The vote for Brexit will clearly lead to a realignment of global capital flows in the next several months. Quite probably, there will be a downgrade of overall global growth prospects in this financial year. In a broad sense, there is likely to be a flight to safety. But, there will also be a redefinition of what constitutes "safety".
Most investors tend to consider hard-currency zones and hard-currency assets "safe" if only because it is easy to exit such assets and limit losses. There will certainly be a reassessment of normal perception since the United Kingdom (UK) is obviously not "safe". GBP (British pound) and GBP-related assets will, almost certainly, get hammered for a while and the UK's gross domestic product (GDP) growth will be affected for a couple of years at least.
There is also a real chance this will set off copycat separatist votes in other European nations and could lead to a further unravelling, of the EU. So, the eurozone will come under pressure as well, and that pressure would intensify if there are political rumblings from other EU nations.
Gold has already increased due to its reputation as a "safe haven". Speculators will also surely be looking at bitcoin and other alternative assets. There is a chance that crude oil will slide into another downturn and other commodities could also go south if demand from Europe slackens, as seems quite likely.
One big question is, how will investors view emerging markets (EMs) and, especially, India under the circumstances? This one is hard to answer. While the knee-jerk reaction would be to exit emerging markets, some long-term investors might decide to cross their fingers and stay with the comparatively better growth prospects of EMs.
However, fundamental growth prospects will be affected in India. India's exports are going to take a hit if there's economic contraction in the UK and the EU. Exports have been contracting for quite a while anyway but Indian companies with the UK and Europe exposure will be under extra pressure, at least in terms of perception. The prospects of raising loans (or equity or foreign currency convertible bonds) denominated in those two currencies in the near future has also declined. There may be a slowdown in terms of foreign direct investment flows. Indian traders should be looking at ways to stay long on the dollar and short on the euro and GBP. Currency markets will be risky however since volatility has spiked and there are high leverages. Apart from direct currency trades, a harder dollar will mean better export prospects to the US. So, companies with American exposures could do well.
Investors with portfolios feel overexposed to the euro and the GBP could look at cutting back. They should be prepared for some fundamental downgrades in companies with euro/GBP exposures. Look at it this way. The Nifty rose from 6,825 in February-March 2016 (52-week low) to a little under 8,300 before the Brexit hit. Fundamentally, global growth prospects have gotten worse since February-March and Indian corporates will suffer some collateral damage. Even if the market corrects all the way back to 6,800 levels, and it may not do so, it should not really cause alarm to long-term investors.
Systematic investors holding SIPs should not, therefore, be looking at getting out. Rather they should just maintain status quo until the situation becomes a little clearer. If there is a catastrophic drop in the stock market, there will even be a case for increasing commitment via SIPs.
Every major central bank in the world will be reviewing its policies under the circumstances. It includes the Reserve Bank of India and it means rupee could swing considerably over the next several months. If you have surplus funds at the moment, consider parking most of the excess in short-term money market funds. These instruments would be relatively immune. The best policy in these circumstances is probably to buy some gold and wait things out. The precious metal could gain as currency volatility increases. If you wish to hedge aggressively, buy some bitcoin.
Most investors tend to consider hard-currency zones and hard-currency assets "safe" if only because it is easy to exit such assets and limit losses. There will certainly be a reassessment of normal perception since the United Kingdom (UK) is obviously not "safe". GBP (British pound) and GBP-related assets will, almost certainly, get hammered for a while and the UK's gross domestic product (GDP) growth will be affected for a couple of years at least.
There is also a real chance this will set off copycat separatist votes in other European nations and could lead to a further unravelling, of the EU. So, the eurozone will come under pressure as well, and that pressure would intensify if there are political rumblings from other EU nations.
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This vote will, therefore, mean a downgrade of the valuations of euro-denominated assets and some attendant currency volatility in the euro. Which would leave only Japan and the US as "safe" large, hard currency zones. Growth is non-existent in Japan and the US is only chugging along rather than moving into top gear. The dollar is also strengthening as a consequence of Brexit. This would affect the US Federal Reserve's policy decisions in terms of rate increase.
Gold has already increased due to its reputation as a "safe haven". Speculators will also surely be looking at bitcoin and other alternative assets. There is a chance that crude oil will slide into another downturn and other commodities could also go south if demand from Europe slackens, as seems quite likely.
One big question is, how will investors view emerging markets (EMs) and, especially, India under the circumstances? This one is hard to answer. While the knee-jerk reaction would be to exit emerging markets, some long-term investors might decide to cross their fingers and stay with the comparatively better growth prospects of EMs.
However, fundamental growth prospects will be affected in India. India's exports are going to take a hit if there's economic contraction in the UK and the EU. Exports have been contracting for quite a while anyway but Indian companies with the UK and Europe exposure will be under extra pressure, at least in terms of perception. The prospects of raising loans (or equity or foreign currency convertible bonds) denominated in those two currencies in the near future has also declined. There may be a slowdown in terms of foreign direct investment flows. Indian traders should be looking at ways to stay long on the dollar and short on the euro and GBP. Currency markets will be risky however since volatility has spiked and there are high leverages. Apart from direct currency trades, a harder dollar will mean better export prospects to the US. So, companies with American exposures could do well.
Investors with portfolios feel overexposed to the euro and the GBP could look at cutting back. They should be prepared for some fundamental downgrades in companies with euro/GBP exposures. Look at it this way. The Nifty rose from 6,825 in February-March 2016 (52-week low) to a little under 8,300 before the Brexit hit. Fundamentally, global growth prospects have gotten worse since February-March and Indian corporates will suffer some collateral damage. Even if the market corrects all the way back to 6,800 levels, and it may not do so, it should not really cause alarm to long-term investors.
Systematic investors holding SIPs should not, therefore, be looking at getting out. Rather they should just maintain status quo until the situation becomes a little clearer. If there is a catastrophic drop in the stock market, there will even be a case for increasing commitment via SIPs.
Every major central bank in the world will be reviewing its policies under the circumstances. It includes the Reserve Bank of India and it means rupee could swing considerably over the next several months. If you have surplus funds at the moment, consider parking most of the excess in short-term money market funds. These instruments would be relatively immune. The best policy in these circumstances is probably to buy some gold and wait things out. The precious metal could gain as currency volatility increases. If you wish to hedge aggressively, buy some bitcoin.