South Africa equity market not saved from pre-Brexit vote fallout


By Nosibusiso Ngqondoyi, Head of Research, Novare

– Our local equity market has not been spared as it is down close to 5% levels month to date as investors are pulling assets to invest into what is deemed safe haven investments.

– South Africa will be amongst the countries likely to be affected the most by a UK exit as the EU is our biggest trading partner.

– A win for the leave campaign would have destabilizing effects on our economic outlook as it might necessitate the renegotiation of existing trade agreements with the EU.

– With our current account having widened to 5% of GDP during the first quarter of 2016 a Brexit is all the more undesirable as it might have worsening effects on our balance of trade account.

In less than a week, Great Britain will hold a much anticipated, and some might argue long overdue, vote on a referendum coined the “Brexit” (British exit). The Brexit refers to the possible or more recently probable withdrawal, if recent polls are anything to go by, of Britain from the European Union (EU). On June 23, the UK will put it to a vote on whether to remain or leave the EU.

For context, the referendum appears to be the unintended consequence of an attempt by the Conservative Party to garner votes in the wake of increased support for the United Kingdom Independent Party (UKIP), notoriously known as Eurosceptics, ahead of the 2015 UK elections.  The biggest concern was that UKIP would detract from their voter base, which would effectively give the main opposition party, the Labour Party, an advantage.  In January 2013, Mr. Cameron, the leader of the Conservative Party, promised the UK public of the referendum if Conservatives won the 2015 elections, which they did.

This all happened while there was growing resentment by some of the UK citizens towards the EU, which they believe is overstepping its initial mandate of facilitating free trade across EU member states. Instead, it is alleged by some to have become an undemocratic political union, with Brussels dictating laws to EU. One of the biggest gripes is the immigration laws, which allow free movement across the EU. The latest reports shows that UK net migration reached 33 000 in 2015, 20 000 higher than 2014 and largely due to less Britons emigrating to live in a foreign country. The leave campaign is advocating for stricter immigration laws to curb this. While the remain campaign is mindful of the high immigration figures, they also highlight the significant role migrant workers play in the overall economy.

A win for the leave campaign would mean the UK will no longer contribute to the EU budget and thus will be able to apply these funds to local development. It would also result in freedom from the perceived ‘globalization focused’ EU and regaining control over laws and policies. On the negative side, a Brexit would result in the UK being shut out of the EU market which would negatively impact on GDP more so since seven out of UK’s top ten trading partners are from Europe. Furthermore, there will be a loss of hundreds of thousands of public sector jobs as the UK public sector is highly reliant on migrant labour force. Migrant workers in UK on an EU passport would have to apply for UK visas or permits to remain in the UK.

Major polls have shown Britons as evenly divided on the referendum until recently. The latest ICM/Guardian phone and online polls indicate that the support for Brexit has grown to 53%, while the remain campaign fell to 47%. While the polling results are to be taken with a pinch of salt if not more, they provide guidance in terms of the direction of the vote. The UK’s most read daily newspaper also came on out in support of the leave campaign on Tuesday which saw stocks and the pound hammered as investors reacted negatively to these news. Interestingly, the three main political parties in Britain are in favour of the remain campaign including the governing Conservative Party.

We have seen global markets, most notably European markets, falling ahead of this referendum while the pound has tumbled to two month lows. There is a strong sense of risk aversion as investors anxiously await the outcome of the referendum. In a risk-off environment, risk assets get hammered the most and emerging markets bear the biggest brunt. Our local equity market has not been spared as it is down close to 5% levels month to date as investors are pulling assets to invest into what is deemed safe haven investments.

South Africa will be amongst the countries likely to be affected the most by a UK exit as the EU is our biggest trading partner. A win for the leave campaign would have destabilizing effects on our economic outlook as it might necessitate the renegotiation of existing trade agreements with the EU. With our current account having widened to 5% of GDP during the first quarter of 2016 a Brexit is all the more undesirable as it might have worsening effects on our balance of trade account.

This is a historic moment for UK citizens as it’s been more than forty years since the Britons had a say on their relationship with Europe. It is however clear from the currency and market reactions that this not just a matter of putting the referendum to the vote, as an outcome in favour of the leave camp is expected to have far reaching implications.


This entry was posted in African News, South Africa News. Bookmark the permalink.

Leave a Reply