Global markets burn in the aftermath of Brexit

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The 24th of June proved to be a black Friday for global markets as the UK voted to leave the EU. A total 51,9% or 17 410 742 voted to leave EU while 48,1% or 16 141 241 voted to remain inside. It was a vote on immigration challenges seen to be brought by the EU model to the British marginalised society. Consequently, it was a vote on the financial well-being of the less privileged communities. Rural areas, the older generation, the less educated voted to leave the EU while cities, the young generation and the well-educated voted to remain. Obviously, their perspectives of the benefits of being in the EU and globalisation are different. The British establishment is unhappy with this outcome but no one is bigger than the democratic vote, at least in the developed world.

Daniel Ngwira ,financial Analyst

The vote ignited calls by the Scottish First Minister to announce that a second vote on Scotland independence from Britain was on the table as Scotland voted to 62%: 38% to remain in the EU. Northern Ireland voted 55,8%: 44,2% to remain. London also voted to remain in the EU. The vote left Prime Minister Cameron, who became the youngest British Prime Minister since Lord Liverpool in 1812, jobless after he announced that he would resign by October as he would not want to extricate Britain out of the EU.European Commissioner Lord Hill also resigned. While Hill opposed the adoption of the euro by Britain, he believed in the EU. The vote resulted in Moody’s cutting UK’s credit rating outlook to negative.

Asian markets took a beating as they were trading when results were trickling in with the Nikkei 225 closing 8% lower. The Kospi, in South Korea took a knock of 3,1% while the Hang Seng was cut off 4,4%. The Dow Jones lost 3,39% while Australia’s S & P/ASX was buttered 3,2%. At the time 253 declarations had been made out of 382, with 51,1% having voted to leave, the Nikkei 225 had lost 3,05%, Kospi 2,57% and S & P/ASX 2,84%. In South Africa Old Mutual lost almost 6%, Investec fell 7%, Anglo American suffered 6% with SAB Miller shedding just 1%. These shares suffered a beating mainly because of their head offices being in London and also being dually listed.

The losses on global markets reversed gains which had been made earlier on anticipation that the UK would vote to remain in the EU. US$2 trillion was wiped off the markets. Financial traders and brokers recorded high volume trades as investors scurried for cover. Of course not everyone lost money as short sellers on prior contracts recorded windfalls. Gold rose 5% to US$1 322 an ounce. In the period ahead, gold and the dollar are likely going to rally should the uncertainty remain amplified. The two are seen as safe havens during times of high volatility.

In currencies, the pound was pounded at the worst 11% to close at 8% to the dollar at US$1,3704, its lowest level in 31 years. The dollar took a beating to 102.44 to the Japanese yen with the euro landing hard on US$1,1052.

It is clear that the thorough beating on the markets was caused by the fact that the risk of the UK leaving the EU market had not been priced correctly or it had not been factored at all.The market doubted that the UK would leave, therefore, the rally that occurred as the remain vote was anticipated to prevail. Britain has been a major financial centre for Europe and one of the strongest economies in EU and the global economy so the leave vote left investors wondering what the next step would be. In other words, the high volatility experience on Friday was because of uncertainty and risk mispricing. While the UK is not one of the six founding members of the EU, it was certainly an anchor economy. The UK, however, was partially in, as it never adopted the euro.

Though Britain will not leave EU immediately as Article 50 of Lisbon Treaty states that “A Member State which decides to withdraw shall notify the European Council of its intention,” the two year period of extrication starts from the time a notice is given to the European Council. Britain is yet to give that notice and David Cameron is unlikely to do so as he has said that he does not want to be part of that process. Article 50 is very brief, perhaps it was not anticipated that any member would leave and indeed no member has left the EU since its formation. Britain may not leave after all following a petition to have a re-run of the vote signed by a million people. The petition now qualifies to be considered by the House of Commons after surpassing the 100 000 signatures threshold.

While EU leaders are angrily pushing for Britain to start to process of leaving sooner, they too cannot guarantee the continued existence of the EU following widespread demands for referendums cross the trading block. Further, there is no rule by which they can force Britain to disentangle quickly before notification as Article 50 leaves that to the constitution of a member state. In Britain, it is up to the Prime Minister to do so. From an economic perspective, it is a delicate balance. The will of the people must be carried but should the EU try to alienate the UK, Britain could enforce measures to protect itself. There are 2,9 million EU non UK workers in Britain. The EU should take heed of what the Germany has said that the EU must not seek revenge. The consequences could be dire on either side. Cameron did not want this outcome, but it is the British people who spoke particularly those who are affected the most bythe current EU immigration model. My view is the EU should take this opportunity to address the concerns of the British people who voted out as other countries in the EU have similar concerns, particularly those in strong economies. In addition, in order to curtail market volatility, both the UK and EU should agree a friendly trade deal.

The outcome of the vote will no doubt create dozens of jobs for lawyers, accountants, treasurers, economists, analysts and negotiators who must make the extrication of the UK a reality over the next few years. In the meantime, scores of chief finance officers across Europe, the UK, Japan, Asia, South Africa and the United States might be recording huge translation losses on their balance sheets for the month of June. With balance sheets wiped out in just a day, the focus on risk insulation in the years to come can only be strengthened. Financial projections of the individual companies have no doubt been thrown into turmoil. The uncertainty will be amplified by the fact that as this has never happened before, everyone will be learning. Unlike the financial crisis which started on Wall Street, this was not manmade but it is a cost of not taking care of the interests of the poor and the marginalised; when they are given a chance they decide to the detriment of the affluent.Both the EU and the UK must work together to avert catastrophic damage to their economies and the global economy. While the UK accounts for less than 2,5% of the global economy, the effect of its exit on global growth will depend on the handling of the exit by both EU and the UK.

I predict that the volatility that we saw since the early hours of Friday trading to close is the worst because the risk had been either mispriced or it had not been factored in. In the weeks or months ahead, while the markets may be volatile, it would be to a lesser degree. Of course, volatility could rise should the EU seek to want to punish the UK. Volatility would be lower if the UK is accommodated in a friendlier model like the Norway Model. Whichever way, in the months ahead, as negotiations takes place, EU could be divided in thoughts and markets could suffer.

The need for EU to accommodate Britain should be seen in the statement given by the US President who pledged support for the UK contrary to what he had said as he tried to drum up support for the remain campaign. While the US and the UK are close ties, economically it is also in the interest of the US, just as with the EU to make sure UK does not falter. The pound sterling fell to a 31-year low on Friday while investors dumped European shares. It should be noted that the FTSE 100 suffered a 5% loss while the German index land France’s index lost 7% and 9% both greater losses than the UK index. The UK will cope in the end. The decision they made to retain their currency ages ago could help smoothen this process.

Dozens of economists around the world believe that the UK harmed itself with this vote. They said so when the UK retained its currency as all the other EU countries abandoned their currencies for the Euro. At this point in time, we cannot tell the full economic consequences of this vote. What we do know is there could be immense volatility across EU and Britain especially in the early weeks ahead depending on how the disentanglement will be handled. Russian President Vladimir Putin said it is understandable why the vote went that way as no country would want to feed weaker economies. This is true in that given the vibrancy of that economy, its citizens feel short changed by the inflow of migrant workers from the rest of Europe.

There has been a suggestion that London could lose its world’s pre-eminent financial centre status. The question is to where? Ngwira is a chartered accountant, a corporate treasurer, a former bank treasurer, spokesman of the Zimbabwe Musicians Union and a former university lecturer. — daniel.ngwira@gmail.com or +26773113161.

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