Download brexit one year on: 6 lessons for south african investors

MACROSOLUTIONS
BREXIT ONE YEAR ON:
6 LESSONS FOR SOUTH
AFRICAN INVESTORS
EVAN ROBINS
PORTFOLIO MANAGER
JUNE 2017
On 23 June 2016, 52% of UK referendum voters defied the pollsters and elected to leave the European Union (EU). This hit UK stock and
currency markets hard, and reverberated south onto the JSE. There are a number of UK listed-companies with a material weight in our
market that have a secondary listing on the JSE − these include companies such as Intu Properties and Capital & Counties Properties
(Capco). As we lick our wounds and reflect on the devastating impact on these dual-listed shares, there are lessons that can be learned
from Brexit that are relevant to South African investors.
#1 A floating currency is a shock absorber
SHOCK ABSORBER: BRITISH POUND LOSES GROUND AGAINST
Following Brexit, the British pound lost around 10% of its value against
US DOLLAR AND EURO (31 January 1973 - 15 June 2017)
the US dollar and the euro − falling to levels that prevailed 30 years
ago. At the time of writing, it had weakened 25% against the rand1.
2.700
2.500
2.250
2.700
2.500
US dollar/British pound (US$1.28)
Euro/British pound (€1.14)
2.250
2.000
2.000
1.800
1.800
more expensive: a bonanza for UK trade. UK goods exports are now
1.600
1.600
significantly cheaper, even if they were subject to maximum World
1.400
1.400
Trade Organisation (WTO) tariffs (the worry is with services). The
1.200
1.200
weaker pound has cushioned the UK economy. If Brexit is as bad as
1.000
0.929
1.000
0.929
As a result, British exports became more competitive and imports
feared, the currency could fall even further to compensate. Ironically,
1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017
countries in trouble in the Eurozone, like Greece, have to try and
stabilise the hard way – without the benefits of their own currency.
With sterling depreciation comes inflation, lower real consumer
spending power and more expensive imported goods. This is bad
for UK retail and the UK property companies listed in SA that are
exposed to shopping centres.
Source: I-Net
#2 Economic pundits can be very wrong
It’s not just the political pundits that predicted a “remain” outcome
from the referendum who have egg on their faces. Prior to and in the
immediate aftermath of Brexit, many economists gave a very grave
assessment of the near-term economic consequences. One year on
and the UK economy has not been devastated. In fact, it grew by
Similarly, at home, the rand acts as the stabiliser in times of crisis.
1.8% in 20162. Over the longer term, the “I told you so” warnings
Our Economic Research Unit has argued that it is probably the only
may indeed be borne out (and recent data has been weak), but the
pressure valve in South Africa because the appetite to raise interest
need to eat humble pie would still be required. Perhaps forecasters
rates or cut spending is limited and greater capital restrictions would
did not consider other moving parts like the sterling depreciation we
be harmful. Rand volatility is a blessing and a curse. We would do
discussed. Some forecasters may also have allowed their political
well to remember this.
1
Currency data as at 14 June 2017. Source: FactSet.
2
UK Office for National Statistics.
distaste to cloud their assessments.
This sentiment still prevails with regards to UK property companies.
the air, including whether non-British staff will be allowed to live in
The shares trade at wide discounts to net asset value (NAV). That
the UK. Investors demand a higher return as a risk compensation and
means the market expects investment grade commercial property
share prices must fall to provide that enhanced return.
values to fall materially. To date, this has not happened, but the market
is still pricing in the “day of reckoning”. There is money to be made
This is amply evident in South Africa. The political and policy uncertainty,
if the current transactional evidence is correct and the market is wrong.
with binary potential outcomes, has resulted in little investment from
local companies or foreign direct investors. This is both a cause and
South African crystal-ballers need to learn this lesson: political views
a symptom of the weak economic environment in South Africa. A
should not cloud economic assessments. Politics is not the only force
positive is that this is something that can be resolved.
working on an economy. The rand is stronger now than many would
have expected, because global conditions are supportive of currencies
#5 A year is a long time in politics
in countries offering high yields. A shock commodity boom would do
The June 2017 UK snap elections were announced to strengthen the
a lot to improve the South African outlook, even in the absence of
Conservative party’s majority and its Brexit negotiating position. It
any improvement in the political environment.
was widely hailed by the erstwhile pundits as a particularly shrewd
#3 Currency volatility can overwhelm short-term returns
Even if a UK share held its value in sterling terms, South African
investors experienced a significant loss. For instance, in sterling, UK
mall owner Intu’s total return is down 12% since Brexit – bad, but no
train smash. In rand terms, due to both pound weakness and, more
so, rand strength, Intu’s total return is down almost triple that, falling
33%2. That hurts. So while Intu has mostly been the victim of rand
move. Then, over the space of a few weeks, the Conservative party
lost their majority. Brexit may now be softer and, at the time of writing,
there was talk of “no May after June”. Everything is up in the air again
– refer to #4 Everybody hates uncertainty. In South Africa, political
developments over the next year will be critical with numerous twists
and turns along the way. It will be difficult to not be distracted by the
noise of the machinations.
strength on the JSE, Brexit has just compounded matters. That is no
#6 Don’t panic
solace for investors.
Investors may have been better off had they not sold their UK property
For mandates that allowed, we hedged some of our UK property
currency exposure prior to Brexit. Not because we expected Brexit
or rand strength, but because we bought the shares for their local
value, not with a currency view, and wanted to mute currency risk.
However, for many funds, mandate restrictions meant this was not
possible.
stocks straight after Brexit, but rather waited. As the saying goes: “If
you are going to panic, panic first,” but the panic-first window is a
short one.
BREXIT PANIC, RECOVERY, SLUMP: INTU PLC SHARE PRICE IN GBP
(21 June 2016 - 16 June 2017)
£330.00
£320.00
£280.00
21 May 17
21 Apr 17
21 Mar 17
to anticipate corrections, than has been lost in corrections themselves."
21 Feb 16
money has been lost by investors preparing for corrections, or trying
21 Jan 17
£250.00
21 Dec 16
brings to mind investment legend Peter Lynch’s statement: "Far more
21 Nov 16
£260.00
21 Oct 16
£270.00
the dark more than it fears falling down the stairs in the dark. This
21 Sep 16
can cause the weak economic outcome. The market may be fearing
£290.00
21 Aug 16
negative economic expectations, but also the uncertainty, which itself
£300.00
21 Jul 16
The post-Brexit market reaction, certainly within property, is not just
£310.00
21 Jun 16
#4 Everybody hates uncertainty
Source: FactSet
UK exit negotiations with the EU could drag on longer than the two-year
JSE-listed UK property companies offer diversification and value,
deadline initiated by the Article 50 trigger on 29 March 2017. Who
despite retail and economic headwinds and uncertainty. However,
wants to make big long-term capital decisions (and property investment
any position size must reflect the risk involved, especially those that
is all about big long-term capital decisions) when so much is up in
are unpredictable and not hedge-able.
2
Intu returns to 14 June 2017. Source: FactSet.
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June2017