Referendum on Britain's exit from European Union (EU) - Impact on Indian Financial Markets

Written on Friday, June 24, 2016
By Alok Agarwal

Big_brexit_045308.jpg Facebook   Twitter   Google+   LinkedIn   Pinterest

The global financial markets saw a panic reaction driven by the results of a British Referendum that voted in favor of Britain's exit from the European Union (EU). Popularly known as BREXIT, this event was known earlier. Still it took the markets by surprise because the markets were complacent going into this event. This partly explains the sharp reaction on friday.

Indian markets also fell in the global carnage, but the fall was lower in comparison to other developed & emerging markets. Attached herewith is a note that contains our views on Brexit and its impact on Indian markets in a simple manner. Here is a deep analysis and "Action Points" for an investor.


Brexit - Background

A referendum was held in Britain to decide on whether they should remain in EU or exit.

The results show that almost 52% of voters have voted in favor of an Exit from the EU; Voters in favor of an exit outnumbered those favoring remaining in EU, by almost 1.3 million.


Technically, this referendum is not binding on the UK government and the Parliament may choose to remain in EU even after this referendum.


British Prime Minister David Cameron who was in favor of remaining in EU, has resigned following the referendum verdict against his stand.


This raises concerns of Left winged parties (they favored an Exit from EU) winning the next elections in Britain.


People fear that it may set a dangerous trend - voices calling for an exit from EU may be raised in other EU member countries.

Brexit - Panic Reactions in Global Financial markets

Prima facie, it seems that financial markets and the political circles were complacent going into the Brexit Referendum assuming that UK will vote in favor of remaining in EU. However, the results have surprised them and hence the panic reaction.

A Risk Off trade seems to have started today globally leading to unwinding of carry trades and flight of capital towards safe havens such as US Dollar, US Treasuries, Gold & Yen




British Pound has fallen to its 30 year lows vs. the US Dollar, depreciating by almost 10% at one point in time, its sharpest single day fall in history

At the time of writing this note, Gold  is up 4.1%, Japanese Yen is up 3% vs. US Dollar, US Dollar Index is up 2% & yields on US 10Y treasuries are down 22 bps


Brexit - Reactions in Indian markets

Indian markets have reacted negatively, tracking global markets, driven by FII selling


Selling in Indian markets is sentimental as seen from the advance decline ratio. Sentimental selling normally tends to pause and recover in near term


Advance Decline ratio is at 1:9 - Advances 5, Declines – 46 which shows extreme sentiments (likely to reverse)


High Beta sectors like Metals, Banks. Realty, Auto are the biggest losers


Defensives have fallen less – FMCG, Media, Pharma, IT




Brexit - Impact on Indian markets

UK is India’s 12th largest trading partner; Among very few countries with whom India enjoys a Trade Surplus (Trade Surplus of $3.64 billion in FY16)


UK is the 3rd largest investor in India after Mauritius and Singapore with a cumulative inward flow of $22.56 billion between April 2000 to Sep 2015


Some Indian companies have material revenues from UK operations – Tata Motors, Tata Steel, TCS, Tech Mahindra


A global risk off trade drives Indian markets lower too (although to a lower extent) as foreign investors reduce exposure to Risk Assets


Such "flight to safety" may also lead to lower commodity prices which, though it will be largely positive for a net commodity importer like India, may impact some Indian commodity companies whose revenues may come under pressure


If Britain exits from EU, British Pound falls sharply, in which case, Indian exports to UK may suffer. India’s trade surplus with Britain may narrow thereby increasing India’s trade deficit and putting pressure on the Rupee


Britain’s exit from EU and a weaker British economy may impact Indian companies operating in Britain; Investments flowing into India from Britain may suffer if British economy weakens


Outlook on India post Brexit


India's economic story is more about demography, domestic demand / consumption and infrastructure investments, than about exports


Exports have anyways been falling over the last 12-18 months. The recent recovery in growth has been led by reforms, government spending in infrastructure and improving domestic demand. These drivers are unlikely to be impacted materially by Brexit


Global Risk aversion - Unless Brexit threatens the very existence of EU (which is a far fetched possibility at this juncture), the risk aversion should subside in the next few days. Global cost of capital is unlikely to rise much (lower German, US and Japanese yields) and with global growth stagnating, foreign capital is likely to resume its chase for better growth and yields. India shall remain an attractive destination for such capital


A few businesses may suffer in the short term, but the impact on wider markets is likely to be limited


Monsoon’s have been above normal so far (though a bit delayed) and geo-spatial distribution of rainfall has been good. As per latest reports, all drought affected areas have received good rainfall; Monsoons, 7th Pay Commission and OROP to drive rural and urban consumption


Rural consumption, Urban demand, Rising Infrastructure Investments as well as focus on manufacturing to lead to better growth in Indian economy


Government focus on infrastructure spending, reforms in key employment generating sectors such as road construction, ports, railways, textiles, garments, drug manufacturing, etc. to lead recovery in investments


Cleaning up of PSU Bank NPAs, infusion of capital in PSU Banks, consolidation in PSU Banks, focus on Micro Finance to strengthen credit availability to MSMEs are big positives that shall drive growth


Action Points:

"NO ACTION" is best during times of panic


Once the dust settles, the next step is to assess the fundamentals and take decisions accordingly


Panic phases give rise to good REBALANCING (buying / profit booking) opportunities in investor portfolios


Hold your investments. Do not exit in panic


Let the dust settle. Today’s selling was emotional (led by sell off across global markets). Such phases tend to settle down in a few days and are followed by recovery


Continue with your SIPs / STPs


Start 6 month STPs in Diversified Equity Mutual Funds today


Hold on to your Debt Mutual Fund investments – 50% in Accrual; 50% in Duration (mostly in short term debt funds)


Diversify your portfolio into Gold ETFs / Gold Savings Funds

Get More Info Now!


 Popular Tags

(1) Child Education(2) Child Future Planing(1) Children Future Planing(2) Equity(1) Financial Goal(1) Financial Planing(2) health Insurance(2) Insurance(1) Investment Options(2) Investments(1) Life Insurance (4) MIP(1) Mutual Fund(1) Mutual Funds(5) National Pension System(1) NPS(5) Personal Finance(2) Retirement(1) Retirement Planing(2) SIP(5) Systematic Investment Plan(2) tax calculator(2) Term Insurance(1)Awards(2)Balanced Mutual Funds(4)Bond(2)Bonds(15)Budget 2016-17(4)Budget 2018(2)Child Education(1)Child Insurance(8)Children Education(4)Children Future Planing(3)Children Future Solution(2)Children Future Solutions(2)Claims(7)Corporate NPS(1)Credit Card(2)Debt(6)Debt Funds(2)Early Investing(22)ELSS(4)EPF(2)Equity(9)Financial Assessment(7)Financial Goal(19)Financial Goel(1)Financial Planing(2)Financial Planning(42)Fixed Deposits(3)Fixed Income Funds(1)Fixed Tenure Fund(1)General Insurance(6)GOI Taxable Bonds(2)Gold(1)GST(1)Health Insurance(28)Home Insurance(2)Income Tax(2)Indian Economy(1)insurance(41)Insurance Grievances(5)Interview(2)Investment(5)Investments(82)ITR(7)Life Insurance(21)Life style(20)Mutual Fund(71)Mutual Funds(30)National Pension System(4)NFOs(1)NPS(6)Overseas Insurance(1)Pension Plan(12)Personal Finance(9)PPF(2)Quiz(1)Retirement(28)Retirement Goal(7)Retirement Goel(1)Retirement Planning(5)Save Tax(6)shikha(1)SIP(14)Sovereign Gold Bond Scheme(3)Start Smart(2)SWP(3)Systematic Investment Plan(3)tax free bonds(1)Tax Planning(37)Tax Saving(44)Term Insurance(2)test(1)Travel(1)Travel Insurance(5)ULIP(5)ULIPs(2)Wealth Creation(93)