Why South African investors should care about “Brexit”

Last week I explained the “Brexit” referendum and believe me when I tell you it could have gone either way.

Robby P.

The “leavers” won by a margin of 51.9 per cent versus the 48.1 per cent of “remainers”.

Last Friday’s result caused global panic as stock markets crumbled and our local index opened a massive four per cent lower, wiping out many traders and investors alike.

Now that the dust has settled, I thought I’d look at the possible implications of how the British exit could affect investment.

READ: Europe referendum explained

In a broad sense, it is likely that countries with a high current account deficit (percentage of GDP), could be hardest hit.

That, unfortunately, slots South Africa right in the mix.

Countries with deficits of over four per cent include Columbia, South Africa, Peru and Turkey.

These economies rely extremely heavily on “outside” financing, so if we see “outflows” of capital we could take a serious economic hit.

I’m not saying the British exit is catastrophic, but there is a very high likelihood that this will cause some Rand weakness and, according to economists, this could shave around 0.1 per cent off of our GDP.

This is actually quite tiny in the bigger picture, but my concern is that we are already struggling for any sort of growth and, in fact, we’re teetering on the brink of recession.

It’s a case of “every bit helps” – and this does not help

There has been an immediate impact on the Pound Sterling and we’ve seen it weaken significantly against the Dollar.

The problem here is that Dollar strength equals Rand weakness.

My fear is that persistent Rand weakness raises the cost of imports.

This means things get more expensive for you and I (inflation) and this opens the door for more interest rate hikes.

Pravin Gordhan was quoted last week saying the UK pulling out of the EU would “complicate life” for South Africa – and he is right!

We are already clinging to our credit rating and any threat to our economic growth puts us in danger of a December downgrade.

We now have to find an extra 0.1 per cent of growth that we didn’t have to before the vote.

We could see investment “leave” SA

Global uncertainty and a potential capital (and currency) flight to safer havens could mean more foreign cash leaving emerging markets like ours.

I have commented in a previous column on just how fickle foreign investors are.

In times of uncertainty, foreign money flows out much quicker than it comes in.

It’s a little concept based on “fear and greed”.

This has never happened before

Bear in mind that what happened last Friday is what is called a “Black swan” event in financial markets.

It’s an event that nobody expects.

This is also a first time event.

What that means is that nobody knows what to do next and nobody knows what is going to happen next.

It’s going to take around two years for the British exit to complete and, in the meantime, the UK has to renegotiate trade deals with Europe.

The bottom line on your investments

A few issues ago, I wrote a piece explaining why you should think like a foreign investor.

The recent events make a strong argument for diversifying investments outside of South Africa.

This is not “Doom and Gloom” for European markets, because I believe both the UK and Europe will come out of this in due course.

I do, however. believe now, more than ever, that you should be looking at Dollar and Euro denominated investments to safeguard yourself against the fragility of our own market.