- Date: Monday June 27th, 2016
- Report Type: News Analysis
What is Brexit?
Brexit refers to the UK including Britain, Scotland, Wales, Ireland and Northern Ireland, exiting from the European Union. This is a significant historic event as if it goes through UK will have broken off from the European Union, and will go independent in terms of economics, government, immigration, business & commerce, etc.
So what is Brexit actually about? It was about the British identity. The concern among the people of UK was about immigration and jobs. Do the British have shared interests with other European countries? Was the association helpful or harmful? People started having doubts on all these aspects, which resulted in the Brexit vote.
What were the results?
So to decide this, a referendum was held in UK on Thu 23rd June, 2016. 51.7% people voted for UK to exit the EU. It was a close decision. The Prime Minister, David Cameron has resigned as PM after people voted to leave the EU and will leave his post in 2-3 months.
Immediate Effect of Brexit Vote
It was an unexpected vote. By next day, Friday, the pound sterling had crashed by 10% against USD, the highest fall in its trading history and its lowest level since Sept 1985. The INR too weakened and stock markets across the world fell sharply – FTSE fell by 500 points while the Sensex closed lower by more than 600 points.
What might happen next?
But quitting the EU for UK is not an automatic process. It has to be negotiated with the remaining members. These negotiations are meant to be completed within 2 years but the European Parliament has a veto over any new agreement formalizing the relationship between the UK and the EU. What will happen is difficult to predict. A flow chart from BBC captures the next steps for UK and European Union:
Our take on Brexit Referendum Effects
Europe hasn’t been doing too well in terms of growth and economics over the last few years; this will be a further blow. One fear is that this may encourage many countries to rethink EU and conduct their own referendum. However my feeling is RoE (Rest of Europe) barring maybe some East Europe countries will stay together. They have strong ties of culture, language, proximity and history. The EU may actually become faster and more responsive to each other’s economic and financial necessities, after this shakeup.
The UK is now exposed to several new uncertainties. It will be affected by some new barriers to trade with the EU, which will come into effect soon. Many work immigrants from RoE who were allowed easy access to UK may now have to head back to their countries. This will improve job prospects locally. However UK may suffer as a financial capital, and as European headquarters for many businesses. The red hot real estate market of London may cool a bit.
How will Brexit impact Indian investors?
We have seen a high volatility in the GBP against most major currencies. Indian firms with an exposure to UK and Europe too have fallen sharply. Certainly the unexpected Brexit vote has increased uncertainties.
- However UK has been quite resilient to currency fluctuations in the past. The country is both a big importer and exporter, and the net effect of the recent changes has to be calculated by sector and by company to understand the specific impact.
- The UK based manufacturer-exporters may actually see a gain due to weaker GBP. However if they need to import significant raw materials, then product prices may have to be adjusted upwards partially.
- Exports from UK to the EU may see some tariff and non-tariff barriers in future. However this may be compensated by other markets and new bilateral ties. And a weaker currency.
- Indian companies which have invested a lot in the UK have concerns. Over 800 Indian firms have invested $2.75 billion into Britain in the last few years. Listed Indian firms with operations or subsidiaries in UK may see an immediate 10% drop in revenues and other financials due to the weakened currency.
- Indian firms with EU assets or subsidiaries should be less affected, as the Euro has weakened only 1.5-2% so far. However higher pessimism prevails as the 27 country EU looks weaker economically.
- However note that in a 3 month period post Brexit, very little will change except these currency rates. Investors should take this as an opportunity to invest in high quality firms. The Indian investor needs to stay calm and take advantage of the situation. Read here: THE TOUGHEST LESSON IN LONG TERM INVESTING https://jainmatrix.com/2014/12/10/the-toughest-lesson/
- Investors in JainMatrix Investments – Model Portfolios may note that there is no change in the recommended firms due to Brexit. They may continue to hold these or invest in a SIP format as per their investment plan.
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This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst (SEBI Registration No. INH200002747) under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at firstname.lastname@example.org.