Brexit – Update & Fallout Bulletin - Views on Brexit

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.