Black Friday as Britain turns its back on EU
MOVING OUT: British Prime Minister David Cameron and his wife, Samantha, head for the front door of No 10 Downing Street after his resignation. The couple will soon be leaving the house for good MARKETS went into a tailspin and every expert had an opinion on what Brexit would mean for the global economy.
One thing was certain: global market volatility will continue.
There is uncertainty about how the UK will manage its exit from the EU and what the consequences will be.
Most British citizens voted to ditch the EU, sending investors scrambling for safe-haven investments, knocking the pound and shocking emerging market currencies and global stock markets.
The market volatility stripped more than 8% off the rand, which fell to a three-week low of R15.68 against the dollar before recovering to R14.93. Expectations are that the currency will linger at R15 to the dollar until the end of the month.
This might change expectations that the Reserve Bank would hold interest rates next month after better-than-expected inflation figures were released last week. But the weaker rand may fan inflation, which has breached the upper limit of the central bank’s 3%-6% target.
Brigid Taylor, CEO of Kaon Capital, said: “The rand is being led by what’s happening on Brexit and as a result you’re going to see the rand now correct to around the R15 level.”
Sanisha Packirisamy, MMI Investments economist, said: “Market volatility will persist until the market is satisfied that the breakaway will follow the appropriate legislation set out by the EU and that the UK will be able to renegotiate ‘friendly’ trade deals.”
Mike Keenan, currency strategist at Barclays Africa, said: “We are concerned not only by the capital flight to quality that we are seeing initially but also further down the line the potential negative effect on the trade flow, if indeed growth slows within the region.”
Keenan said the likelihood of the UK falling into a recession had increased and this had negative growth implications for Europe.
But Dave Mohr and Izak Odendaal of Old Mutual MultiManagers said the exit was unlikely to fundamentally change the outlook for global growth because the UK economy accounted for only about 2.3% of the global economy.
Packirisamy said gold and the dollar — considered safe havens in times of market uncertainty — could rally while emerging market currencies such as the rand could weaken. Gold jumped 8% during intraday trading on Friday to a two-year high of $1 357 an ounce.
But Peter Major, a director for mining at Cadiz Corporate Solutions, said the benefit for South Africa in the rally in the gold price would be small.
“Up until 20 years ago, when we produced 600 tons a year, then it would really benefit us. But now we only produce 150 tons a year. Maybe we get $5-billion or $6-billion a year from gold and we used to get $25-billion.”
Keenan said: “I don’t think gold is going to save the day for South Africa, even if the gold price continues to soar. We’re at record highs now in terms of the rand price of gold, but there are other forces of play here which I think are going to outweigh the benefits of a higher gold price.”
The share prices of South African dual-listed companies with head offices in London took a hit. Financial services group Old Mutual was down nearly 6% on Friday, Investec lost 7%, and Anglo American fell more than 6% while brewer SABMiller gave up 1% on the day.
Anglo American said there would be a direct commercial impact on its operations. SABMiller declined to comment.
Investec, which has shed 22.7% of its share price over the past 12 months, said: “We are confident that our diversified business model with multiple income streams will provide resilience, as it has done in the past during times of economic uncertainty.”
William Baldwin-Charles, head of corporate affairs at Old Mutual plc, said that because of the uncertainty created by the two-year cooling-off period, it could not speculate on the impact on its UK-based Old Mutual Wealth business model. He said the parent company’s strategy would not change and it remained well capitalised and resilient.
Analysts said there could even be a bright spot for South Africa. The lengthy period of negotiations for new trade agreements increased the probability that the UK would opt for less strict import policy, giving South Africa an opportunity to increase its exports into the UK, according to BDO audit manager Werner Gerber. Exports to the UK constitute 4% of South Africa’s total exports. The EU is South Africa’s largest trading partner with 24% of the country’s total exports last year.
I don’t think gold is going to save the day for South Africa
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