 "Is the Brexit fallout over for markets?")
Markets seem to have taken Brexit in their stride. Indian markets have crossed pre-Brexit highs and are trading above it. American markets too are trading closer to pre-Brexit levels but most of the European markets are trading lower than pre-Brexit highs. The biggest surprise in Europe is that UK’s index FTSE is trading above pre-Brexit levels.
Two obvious questions arise from these patterns. One, why is the UK market trading at pre-Brexit high levels while others are still below it, and two, as far as the Indian and American markets are concerned, was Brexit really an issue?
There are many reasons why UK’s FTSE trades higher despite analysts and economists passing judgment that the country will be the worst effected as it exits from the European Union. First is the fact that the exit is still at least two years away, even though German Chancellor Angela Merkel and other European nation want a quick exit. In fact, British politicians are now stalling the exit prices by trying to delay the inevitable as much as possible.
Finally, FTSE 100 is the benchmark index tracked globally, which comprises of top 100 multinational companies that derive most of the revenues from markets other than the UK, has done well as compared to the broader FTSE 250 which comprises of companies that are dependent on the UK economy which is yet to reach the pre-Brexit highs.
Though markets have defied popular sentiment, analysts feel that markets can correct sharply, especially the US market. Bank of America Merrill Lynch feels that just because the S&P 500 Index has recovered it doesn’t mean the USA is out of the woods. The firm says that it’s just a matter of time until companies start to reveal just how hard Brexit is hitting them and it could soon get quite ugly for stocks.
Bank of America Merrill Lynch says that Brexit was not on the radar of most of the company and has come as an unpleasant surprise. In previous quarter’s result commentary only 26 of the 500 S&P 500 companies mentioned Brexit but now all of a sudden there is potential for weaker growth in Europe, even potential for a UK recession.
However, not everyone seems to be as bearish. Deutsche Bank says that Brexit’s loss would be emerging markets’ gain. The report says that there is further economic slowdown in the Euro Area, Japan, and the US, reducing the already remote chance of policy normalisation. Developments over the year in the developed world are resulting in $11.7 trillion of sovereign debt yielding negative yields.
For yield-hungry pension funds and insurance companies, this is highly problematic. While yields in emerging market have also come down, they remain considerably higher than anything available in developed market, and in quite a few cases are rather convincing from a risk-reward perspective.
Economies like Brazil, India, Indonesia, and Turkey have their economic, structural, and political issues, but their relative attractiveness is considerable in this negative yield environment. The development is also positive for emerging markets feels Deutsche Bank as in all likelihood these countries will deliver higher nominal GDP growth rates which should manifest in higher revenue and profit growth, making a strong case for their equity markets.
While the Brexit event has been discounted by markets across the globe, realignment is expected to take place as there is more clarity which will be first reflected in the currency markets.
Bansi Madhavani, analyst, India Ratings and Research pointed out that implications of an eventual Brexit are likely to be material over both the near and medium terms as the UK and EU iron out modalities of the exit. In the interim, financial markets, especially currencies, are likely to realign and reflect shifts in the global risk appetite, he says.
Two obvious questions arise from these patterns. One, why is the UK market trading at pre-Brexit high levels while others are still below it, and two, as far as the Indian and American markets are concerned, was Brexit really an issue?
There are many reasons why UK’s FTSE trades higher despite analysts and economists passing judgment that the country will be the worst effected as it exits from the European Union. First is the fact that the exit is still at least two years away, even though German Chancellor Angela Merkel and other European nation want a quick exit. In fact, British politicians are now stalling the exit prices by trying to delay the inevitable as much as possible.
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Second, Bank of England’s governor Mark Carney had hinted last week that UK rate cuts are likely in order to cushion the Brexit vote impact. Interest rates in UK are at historic lows of 0.5%. Further, Chancellor George Osborne is said to be planning to cut UK’s corporation tax to less than 15% to offset the shock for investors. It was believed that many companies would move out of UK if Brexit would become a reality. UK is now trying to woe these companies back by contemplating tax cuts thereby softening the impact.
Finally, FTSE 100 is the benchmark index tracked globally, which comprises of top 100 multinational companies that derive most of the revenues from markets other than the UK, has done well as compared to the broader FTSE 250 which comprises of companies that are dependent on the UK economy which is yet to reach the pre-Brexit highs.
Though markets have defied popular sentiment, analysts feel that markets can correct sharply, especially the US market. Bank of America Merrill Lynch feels that just because the S&P 500 Index has recovered it doesn’t mean the USA is out of the woods. The firm says that it’s just a matter of time until companies start to reveal just how hard Brexit is hitting them and it could soon get quite ugly for stocks.
Bank of America Merrill Lynch says that Brexit was not on the radar of most of the company and has come as an unpleasant surprise. In previous quarter’s result commentary only 26 of the 500 S&P 500 companies mentioned Brexit but now all of a sudden there is potential for weaker growth in Europe, even potential for a UK recession.
However, not everyone seems to be as bearish. Deutsche Bank says that Brexit’s loss would be emerging markets’ gain. The report says that there is further economic slowdown in the Euro Area, Japan, and the US, reducing the already remote chance of policy normalisation. Developments over the year in the developed world are resulting in $11.7 trillion of sovereign debt yielding negative yields.
For yield-hungry pension funds and insurance companies, this is highly problematic. While yields in emerging market have also come down, they remain considerably higher than anything available in developed market, and in quite a few cases are rather convincing from a risk-reward perspective.
Economies like Brazil, India, Indonesia, and Turkey have their economic, structural, and political issues, but their relative attractiveness is considerable in this negative yield environment. The development is also positive for emerging markets feels Deutsche Bank as in all likelihood these countries will deliver higher nominal GDP growth rates which should manifest in higher revenue and profit growth, making a strong case for their equity markets.
While the Brexit event has been discounted by markets across the globe, realignment is expected to take place as there is more clarity which will be first reflected in the currency markets.
Bansi Madhavani, analyst, India Ratings and Research pointed out that implications of an eventual Brexit are likely to be material over both the near and medium terms as the UK and EU iron out modalities of the exit. In the interim, financial markets, especially currencies, are likely to realign and reflect shifts in the global risk appetite, he says.