Britain’s proposed exit from the EU, or Brexit, has left Prime Minister Theresa May hanging by a thread. The resignation of Brexit secretary David Davis and foreign secretary Boris Johnson rattled the markets, which were already unsettled as the US and China continued to swap blows in their trade war.
Although it may be confusing to some that Brexit is even a point of interest in SA, it is true that the outcome of the heated debates under way in Europe could have a knock-on effect on SA. From a corporate perspective, many South African companies have their European headquarters in the UK, which they use 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 doing business in Europe.
A potentially greater effect for SA and its economy could come from changes to international trade agreements. The EU is SA’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 European bloc, trade agreements would have to be renegotiated, with no guarantee of an equally favourable outcome.
Also, if growth in the UK remained sluggish after Brexit, demand for imported goods would likely be hit, with a negative knock-on effect for SA.
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.
However, 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.
Although we can make predictions and hypothesise on likely outcomes, it is ultimately impossible to know in advance what will happen and how it will affect the markets.
For example, after the initial Brexit vote, when all forecasts were dominated by negative predictions, the FTSE hit all-time highs and broke record after record. Pity the people who sold out of the market before it started climbing.
Forecasting the effect of news events is kind of like predicting which shares and funds will do well and which will do badly in the future. Sometimes someone gets lucky and gets it right, but consistently predicting what will happen in the future is just not possible.
The evidence shows that trying to predict the future and responding accordingly will stack the odds heavily against you. You erode value and have poorer investment outcomes than if you simply have a little exposure to everything, that is track the index and hold steady over the long term.
The best way to give yourself the greatest possible chance of success is to stay focused on your long-term goals and not make changes based on short-term noise.
Of course, stability is important. Markets don’t like uncertainty. This is true for most people in their day-to-day lives and even more so for investors. Uncertainty breeds fear and can often lead to rash or poorly thought-out decisions.
If threats to the stability of the UK and EU do materialise, there will probably be some damage to funds in the active management space.
There is likely to be an impact, with certain managers favouring some European countries to emerge as “winners” over others. However, if you ask 10 different managers, you will be unlikely to find any consensus on who these winners and losers will most probably be.
Many of these predictions (gambles) will damage fund performance and unfortunately devastate many investors’ life savings. With long-term decisions, such as saving for retirement, it is so important to take a long-term view.
What is important is not what happens in the next two to three years, but what happens in the next 10, 20, or more.
Companies such as Amazon, Netflix and Apple have built themselves up over long periods; the success they are reaping now is leveraged off the groundwork that was put in at the early stages.
The same applies with your investment portfolio: good decisions made at the very beginning will pay off and these gains will continue to compound over time and grow exponentially.
At a company retirement fund level, Treasury has tried to help ensure better, more consistent outcomes by implementing the default regulation changes.
Companies have until March 2019 to ensure that their pension and provident funds are underpinned by a low-cost, well-performing investment strategy. The main requirements of these changes, which have been cornerstones of 10X Investments’s philosophy from the outset, are that companies are obliged to create a safe path for members’ retirement funds and reduce the complexity and the cost of the decision-making process. The bottom line is that investors should not rethink where they have invested their money in response to recent global developments, dramatic and scary as they are.
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.
This article was first published by BusinessDay on 2 August 2018.