Breaking down Brexit…

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The decision by UK voters to leave the European Union (EU) was a surprise outcome, which has resulted in tangible uncertainty and widespread market volatility.

In our view, both political and economic uncertainty can be expected for at least the next two years; exiting the EU will be a complicated and thorny process for Britain and its trading partners.

Key considerations:

  • UK trade negotiations with Europe will need to be renegotiated.
  • Fixed direct investment into the UK may slow, as European companies decide where to be domiciled.
  • Economic uncertainty is likely to continue for some time, leading to a weaker GDP.  As a result, UK businesses are likely to hold off investment and hiring, impacting negatively on growth.
  • UK consumers are likely to be negatively affected as hiring intentions suffer and as inflation climbs.
  • Ultimately, this will all translate into slower economic growth for the UK. Given the importance of the EU economy and the possibility of a reduction or disruption in trade flows, global growth is likely to suffer.
  • Globally, there are concerns about continued slower economic growth.  Central banks, including the US Federal Reserve are likely to pause the hiking of interest rates, leading to lower rates persisting for longer.

Impact on emerging markets:

The economic impact for emerging markets will be dictated by how significant the UK is as a trading partner, and the terms of the renegotiated trade deals, which will now have to happen.   Notably, Europe remains a more important trading partner for SA than the UK.

The Political Fallout:

Without doubt, Brexit raises key questions about the integrity of the EU.

Some European countries may push for a referendum on whether to leave the EU or not (France’s National Front is already calling for a referendum). Scotland may call for a referendum, while European leaders are expected to rally their countries around the EU.

Furthermore, the prevailing uncertainty raises questions around the actual sustainability of the EU.

The Rand:

The Rand is a liquid currency and when global trade or capital flows are under threat, it is likely to see selling pressure.

On a positive note, however, there can be no doubt that market overreactions will occur – and this will create moneymaking opportunities for savvy investors.

Finally, it must be mentioned that there are some credible commentators (like Gideon Rachman of the Financial Times) who do not believe, at the end of the day, that Brexit will actually happen…

Source:  Stanlib / Momentum Investments / Anchor Capital