact with the managers who run the underlying funds in our portfolios. Each of these managers has been carefully chosen for their experience, expertise and rigorous investment process. We therefore expect them to approach the current situation with a similar long-term, opportunity seeking mind-set.
We appreciate that the current period is very unsettling for investors and challenging for their advisers. We will do our utmost to support you and your clients during this time.[/blockquote]
Here are some of the views expressed by our strategic partner Acsis / Old Mutual Wealth:
[blockquote]NOT ANOTHER LEHMAN
Brexit is unlikely to fundamentally change the outlook for the global economy. The UK will not disappear off the face of the earth, but it is an event that matters hugely for the UK. However, it is unlikely to have an economic fall-out in the US or China, the largest economies in the world. The UK economy accounts for around 15% of the EU’s economy, but only around 2.3% of the global economy.
This is not a Lehman-like moment since credit markets won’t seize up and the Bank of England (and other central banks) are ready to provide liquidity if needed. Importantly, there is no redenomination risk from leaving the EU (unlike the feared exit of Greece from the Eurozone a few years ago) since UK debt and assets are still denominated in pounds. The pound is just weaker (which should benefit UK-based exporters and some London-listed multi-nationals).
For South Africa, the impact will largely come through the financial markets channel; if the rand weakens further, it could place upward pressure on interest rates and inflation. Our very important trade relationship with Europe is not in danger, but given that the UK will have to increasingly look outside Europe to do business, our trade relationship with the UK might even improve.
INVESTORS SHOULD FOCUS ON THEIR LONG-TERM PLANS, NOT NEWSPAPER HEADLINES
Market moves of 5% or more are scary but common. On a long-term investment horizon, however, they become small blips that were often good buying opportunities, and bad times to sell out.
Markets typically overreact to such events and are likely to be volatile while the outcome and its implications are digested. Brexit is not an event that requires South Africans to change their financial plans. Financial plans and investment strategies should be built around life events and life goals, not changes in market volatility. A diversified portfolio remains the best way to manage the inherent uncertainty in investing, instead of a fearful concentrated portfolio of gold or cash.
When the market overreacts, it creates opportunities for us to add value through tactical asset allocation. We select managers who share this longer-term valuation focus, and the sell-off similarly provides opportunities for them based on also being valuation-focused.[/blockquote]
Since these comments, as we said earlier, markets have reacted very positively, regaining much of their pre-Brexit levels. The Rand is back to the level it was against the USD and has, unsurprisingly, improved against GBP by nearly 11%.
Nevertheless, uncertainty still remains and we can expect volatility to be a feature in global markets for some time to come. In the face of this we continue to believe that well-diversified portfolios managed by carefully selected asset managers is the best possible defence against sudden shocks and on-going volatility.
We continue to have great confidence in the partnerships we have forged, such as the recent one with Morningstar, to help our clients achieve their goals whatever the prevailing circumstances may be.