UK Elections 2017: Britain gets a hung parliament, but Indian markets will weather the storm

Results can delay Brexit talks; this can work in favour of global financial markets, including India

Indian markets edged lower in intra-day deals on Friday, in line with their Asian peers as the polls in the United Kingdom (UK) hinted a loss for the British Prime Minister Theresa May's ruling Conservative party that could result in a hung Parliament and delay Brexit talks.

Asian markets were trading mixed on Friday, with Nikkei, Straits Times and KOSPI marginally in the green, while Hang Seng, Taiwan Weighted and Jakarta Composite slipped 0.1% - 0.3% in intra-day deals. Back home, the S&P BSE Sensex and the Nifty50 indices were trading around 0.2% lower each at 31,153 and 9,618 levels, respectively. They, however, managed to recover losses and end 0.2% higher at 31,262 and 9,668 levels.

Going ahead, the reaction by financial markets will be seen as an important gauge of how investors look at the United Kingdom’s prospects, the impact on Indian markets is likely to be limited.

Though the fall seen on Friday was warranted given the global linkages, analysts say, Indian markets are expected to perform better than most other emerging and developed markets over the long run. On the contrary, the UK poll outcome that could delay Brexit talks could work in favour of global financial markets, including India.

“Brexit is a fact and the new government will have to negotiate accordingly. However, I expect these negotiations to be weaker in case May loses the election. The markets were never in favour of Brexit and to that extent, incrementally weaker Brexit negotiations and a possible delay will be appreciated by the markets. The Indian markets will weather this storm as there is not much at stake as far as India is concerned. As best, trade negotiations with the UK will have to be reworked,” explains U R Bhat, managing director, Dalton Capital Advisors.

The Indian economy with a stable macro environment and government pushing through reforms, favourable monsoon forecasts and with a banking sector undergoing an overhaul, Indian markets have enough buffers to withstand the poll outcome in the short-term, analysts say. They expect the impact to be transitory in nature with the markets likely to recover soon from any knee-jerk reaction. 

For the rest of the world besides the UK, the poll outcome is irrelevant in a fundamental sense. This means that any short-term volatility in global markets arising from this election should be exploited to build positions or take profits in any assets which temporarily get mispriced, said Jan Dehn, head of research at London-based Ashmore Investment Management in a recent interview with Business Standard.

Read it here: The Indian story is solid; there are no big threats to stability: Jan Dehn

Going ahead, implementation and impact of goods and services tax (GST) bill on the economy, progress of monsoon and corporate earnings are some of the other important factors that the markets will react to in the short-to-medium term.

“There will be a reaction from the global financial markets, and the Indian markets are likely to perform in line. What we have seen historically is that the reaction doesn’t last beyond a day or two. For India, what matters more is the implementation of GST bill and its impact on the economy and corporate earnings. The UK poll outcome will have a transitory impact at best and the markets will recover soon,” says Ambareesh Baliga, an independent market analyst.