Brexit! Now A Reality

[otw_shortcode_info_box border_style=”bordered” css_class=”boxed”]Britain’s Exit from the European Union (or Brexit) has been making global headlines. With UK being the fifth largest economy worldwide, finance markets the world over will get affected due to Brexit. What does this auger for India’s financial sector? And how will this affect investments? Mehran Felfeli provides useful insights about Brexit and its impact globally and on India and the Indian investor. [/otw_shortcode_info_box]

Britain, Britain
why did you leave?
Turned your back,
which is hard to believe,
To globalization
you said a big NO,
Blaming immigrants,
you voted to go,
What you have unleashed,
is for the world to see,
That racism is still
your English cup of Tea….
By Mehran Felfeli

Over the last few months, the world had been speculating whether Britain would exit the European Union (EU)… Finally, Britain voted in favor of exit (52% Leave – 48% Remain). Brexit heralds not just Britain’s exit from the European Union but a vote against the 20th century ideal of a liberal, globalised world. Mostly the old voted to leave and the young voted to remain. Those who lost their jobs to advanced technologies and global trade showed their resentment by voting out. Those who believed in trans-national collaborations in markets, business and global trade voted to stay.

Both the markets and the regulators are trying to gauge the enormity of its impact. From India’s perspective, the impact is limited on a medium to long term basis, as Indian exposure to UK is low, exports to UK forms less than 1% of India’s GDP. Over a medium to long term, the fundamentals take over and with Indian macro looking better, the markets will stabilize as more clarity emerges.

Firstly, it’s important to note that the timeframe for withdrawal from the EU is not clear. Given the lack of clarity on the extent of impact, central banks across the world may adopt a wait and watch policy before reacting. UK (London), being a large global financial hub, the financial sector largely impacts UK’s economy. In that sense Indian markets are well insulated due to low exposure at this point in time. Since trade ties with the UK are not significant, Indian companies are mostly unaffected in terms of their operations, but a market sentiment will pull the markets down, in the short term at least. We cannot negate the fact that Britain is the world’s 5th largest economy and the contagion effect may last for a while. Also, Brexit remains complicated as there is a possibility of Scotland and Ireland separating from the United Kingdom and joining the European Union.

In the interim period INR may also see volatility but given the Reserve Bank of India’s (RBI) confidence with the management of the INR-USD equation and the current record Forex Reserves, the RBI is confident of managing the volatility well. RBI will look to protect currency from both – extreme and disorderly disruptions, but will be agreeable to let it depreciate in small steps, in an environment where all other EM currencies are also weakening. While Indian equities will remain choppy for a while, we believe that once the dust settles, India would emerge as the key investment destination for the opportunity starved FII’s. Investors should consider this as an opportunity to buy into equity at such attractive levels.