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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. Exclusive Investment expertise weekly from next week Watch this space! T: +27 21 943 1800 www.nmg.co.za Belvedere Office Park, Block B, Pasita Street, Bellville NMG Consultants and Actuaries (Pty) Ltd (Co Reg No. 1979/001308/07) Authorised Financial Services Provider - FSP 12968 www.nmg.co.za 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. 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