Download Stay Put, unlike Britain

Stay Put, unlike Britain
The world waited to see whether Britain went ahead with the Brexit or to Bremain, the ultimate outcome of the exit sent the
markets into whirlwind. On Thursday the 23rd July 2016, 51.9% of the British nation voted to leave the EU, marked as one of the
biggest divorces in history. Moments later, the Prime Minister David Cameron resigned. Markets plummeted. The British pound fell
by more than 10% against the US dollar to a 31 year low. Headlines across nations exclaimed “what now.”
So why on earth would Britain be motivated to vote this way? Those driving this decision, motivated it that EU is sliding downhill,
fast, with the recent economic crisis, refugee crisis and so on, that Britain needs to cut cords. Moreover, they see interference with
their own policies by remaining in the EU, along with the high membership cost that comes with being an EU constituent. All of this
and more drove Britain to vote in favour of leaving.
The impact of the decision is expected to directly affect the UK the most, with varying spill over effects reaching other nations.
So what does this mean for South Africa? Well, the Rand is often seen as a proxy for risk sentiment, and is extremely volatile in
response to such events. The initial panic saw the currency fall 8%, with further expected negative impacts on the South African
economy. Being a major trading partner, the weaker Pound means South Africa can import more for less, but we export less as
they become more costly. These effects are detrimental to the country’s GDP. As for foreign direct investment (FDI), the Brexit
will cause uncertainty across the globe, with investors becoming even more wary of investing in emerging markets, such as South
Africa. Currently over 40% of FDI in South Africa is sourced from Britain.
The reasons for Brexit will only fully reflect in 2 years’ time, after lengthy renegotiations and discussions. The initial impact is
mainly driven by panic and irrational human behaviour, but it is only temporary. The real effects of the planned policy changes and
reasoning for Brexit will show up in the long-term. Markets tend to overreact in the short-term, but will smooth out, as with any
market shock that has occurred in history, and absorb the shock’s effects.
This voting outcome is out of our control, and it will affect us. However it is important to keep things in perspective, and the
ultimate impact will unfold over time in terms of direct and spill over effects of the Brexit, which will eventually be absorbed
into the market over the long-term. Thus for long term savings, such as those for retirement, it is imperative to remember this
current market uncertainty has short term fluctuations that will pass. Stay put and let the shock play out. One thing is for sure, the
aftermath will touch all corners of the globe, and no one can say we don’t live in event-filled times.
All Share Susceptible to Global Market Shocks
60,000
Nengate - 2015
Brexit - unfolding
Oct-14
Jun-16
Global Financial Crisis - 2008-2009
20,000
11th Sep. - 2001
30,000
TMT Bubble - 1999
Gulf War 1990 -1991
40,000
Asian Currency Crisis - 1997
50,000
10,000
Feb-13
Jul-11
Nov-09
Mar-08
Jul-06
Dec-04
Apr-03
Aug-01
Dec-99
Apr-98
Sep-96
Jan-95
May-93
Sep-91
Jan-90
-
This chart shows the performance of the South Africa All Share Index since 1990, along with a number of political and economic crises that occurred throughout this
period.
This chart shows
the performance of the South Africa All Share Index since 1990, along with a number of political and economic crises
that occurred throughout this period.
Key Messages
•
Despite periodic disruptions, equities have historically managed to fight through these and maintain their long-term upward
climb.
•
Crises occur with relative frequency, and there is no reason to believe that this will not continue. Understand this. Be prepared
for this. Accept
this. That way, you will be less inclined to panic about your long-term investments when they occur.
The NMG
Mercado
Week 11
424
• Over
shorter periods, equity market disruptions can put your capital at risk if you are unexpectedly forced to sell. However,
TOPICAL
NEWS
over the longer-term, these disruptions simply become temporary volatility.
South Africa Level of Credit Rating Above Junk
2
•
0
•
•
Fitch
Standard & Poor's
Baa1
Baa2
BBB+
BBB
BBB+
BBB
B
Caa
Ca
C
B
CCC
CC
C
B
CCC
CC
C
Historically, the longer one remains invested, the lower the risk of losing capital and theAaa
higher the probability
of achieving
AAA
AAA
Aa
AA
AA
Downgrade
frombonds).
Moody's will
enhanced returns (over
cash and
A
A
A
move its evaluation on par
1
Credit Ratings Scales
Moody
Investment Grade
Temporary volatility is simply the price that has to be paid in order to enjoy the historical
outperformance
of
Baa3 longer-termBBBBBBBa
BB
BB
equities vs bonds or cash.
Non Investment Grade/
Speculative
If one truly believes in the long-term resilience of equities, then shorter-term downturns should be welcomed and indeed
Fitch (outlook stable)
S&P (outlook negative)
Source: Trading Economics; NMG Actuaries & Specialised Consulting
embraced as opportunities
to Economics;
purchase
sale”.
Source: Trading
NMGstocks
Actuaries &“on
Specialised
Consulting
Moody's (outlook negative)
South African Credit rating Under Threat
Consulting
SouthNMG
AfricaInvestment
is working hard
to convince that Moody’s Investors Service that structural reforms and other actions required to support the fiscal framework announced
in the Budget 2016 are enough to avoid a credit-rating downgrade. The country is targeting budget deficit to decline to 2.4% of GDP in the outer year of the three-year
cycle from the projected shortfall of 3.9% of GDP in the year ending March 31, 2016. Gross debt will exceed 50% of GDP this year and this is for the first time in at least
25 years. The government expects the economy to growth by 0.9% this year whilst Moody’s forecasts the economy to expand by 0.5% in 2016, and should the country’s
economic growth be within Moody’s expectations, South Africa will face headwinds in servicing its debt. The means that the cost of debt will go up on the back of weak
commodity prices due to weak global economy. Hence, there will be increased headwinds for government to meet its obligations such as infrastructure developments.
In addition, both offshore and domestic pension funds may be barred holding South African debt because of the rules on how much on investment grade debt they can
invest. This also means that the probability of default on South Africa’s debt will increase as the country might face pressure to payback debt due to higher interest rate
and headwinds on its income. This implies that prices of South African assets will drop because of decline in demand, currency will weaken further, and individuals will
experience higher costs of goods, services and interest rates. Looking at other countries that have been downgraded to junk status, it took an average of 7.5 years to
recover from junk status downgrade. however, our view is should South Africa be downgraded to, it is poised to take less recovery time due to measures that the
government has put in place in the budget, government and private partnership, positive developments on South Africa’s energy supplies. South Africa income had
been spoiled by low commodity prices, government policies uncertainty, ever sky rocketing wage bill and low productivity in some sectors due to strained labour
relations. Standard & Poor’s has a negative outlook on the nation’s BBB- rating, which is one level above junk. Last week, Moody’s Investors Service highlighted that it
is putting South Africa’s Baa2 assessment on review for a downgrade because of the weaker growth and fiscal outlook. A one-step cut by Moody’s will move its
evaluation on par with that of Fitch Ratings Limited and Standard & Poor’s.
Market Snapshot
CLOSE
PRICE
FTSE/JSE Indices
All Share Index
Top 40 Index
Resources Index
Industrials Index
Financials 15 Index
Interest Bearing Indices
BEASSA All Bond Index
STeFI 12 Month Index
Inflation-Linked Bond Index
World Indices
MSCI World Index
MSCI Europe Index
MSCI Emerging Index
WEEKLY
%
CHANGE
YTD 11
MAR
2016
51,739.8
45,761.3
16,859.9
77,744.8
14,931.8
-0.8%
-0.9%
-3.0%
-0.3%
-0.9%
2.3%
0.1%
22.9%
-1.8%
-2.0%
490.4
357.0
636.4
1.4%
0.1%
0.2%
6.1%
1.5%
1.5%
1,626.2
1,465.8
800.9
1.1%
1.5%
1.3%
-2.2%
-3.7%
0.9%
CLOSE
PRICE
Currencies
Rand/Dollar
Rand/Pound
Rand/Euro
Rand/Japanese Yen
Dollar/Pound
Commodities
Gold (Rand)
Platinum (US$)
Brent Crude Oil (US$)
Major Economies Indices (base currency)
S&P 500 (United States)
FTSE 100 (United Kingdom)
Nikkei 225 (Japan)
WEEKLY
%
CHANGE
YTD 11
MAR
2016
15.21
21.69
17.02
7.45
1.44
-0.1%
0.3%
0.7%
0.6%
1.1%
-1.6%
-3.8%
1.3%
-4.1%
-2.4%
19,296.04
961.50
40.39
-2.3%
-1.8%
4.3%
17.3%
7.9%
8.3%
2,022.2
6,139.8
16,938.9
1.1%
-1.0%
-0.4%
-1.1%
-1.6%
-11.0%
THE WEEK AHEAD
• South Africa's Retail Trade Sales data - Retail sales in South Africa increased 4.1% YoY in December of 2015, compared to a downwardly revised 3.8% rise in the
previous month and consensus was at 3.3%. The highest growth rates were recorded for household furniture, appliances and equipment. The market is
expecting retail sales for January 2016 to be 3.9% Poor’s.
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Disclaimer
“The information contained herein is intended for general information and illustrative purposes only and must not be seen as advice as defined in the FAIS Act. NMG does not expressly or by implication represent, recommend or propose, nor does it intend to represent, recommend or propose that the financial information contained in this report is appropriate to the
particular investment objectives, financial situation or particular needs of any existing client or any other person reading the report.It is recommended that you consider on your own or in consultation with your licensed financial services provider as to whether the intended purchase of any financial product; the investment in any financial product; the conclusion of any
transaction in respect of a financial product; or the variation, replacement or termination of any terms in relation to a financial product is appropriate when considering your particular needs, personal objectives and financial situation.
NMG has taken all reasonable measures to insure that the information is complete and accurate; however, NMG makes no representation and gives no warranty as to the integrity, adequacy, completeness or suitability of the information contained herein or that the information is free from errors and omissions of any kind. NMG will not be liable for any actions taken by
any person based on the correctness of this information.”