The United Kingdom’s vote to leave the European Union caused wild swings on financial markets around the world, but if you are investing for the long term, you probably don’t have a reason to change your investments.
Markets typically overreact to unexpected events, such the outcome of the referendum in Britain, and they are likely to remain volatile while the outcome and its implications are digested, local investment managers say.
The turmoil affected markets across the globe yesterday. London’s FTSE 100 Index plummeted than seven percent before recovering slightly during the day, and the pound fell 10 percent against the United States dollar to its lowest level since 1985. In France, the CAC40 had fallen nine percent by mid-afternoon, while Germany’s Dax was down seven percent.
Locally, the FTSE/JSE All Share Index fell sharply, by over four percent, soon after trading began, before stabilising at about minus 3.6 percent by mid-afternoon. The price of gold hit a two-year high, up about six percent.
The rand fell by five percent against the US dollar, although it was up almost four percent against the flailing pound.
Local investment houses and financial advisers were quick to reassure investors.
Dave Mohr and Izak Odendaal at Old Mutual Multi-Managers say Brexit does not require South Africans to change their financial plans. Investment strategies should be built around your life events and life goals, not newspaper headlines and market volatility, they say.
When markets move five percent or more, it may be scary, but it is also common. Over the long term, however, it will become a small blip rather than a major fall and these dips often give your investment manager a good opportunity to buy shares and other assets at low prices and then benefit from the recovery.
A diversified portfolio remains the best way to manage the inherent uncertainty in investing, instead of a fearful concentrated portfolio of gold or cash, Mohr and Odendaal say.
The markets, the pound and emerging market currencies rallied strongly in the days leading up the referendum as polls indicated that Britons would vote in favour of remaining in the EU. The big market moves yesterday need to be seen partly as a reversal of the gains made in the previous few days, they say.
Mohr and Odendaal say that while the Brexit vote will drain investors’ appetite for risk in global financial markets, it is unlikely to fundamentally change the global economic outlook.
“The UK will not disappear off the face of the earth, but it is an event that matters hugely for the UK. However, it is unlikely to have an economic fall-out in the US or China, the largest economies in the world,” they say.
The UK economy accounts for about 15 percent of the EU’s economy, but only about 2.3 percent of the global economy.
The pair say South Africa is likely to feel the impact most in its financial markets and if the rand weakens further, it could place upward pressure on interest rates and inflation.
South Africa’s trade relations with Europe are not in danger, however, and relations with the UK, which is increasingly looking outside Europe to do business, might even improve, they say.
Commenting on what he labelled an overreaction by the market, Mark Appleton, South African head of multi-asset and strategy at Ashburton Investments, says markets don’t like the kind of uncertainty that Brexit introduces and investors will demand more for taking investment risk. This will cause the prices of shares and other risky assets to fall, but for you, as a long-term investor, the message is “don’t panic”.
Appleton says local stocks such as Steinhoff, which is exposed to the UK and Europe, Richemont, which faces cost increases as the Swiss franc appreciates gainst the euro, and BHP Billiton, which is affected by US dollar strength, may be negatively affected by Brexit.
However, like Old Mutual Multi-Managers, Ashburton is focused on quality shares that it expects will stand it in good stead in uncertain times.
Rob Price, economist at Investment Solutions, says while markets will be volatile in the short term, long-term outcomes will depend on the economic policies implemented in future.
If the new UK leaders implement constructive economic policies, the UK economy and the pound will quickly recover from this fall in confidence, and there won’t be an economic catastrophe. However, if the new leaders implement regressive economic policies that pander to special-interest groups, this could push the UK economy – and its people – into dire conditions and they will look back on the Brexit decision with regret.
Financial markets could recover quickly if confidence is restored, he says. Although it won’t solve the political or economic problems, the Bank of England has pledged 345 billion pounds against any severely negative market events in an attempt to restore confidence.
Price says it is important to keep in mind that while currencies, shares and other assets can be volatile, over the long term they return to their fundamental values. This means that, as an investor, you should stick to your long-term investment plan, even when short-term outcomes in markets are volatile.
“History has shown that investors are driven by fear and greed, which, more often than not, means buying high and selling low,” he says.
Adopt a sound strategy based on your needs to avoid falling into this trap, he suggests.