Overview:
- "Brexit" is now a reality - the outcome of the voting in United Kingdom came as a huge surprise for the market which was assuming "Bremain" till last week.
- On the back of negative sentiment, there is a possibility of near term declines in global equities as well as other risk assets.
- Indian markets will be only marginally affected by "Brexit" as we believe that the fundamentals of Indian markets remain intact, supported by a strong growth momentum. In the near term a good monsoon is likely to improve domestic demand.
- Investors may see some near term sell-offs as buying opportunities for long term investing.
- Details here : Views on Brexit
Brexit – Update & Fallout
Since last few months
markets have been speculating whether Britain will exit the EU or not,
an alliance that Britain joined in 1973.
2.10 pm: NIFTY -2.41%, CNX Midcap -1.88%, BSE Smallcap -2.09%
Since last few
months markets have been speculating whether Britain will exit the EU or
not, an alliance that Britain joined in 1973 and got formalised in
1993. With the votes that are already in, Britain has voted in favour of
Exit (52% Leave – 48% Remain). This development has major global
political & economic repercussions with most developed markets
indices bonds & currencies moving wildly today. Both the markets and
the regulators are trying to gauge the enormity of its impact. From
India perspective, the impact is limited on a medium to long term basis
as the Indian exposure to UK is very low. Exports to UK forms less than
1% of India's GDP (see chart). This event however has the potential to
set in a global risk off, at least in the short term. Over a medium to
long term, the fundamentals take over and with Indian macro looking
better, we feel that the markets will stabilise as more clarity emerges.
First of all it is
important to note that the UK PM has stated his intent to start off the
process of withdrawal from EU as the Exit vote gets finalised, but the
time frame for the same is not clear. Given the lack of clarity on the
extent of impact, central banks across the world may adopt a wait and
watch before reacting in terms of rate easing or tightening. UK (London)
being a large global financial hub, Financial sector has a large impact
on UK economy. In that sense Indian markets are well insulated due to
its low exposure at this point in time. However, a Global risk off set
in by this event could have a potential negative impact on India as one
of the Emerging markets dependant on foreign capital. We Further, this
will have some impact on the cyclical like metals, auto (& auto
ancs) and financials too. IT is another sector that will have some
impact due to currencies moving haywire. Since the trade ties with UK
are not significant, Indian companies largely are unaffected in terms of
their operations but a market sentiment will pull down the markets in
short term at least.
In the interim
period INR may also see volatility but given RBIs confidence with
management of INR USD equation and the current record Fx Reserves, the
Reserve Bank of India is very confident of managing the volatility as
well. RBI will be looking to protect currency from both extreme and
disorderly disruption but will be agreeable to let it depreciate in
small steps in an environment where all other EM currencies are also
weakening. This means that RBI will have to do Open Market Operations
(OMO) to ensure liquidity in financial markets. In general this is
positive for rates and in particular its very good for Govt Bonds as we
feel it would be preferred route by RBI infuse liquidity. We also expect
widening of corporate bond spreads on account of uncertainty & FII
selloff in credit space hence prefer duration through Govt Bonds. While
Indian equities have opened large negatives, we might see markets
recovering well by the end of day with more clarity. Across portfolios
we have been constructive on financials, pharma & autos which may
see some volatility but expect it to rebound smartly on more clarity
emerging.
