You won’t have to look far to see news that Britain’s proposed exit from the European Union, or Brexit, has left Prime Minister Theresa May hanging by a thread, says Mica Townsend, business development manager at financial services provider, 10X Investments.
“The resignation this week of Brexit Secretary David Davis and Foreign Secretary Boris Johnson rattled the markets, which were already very unsettled as the US and China continued to trade blows in their fast-developing trade war,” said Townsend.
Brexit is the impending withdrawal of the United Kingdom from the European Union.
May narrowly escaped defeat on her Brexit proposals in Parliament Monday, Bloomberg reported. Moreover, a growing number of lawmakers are discussing a potential second referendum on Brexit, after 51.9% of the participating UK electorate voted to leave the EU in the initial event in June 2016. The turnout was 72.2%.
If the UK fails to get a Brexit deal with the EU and instead trades with it under World Trade Organisation rules, that potentially presents a “financial stability event” for both Britain and the bloc, BOE Governor Mark Carney told lawmakers on Tuesday, as reported by Bloomberg.
“Although it may be confusing to some that Brexit is even a point of interest in South Africa, it is true that the outcome of the heated debates currently under way in Europe could have a knock-on effect on South Africa,” said Townsend.
“Many South African companies have their European headquarters in the UK,” she said, “and they use these as a base to serve the rest of Europe. Depending on which way the Brexit needle swings these companies may be forced to set up a base somewhere else to continue to do business in Europe.”
This could create the risk of significant additional cost to companies resulting from a move of this sort, as well as major impacts from a human resources perspective.
A potentially greater impact for South Africa and its economy could come from changes to international trade agreements. The EU is South Africa’s most significant trading partner, with the UK being a big part of this.
“The UK is a large importer of South African goods, such as wine, fruits and precious metals. If the UK were to leave the EU, trade agreements would have to be renegotiated with no guarantee of an equally favourable outcome,” Townsend said.
She also pointed out that, if growth in the UK were to remain sluggish after Brexit, demand for imported goods would likely be hit, with a negative knock-on effect for the South African economy, as exporters would find their markets dwindling.
On an individual level, many South Africans have UK passports via their ancestry. Up until now this has given them the automatic right to live and work in the EU, which looks unlikely in the future.
But, as much as Brexit may be a real concern for some South African companies and individuals, it is important to remember that this is just another in a long line of threats to the stability of the world economy. There will always be volatile political events, the threat of wars and so on, and there is just no way of knowing how things will pan out.
Townsend said South African savers and investors would be ill-advised to change their long-term plans to respond to short-term events.
“As long as your portfolio has been constructed with your long-term goals in mind and your investment strategy has been aligned to give you the best chance of achieving this there is no need to be reactive to events.
“Just as was the case with the global financial crisis of 2008, 10X Investments will not change our simple, steady, low cost investment strategy in light of the latest developments – and we believe that investors should follow the same approach.”