By Alexander Kalis, Managing Partner & Head of Manager Research at Milltrust International LLP, 7 July 2016

Unexpectedly, the United Kingdom (UK) voted to leave the European Union (EU), sending shockwaves across the world in the wake of the decision. We set out below our investment managers’ views for the respective markets: 

See Part 1 for Impact on Asia and Latin America

Impact on Russia

Economic Impact: With Russia’s top export destinations being China ($39.3B), the Netherlands ($39B), Germany ($29.8B), Italy ($22.9B) and Japan ($21.5B), the United Kingdom at only $9.28B (2.1% of the country’s exports) is not expected to cause significant strain on Russia’s economy.

Financial Impact: After an undeniably horrible 2014, Russian equities managed an upturn in 2015 and 2016 and historically low equity market valuations of merely 7 to 8 times earnings may prove to be a very appealing opportunity. However, a number of Russia’s largest companies trade their shares on the London Stock Exchange, and after Brexit, a series of companies might delist their stocks which could lead to as sell off in the value of these Russian companies in particular.

Political Impact: The UK’s ‘leave’ vote may ultimately prompt Europe to start deepening its ties with Russia. In the short term, this could lead to the possible weakening of anti-Russian sanctions. The UK had consistently spoken in favour of preserving the sanctions against Russia, which were introduced in 2014 because of the Ukrainian crisis, although some other countries – primarily France and Italy – have expressed a softer position.

South Africa

Economic Impact: South Africa’s already battered economy may be the worst affected by Britain’s exit. The UK is the fourth largest destination for exports from the country, and the biggest single investor in the South African economy. Because of South Africa’s wide current account deficit – which is in the region of 5% of gross domestic product – it is very reliant on foreign capital inflows to finance this shortfall. And with the rand already under pressure imported goods is going to increase in price significantly. This is also going to have a direct impact on the workforce in the form of rising prices and possible layoffs.

Financial Impact: In the immediate Brexit aftermath, the South African rand lived up to its reputation as a proxy for risk sentiment, plunging by the most since 2008 against the dollar and falling to a record against the yen as investors piled into haven assets. The rand has already slumped 21% in the past year amid concerns that political upheaval and deteriorating fiscal metrics could lead to a credit downgrade to junk.

With regards to equities, after record net outflows of R30bn in the first five months of the year, investment into South Africa had seen a turnaround. Foreigners invested a net R65bn in their South African portfolios in June, two-thirds of which had come from a resurgence of foreign appetite for domestic equities.

The referendum decision caused an immediate sell of of South Africa’s benchmark share index, led by stocks with listings in London and by diversified mining companies. Nevetheless, valuations remain attractive when considering that for international companies, revenues may be dollar-denominated and that the ultimate actual economic impact of Brexit on South Africa may be small.


Economic Impact: The U.K. was Turkey’s second largest export market after Germany in 2015. Turkey’s exports to the U.K. are around 7% of total exports, while exports to the EU are around 44.5% of the total. However, some officials and the government ruled out that the U.K.’s decision would have any significant long-term implications.

Financial Impact: The knee-jerk reaction was pretty much as expected: Risk-off, but there will be limited impact on Turkey beyond the initial knee-jerk reaction unless Brexit seriously affects the economic outlook for the euro area, which is too early to say. The volatility in the FX market and the surge in demand for safe-haven assets will significantly dampen the appeal of the Lira but the central bank’s track record suggests that its first line of defense against the volatility will be to utilize its tools of liquidity management for the lira and forex.

Political Impact: In Turkey, the general assumption is that the already difficult road to membership of the EU has become much harder following Brexit, if not downright impossible. Ironically, Britain had long been Turkey’s main advocate in the EU, often in the face of deep German and French scepticism.


Economic Impact: The direct impact of Britain leaving the European Union is expected to be limited on the GCC region.

Oil prices, meanwhile, could face downward pressure however if Britain opts to leave the EU, as the ongoing political uncertainty is likely to affect demand during the remainder of the year and possibly next year.

On the other hand, Brexit will result in a decline in the euro currency and since most of the MENA local currencies are pegged to the US dollar, the import bill from the EU will go down which will act as a positive for those countries.

However, in places like Egypt, tourism from the UK, which has brought in roughly 200,000 tourists a year to the country, will be hit hard as households will curb expenditure on tourism caused by the drop in the sterling. In addition, Britain was the biggest foreign investor in Egypt, where investments have reached $24.1billion in the last five years, marking 49.5% of total FDI in Egypt, which may be affected.

Financial Impact: Stocks across the Arabian Gulf plummeted in the wake of the UK’s shock decision to leave. And market volatility across asset classes is forecast to continue both globally and locally, as markets struggle to come to terms with the implications. Retail and high net worth investors (owners of significant capital in the GCC) are likely to show greater risk aversion in the face of (developed market) political uncertainty.

Political Impact: Future political uncertainty that plagues the UK may very well affect its foreign policy with the MENA countries. MENA engagement with the UK will be difficult, particularly as its relationship with NATO could change. Joint military arrangements could suffer as Britain is one of the major military powers in Europe. The US might cease to provide a bridge between NATO and the EU, which will upset the political and economic balance of power. A post-Brexit Britain will likely double down on its existing geographic areas of strength, and would put particular priority on trade and defence with the Gulf; relations with North Africa could end up being neglected, and the Middle East Peace Process will probably remain on the back burner.

Sources: VTB Capital Investment Management, Garanti Asset Management, SEDCO Capital, Atlas Media, Wall Street Journal, Quartz.