Brexit – what were they thinking?
22 July 2016
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On mobile, on digital, on demand, this is Old Mutual Live, the Money Coach edition. Hello and welcome, my name is Chris Gibbons and joining me now to discuss something called Brexit from Old Mutual Multi-Mangers in Cape Town, Strategist Izak Odendaal. Isaac, welcome to Old Mutual Live Money Coach, first off, what is this Brexit thing that I’ve been hearing about for the past few days?
Izak Odendaal: Well, basically what it was, was it was a very unexpected referendum result. The British people voted to basically end their membership of the 43 years of the European Union.
CG: How does this affect the global economy?
JM: The thing is, it was unexpected and so the first thing you saw is a very sharp market reaction. You saw stocks fell off, you saw the Pound weakening substantially. What really is happening, is you’ve created a lot of uncertainty, so there’s a short term effect which is the market reaction.
The longer term effect is that because Britain wants to end its existing relationship with the rest of Europe, but it doesn’t have a new relationship in place yet. There will be a negotiation process if this Brexit thing goes ahead and that is an ‘if’.
But there will be a negotiation process to re-establish some sort of trade relationship with the rest of Europe. In the interim, it makes it very difficult for companies, British companies and global companies operating in Britain to make long-term decisions. Because they simply do not know what the lay of the land is going to be in the next couple of years.
You can probably expect a negative impact for the British economy. The British economy in the global context is not that big, it’s about 2.5% of the global economy. So it will probably shave off a couple of points of global growth, but it shouldn’t completely derail the global economy.
How will it affect South Africa?
CG: More importantly I guess, is how will all of this affect us here in South Africa?
JM: Well, I think the main impact will be through the reactions of financial markets because on the trade side, we don’t know how it’s going to play out. We don’t know what the future relationship between Britain and the European Union will be.
Our relationship with the European Union will remain unchanged. We will probably have to re-negotiate trade treaties with the United Kingdom. But the big challenge for us is going to be if there is a further negative reaction with financial markets, you could see the Rand weaken. A weaker Rand can cause inflation in South Africa to pick up and cause therefore the Reserve Bank to respond by hiking interest rates. That will obviously dampen economic activity in South Africa.
Having said that, the reaction of the Rand so far has been remarkably little. the Rand, despite the global volatility, the Rand has actually strengthened against, not only the Pound, but also against the Dollar over the last couple of weeks.
So far the fallout from Brexit from a South African point of view, appears to be very small to nothing. There are obviously South African companies doing business in the UK and they might be affected. But for South Africa as a whole, the impact appears to be minimal at this stage.
CG: You’re listening to Old Mutual Live, the Money Coach edition, on demand, visit dogreatthings.co.za. Izak against that background then, what are the things that I need to bear in mind as I try to plan my financial affairs over the next say 6-12 months?
Best reaction to Brexit – don’t panic!
JM: I think the main thing is that an event like Brexit should not cause you to change your financial plans. Your financial plans, it’s something you sit down with your advisor and it’s a long-term vision. It’s where do I want to be in 10-20-30 years. Then making the appropriate investment decisions that will get you there.
There will always be bumps along the way, markets will always get unsettled by things like Brexit. In South Africa we had the whole debate around downgrades. Will they happen, will they not happen? These are not events that cause you to change your financial goals. Therefore they’re not events that should cause you to change the way that you manage your investments.
Obviously these things grab headlines, they sell newspapers. The media will try and make as much as hay out of these kind of events. They do cause financial market volatility but we mustn’t get carried away. I think investors need to really kind of keep their eyes on the long term prize.
Your financial plan should only really change when there’s a change in your own life, when you decide to retire early or when you have another child or when you lose your job. Those are the kind of events that necessitate a change in a financial plan, not necessarily something that happens thousands of kilometres away.
CG: Let’s recap. Is Brexit likely to have any direct impact on the things that really matter to me and my family, like interest rates or the price of food and fuel?
How Brexit affects your right now
JM: At this stage the impact appears to be minimal. As I said, the big thing will be that if there’s further financial market volatility. The Rand is a highly traded currency, if global investors get scared, if they get risk averse, they tend to sell the Rand.
If the Rand weakens, we could see upward pressure on the things that you mentioned through fuel, etc. That could lead to higher interest rates. At this stage, as I said, the Rand remains remarkably resilient. As long as that picture persists, I think the fallout from Brexit for not only investors, but the man in the street in South Africa will be limited.
CG: This has been another edition of Old Mutual Live, the Money Coach edition. My name is Chris Gibbons, with me on the line from Cape Town has been Old Mutual Multi-Managers Strategist, Izak Odendaal. Izak, thank you for clarifying the subject for us.
Get in touch any time if you have any questions for me, topics you’d like us to cover on Old Mutual Live Money Coach. Please feel free to send them direct to me at firstname.lastname@example.org, I’d be delighted to hear from you. Until the next time, thank you for listening. Old Mutual Live, on mobile, on digital, on demand.