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First Brexit, then Trump: What it means for the Euro, the Pound and the Rand

by Andrew Rissik | Nov 21, 2016
  • It’s been just over a week since the applecart was well and truly overturned in the US elections. The fallout from Donald Trump’s victory has slowly started to moderate and now we’re left with the question: In a year that has already seen Brexit, which countries and currencies stand to benefit and which are going to suffer due to these seismic shifts in Western politics?
    save the middle class

    Why did the US back Trump and the UK shun the EU?

    In my opinion, it’s pretty clear what caused UK voters to choose to leave the EU and US voters to pick Donald Trump – middle class disillusionment. Years of ever-increasing taxes, stagnant wages, lower social mobility and job losses have come to a head. This easily mobilised cynicism in the electorate was pounced on by Trump and the leave campaign expertly.

    Middle class tax payers in the US and UK have been economically strained for many years now. With local manufacturing and production jobs dwindling in favour of globalised service industry jobs, many families have come under intense pressure.

    The working and middle class families in the US and UK have been left trying to make ends meet by working in retail and other low-level service industries – industries that are now reliant on cheap imported goods. Goods that were often once produced locally.

    In the US, Trump’s biggest bugbear was the outsourcing of manufacturing and production to the lowest bidders. This has come at a great cost to local manufacturing industries and the former reality TV star has promised to bring these jobs back to the US.

    In the UK, the middle class has also felt the pressure of globalist economic policy. But the focus of Brexit seems to be more on leaving the shackles of the EU rather than an outright rejection of globalisation and free trade.

    Both the Brexit and Trump campaigns tapped into the frustrations of the missing-middle demographic, but the two powerhouses of the West seem to be taking very different paths. Britain appears to be wanting to strengthen its ties with the rest of the world, while Trump seems intent on isolating and insulating the US from the rest of the world. James Monroe would be proud.

    Can globalisation be undone?

    In the US, following Trump’s victory, industrial stocks surged while tech stocks took a beating. This difference in reaction is illustrative as to how market participants see the future direction of the US economy.

    The campaign rhetoric used by Brexiters and Trump in the US often revolved around reviving a bygone era of local manufacturing and production. Frustrated electorates dutifully cast their votes in the hopes of restoring the prosperity of the past.

    In the medium to long-term, market overreactions will correct. As in reality, Trump is just another US president with an off-kilter personality; he’s not the first and certainly won’t be the last. However, what cannot be doubted is that his presidency will have a profound effect on how global politics and economics function.

    Markets are betting, for now, that there will be a raft of economic policies promoting manufacturing in the US. Whether it’s even possible for the US, and the UK for that matter, to regain their status as the global manufacturing hubs they once were is a point of massive debate.

    Try as he might, Trump is probably not going to succeed in undoing decades of globalisation. North America and most of Europe have surrendered much of their competitive advantage in manufacturing to developing countries, particularly those in Asia.

    Don’t worry about the UK. Watch the EU.

    The Pound was hammered post-Brexit and has remained weaker as the markets have priced-in uncertainty, but with Trump’s win, the UK is starting to look like a rosy place to be.

    In the days following the US election, we saw the Pound climb to five-week highs. It’s as if the US election put the post-referendum Pound slide into context and investors are now starting to buy into the undervalued currency.

    The UK has a lot going for it right now. While the leave campaign was extremely right-wing and inward looking, the current UK government’s Prime Minister is a person who voted to remain in the EU. This is vitally important to remember. Theresa May is now setting about achieving the best possible outcome for Britain post-article 50.

    May is an astute politician who has assembled an extremely well-constructed cabinet and it’s a near certainty that her government will be pursuing stronger ties across the globe, free from the yoke of the EU’s regulations and treaties.

    From where I sit, I’d have to say that the EU will fall back into the media and market spotlights, only to highlight the big trouble brewing in Europe.

    Keeping a shared currency and policies pointing in the right direction is difficult at the best of times. Now, with the nationalist nature of Brexit and the Trump victory, many analysts are expecting EU members to start leaning further right.

    Brussels needs to wake up and realise that if the UK’s vote was an indicator of wider issues in the global order, Trump’s victory is a country-sized warning. If the European parliament makes some serious changes in the next few months, and become less rigid and desperate to remain as it is now, it could well survive for a while longer.

    Can the EU pull the fat from the fire?

    It is now up to the EU parliament to recognize the incredible disillusionment of the electorates in its member states.

    Pollsters are already saying the right wing Marine Le Pen can’t win in the upcoming French elections. So far, however, they’ve been wrong about Brexit and Trump. Will the third time be the charm? And what of grumbles growing louder in Italy, Austria and the Netherlands around leaving the EU?

    The EU needs to bend, and bend quickly, before it breaks.

    Trump, Brexit and this wider European discontent are not isolated events and trouble in the EU spells trouble for both developed and developing economies.

    The Rand: Battered and bruised, as usual

    Through all of this the Rand is likely to get pummelled. It is still a risk-on currency and no one is keen on taking any on at the moment. Currently, the Rand is probably oversold, but when markets are this frothy it’s very hard to tell with certainty.

    Having said that, no matter what currency you’re assets are in, you need to be patient and wait out the storms. Short-term trading is for the young and the reckless.

    There will no doubt be further twists and revelations through the next few months. But keep in mind that currencies, the Rand included, will always revert to their fundamentals in the long term.

    So don’t throw the Rands out with the bathwater just yet. Any offshore investment decision you make, especially in these volatile times, will require a steady hand on the wheel and a keen eye on the distant horizon.

    Andrew Rissik is the Director of Forex and International Projects at Sable International.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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