GTC’s Investment Analytics team comments on Brexit
Our GTC Investment Analytics team has provided the information below on recent developments related to ‘Brexit’, to assist you to gain an understanding on the relevant information and its potential impact.
What is Brexit?
Brexit is a term used to describe Britain’s exit from the European Union (EU). The EU is a legal community of 28 member countries that was initially established in the interests of promoting trade, but later increased its authority to areas such as the environment, human rights, immigration and education amongst others. The increased scope of its authority and bureaucracy are contributors to growing dissatisfaction with the EU amongst Europeans.
What happened?
On Thursday 23 June 2016, Britain effectively voted to leave the European Union by a margin of 51.9% to 48.1%. The result was confirmed early on Friday morning. While the decision is certain, there is little certainty relating to how it will be effected. David Cameron, the Prime Minister of Britain who was a strong promoter of remaining a part of the EU, has indicated he will step down by October 2016 at the latest.
Why does this matter?
Short Term (over the next week):
The decision to leave the EU was against market expectations and as a result investment markets across the globe reacted negatively in the early hours of Friday morning as evidence of the shock result became clearer. The British Pound was hardest hit, initially dropping by as much as 11% against the US Dollar before recovering. The shock caused investor sentiment to shift dramatically into one based on fear (‘risk-off’ sentiment) and as a result most risk assets, including Emerging Share Markets and currencies were traded down in a significant negative move. Our own share market, the JSE All Share, fell as much as 5% before recovering some ground by midday.
Markets are likely to remain volatile over the coming week as the decision has created a lot of uncertainty around the business, economic and financial impact of Britain’s departure.
Medium Term (over the third quarter):
While volatility in investment markets will probably be higher over the 3rd quarter 2016, the direction that markets move in the short and medium term is of course impossible to predict. Potentially negative ramifications from the Brexit decision on economic growth, both in the UK and abroad, could be offset by the actions of the world’s central banks. Central banks control monetary policy and have, since the financial crisis of 2008, regularly come to the aid of the financial system by providing additional financial support. They have done so primarily through cutting interest rates and effectively creating additional money (e.g. quantitative easing). With interest rates at all time low levels in the developed world (and in some cases at negative levels) it is debatable how much additional support monetary policy could provide.
Long Term:
At the time of writing, little remains clear of the long term impact. Initial estimates are that it will take at least two years just to effect the exit from the EU. This in itself creates an economic problem in that businesses battle to plan and grow in uncertain environments. Businesses based in the UK, partly because of their status as an EU member, will have to seriously consider relocating.
A narrow margin in a referendum is potentially fractious for a society and it is interesting to note that the majority of voters under the age of 50 voted to remain within the EU. The authorities in both Britain and the EU are aware of these ramifications and should therefore work speedily to at least make the way forward clearer.
Brexit is a symptom of the state of the world in which slowing economic growth caused by unprecedented debt levels and growing disillusionment with the current political systems are causing significant changes to the status quo. While change can be disruptive and concerning in the short term, it is obviously necessary if the problems the world faces today are to be overcome. There is a view that suggests that Brexit could ultimately prove beneficial if the serious challenges the EU has faced over the past few years are addressed and as a result Europe finds improved ways of collaborating.
As is typically the case with developments of this nature, more will become clear in the coming days and weeks. GTC Investment Analytics will continue to monitor the issue and communicate with our clients accordingly.
How will this affect your investments?
Investors who monitor values on a daily basis are likely to see big moves in value (i.e. volatility). Performances for investments to the end of June 2016 are also likely to be impacted especially when compared against inflation related investment objectives. Over the longer term we do not expect this development to significantly impact the GTC portfolios’ ability to achieve their investment objectives. This view is based on the diversified nature of the portfolios we manage, as well as our tactical asset allocation decisions which have been underweighting local risk assets in favour of global assets, and which can be adjusted through time.
What action do you need to be taking as an investor?
As communicated previously, for most investors who have a relationship with GTC the answer is “none”.
GTC’s institutional and retail advisory teams work with clients to ensure their risk and return objectives are clearly defined and that their resulting investments are aligned with these.
Given our comprehensive investment process, you as a client can take comfort in the fact that your portfolio is correctly positioned and has been designed to achieve its investment objective over time. GTC will continue to manage and monitor your investments in the prudent and focused manner that is our trademark.
If your circumstances have changed, or if you feel it may be time to revisit your risk and return objectives, please contact your Wealth Management or Employee Benefits Consultant. However, in times of market volatility, we do not recommend making significant changes to investment strategy based on singular events.
