Brexit hits SA businesses with overseas operations

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The share price of South African businesses with overseas operations will for the foreseeable future continue to be affected by the relative exchange rate in the aftermath of Brexit, says Pieter Fourie, Sanlam Private Wealth’s head of global equities.

“Ultimately, the business fundamentals will determine if a dual-listed stock performs well in the long term, irrespective of the weakness of the rand,” Fourie says.

On Friday, markets reacted strongly to the news that the majority of Britons voted to leave the European Union (EU). Worldwide, financial markets tumbled, causing severe currency volatility and analysts expect aftershocks to continue for the next few days.

As for the rand’s prospects in light of Brexit, Fourie says structurally the rand has been a weak currency over the last four years. “The negative sentiment is arguably overdone. However, at times of uncertainty investors have a tendency to invest in safe haven assets. Therefore the rand may even lose further ground against both the pound and the euro in the shorter term.

“From a pure value perspective, however, we would think the rand would stabilise against the mentioned currencies as soon as more certainty returns to the market.”

Fourie, who is based in London, says the vote to leave has understandably left investors feeling nervous and Sanlam Private Wealth will watch closely to see how the investment community, the Bank of England and the European Central Bank are going to deal with the immediate aftermath.

“We have moved into unchartered territory and it may take some time before investors at home and abroad fully understand the impact of this result on UK businesses and the economy as a whole.”

Fourie says whether the EU starts negotiating aggressively to hasten the UK’s departure from the union, or the UK parliament delays the negotiations for up to two years, both scenarios will create a challenging environment that will impact the UK and EU for the foreseeable future.

“We think the UK economy is likely to contract in the second half of the year with weak growth in 2017, predominantly due to increased uncertainty. We also believe that inflation in both the UK and the wider European region should increase structurally as both sterling and the euro remain weaker against the dollar in particular.”

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