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Defying logic to end a longstanding relationship

27 June 2016 Jonathan Faurie

In keeping with a long honoured tradition of defying logic and not listening to sensible advice, the UK amazingly voted that it will leave the European Union in a historical referendum which was held on 23 June.

The immediate impact of the decision was startling, the Pound devalued to levels last seen in 1985 and Prime Minister David Cameron’s tenure will also now end. Below are some of the biggest stories that have come as a result of Brexit.

The volatile Pound

According to reports by the British Broadcasting Corporation (BBC) and Sky News, the Pound experienced a torrid time in the immediate aftermath of the vote.

The BBC reported that the Bank of England said it was "monitoring developments closely" and would take "all necessary steps" to support monetary stability while Sky News said that the Bank of England was on standby to take action after the UK's decision to quit the EU sent the Pound plunging.

Sky News added  that the Pound saw wild swings after the polls closed - research showed the Remain side marginally ahead at 11pm and the Pound headed sharply up to a six-month high against the Dollar at $1.50. But after regional results began to paint a clearer picture, the Pound nosedived by more than 10% to $1.33. The Sterling also saw a sharp fall against the Euro, down 8%.

What will the implications be for international markets?

In a release to the media, David Zahn, Head: European Fixed Income Franklin Templeton Fixed Income Group, said that in general, he considers this a risk-negative result. “That means I would expect what investors consider to be risky assets such as equities and corporate bonds to underperform and for there to be a flight to quality to those perceived as less risky, most notably Gilts and Bunds.”

He added that he would expect to see some ramifications on the weaker economies in the Eurozone and wider EU, with peripheral European bond spreads likely widening. The value of the Euro will also decrease, although likely not as much as the Pound.

John Orford, Old Mutual Investment Group: Macro Solutions Portfolio Manager, feels that Britain leaving the EU is an important, but local, event and is unlikely to have a major impact on the global economy.

"Far more pressing is the fact that the global economy is already very weak, with growth of 2.5% at best and much lower than growth during the 2000’s. Other concerns are China’s unpredictable economic outlook, ongoing uncertainty about when the US Federal Reserve will again raise interest rates and pretty weak corporate earnings across the world,” he said.

The roller coaster begins

Reports from News24 suggest that analysts were shocked on Friday to see the Rand dive more than the day President Jacob Zuma fired former finance minister Nhlanhla Nene in the wake of Brexit.

The News24 report added that Rand Merchant Bank analyst John Cairns was alarmed that the currency’s losses against the Dollar had swung between 5.5% to 8.5% on Friday, more than the 5% when Nene was fired.

He said that the fall was at the larger end of the ranges that he expected. “The Rand has been an underperformer, for no particular reason that we can think of,” he said. “This allows some scope for recovery, but this will be swamped by the broader global moves.”

Umkhulu Consulting’s Adam Phillips was just as taken aback. He even labelled Brexit as a disaster for all emerging market currencies.

“These losses might only be the start. No doubt many London traders are already at their desks, if they ever left them, but we’ll need to see the full force of London and Wall Street before we can truly gauge the effects.

Impact on SA financial markets

Sanisha Packirisamy, Economist at Momentum Investments, says that the Rand as a liquid currency in a dissipating global risk appetite framework is likely to feel the selling pressure – particularly as SA’s large twin deficits are always exposed when global trade or capital flows are under threat.

While SA bonds and equities are both likely to feel the Brexit pain, at least the local equity market will be protected somewhat by the offsetting impact of Rand weakness on the dual-listed shares, as well as on the companies with large offshore earnings bases.

Editor’s Thoughts:
While the true impact of Britons decision to leave the EU will only be fully quantified over the course of the exit, immediate indications show that the world’s economic woes are far from over, but South Africa may still benefit from a weakening UK currency.  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Cynical Simon, 27 Jun 2016
An immensely more important issue is the dangerous and ominous groundswell of which Brexit and Trumpxit are only the symptomatic results.What we need to understand is the question: What is happening in the world as we know it, and in what ways are the existing order being threatened and are there ways and means to contain the impending implosion of sound logical and rational strategies..The dividing lines have been redrawn but where are these lines now and exactly what are these.?
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Added by Ayanda, 27 Jun 2016
Dear Jonathan,
I cannot imagine where you come upon the idea that the Brits have a long tradition of not accepting good advice, or even that advice to leave the EU was not good.
Brexit ensures that the Brits set themselves free from unelected, unaccountable socialist bureaucrats in Brussels micro-managing them, with no way to stop it. They obtain their independence once more after over 40 years of lost democracy.
Both Cameron and Corbyn ran rather lackluster, unconvincing Remain campaigns as they were previously known for their Euro-skeptic views. They weren't really convinced themselves.
Britain can now also rid itself of 30-odd Scottish socialist MPs with disproportionate influence in the Westminster parliament. (Remember too that only London, Scotland and Northern Island voted to stay in. EVERYWHERE else voted by large majorities to get out.)
A bonfire of the red tape is now promised and London can go on to strengthen its position as the financial capital of the world, without being dragged down by the imposition of ill-considered, wealth and job destroying EU and American socialist regulation.
Perhaps now even our lot will think twice about dragging South Africa willy-nilly down the twin-peaks/RRD rabbit hole...?
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