Brexit turmoil ‘shouldn’t faze long-term investors’

The United Kingdom’s vote to leave the European Union caused wild swings on financial markets around the world, but if you are investing for the long term, you probably don’t have a reason to change your investments.

Markets typically overreact to unexpected events, such the outcome of the referendum in Britain, and they are likely to remain volatile while the outcome and its implications are digested, local investment managers say.

The turmoil affected markets across the globe yesterday. London’s FTSE 100 Index plummeted than seven percent before recovering slightly during the day, and the pound fell 10 percent against the United States dollar to its lowest level since 1985. In France, the CAC40 had fallen nine percent by mid-afternoon, while Germany’s Dax was down seven percent.

Locally, the FTSE/JSE All Share Index fell sharply, by over four percent, soon after trading began, before stabilising at about minus 3.6 percent by midafternoon. The price of gold hit a two-year high, up about six percent.

The rand fell by five percent against the US dollar, although it was up almost four percent against the flailing pound.

Local investment houses and financial advisers were quick to reassure investors.

Dave Mohr and Izak Odendaal at Old Mutual Multi-Managers say Brexit does not require South Africans to change their financial plans. Investment strategies should be built around your life events and life goals, not newspaper headlines and market volatility, they say.

When markets move five percent or more, it may be scary, but it is also common. Over the long term, however, it will become a small blip rather than a major fall and these dips often give your investment manager a good opportunity to buy shares and other assets at low prices and then benefit from the recovery.

A diversified portfolio remains the best way to manage the inherent uncertainty in investing, instead of a fearful concentrated portfolio of gold or cash, Mohr and Odendaal say.

The markets, the pound and emerging market currencies rallied strongly in the days leading up the referendum as polls indicated that Britons would vote in favour of remaining in the EU. The big market moves yesterday need to be seen partly as a reversal of the gains made in the previous few days, they say.

Mohr and Odendaal say that while the Brexit vote will drain investors’ appetite for risk in global financial markets, it is unlikely to fundamentally change the global economic outlook.

“The UK will not disappear off the face of the earth, but it is an event that matters hugely for the UK. However, it is unlikely to have an economic fall-out in the US or China, the largest economies in the world,” they say.

The UK economy accounts for about 15 percent of the EU’s economy, but only about 2.3 percent of the global economy.

The pair say South Africa is likely to feel the impact most in its financial markets and if the rand weakens further, it could place upward pressure on interest rates and inflation.

South Africa’s trade relations with Europe are not in danger, however, and relations with the UK, which is increasingly looking outside Europe to do business, might even improve, they say.

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