 "Brexit could roil global, domestic equity markets")
If Britain votes to exit the European Union (EU) in the referendum vote on Thursday, it would trigger turmoil in equity markets across Europe and have an impact on currencies and equities globally, including India. Global markets are expected to remain on tenterhooks as the UK’s public decide whether to leave or stay.
Although European markets rallied sharply and the euro and the pound gained against the dollar on Monday as the ‘leave EU’ campaign was seen losing steam, opinion polls suggested the race could be neck and neck.
Although the UK’s exit from the EU doesn’t have a major bearing on the Indian markets and the economy directly, domestic markets will certainly react to the outcome, as it will dictate global investor sentiment, say experts.
“Brexit can change the equation dramatically. After the US Fed, it is a major event that is followed by investors across the globe. Europe would be on the verge of a meltdown if Brexit happens,” says U R Bhat, managing director, Dalton Capital Advisors.
“The markets will remain choppy and volatile till the Brexit poll. Post the poll, there would be a knee-jerk move. However, the effect on rupee will be moderate. If the UK leaves the EU, central banks, including the US Federal Reserve, will be supportive,” says Samir Lodha, managing director, QuantArt Markets.
If UK votes to leave
It would see a sharp drop in the European markets and trigger a risk-off sentiment, which could see foreign investors pulling out money from riskier markets in Asia. The impact on the markets, however, is unlikely to be long-term. Brexit’s impact on the Asian economies is likely to be benign.
Bloomberg quoted a note by Capital Economics, which said a Brexit would cause at most a GDP drop of just 0.2 per cent across Asia.
Another think tank. the National Institute of Economic and Social Research, believes Brexit would reduce British imports by 25 per cent worldwide within two years.
The UK is one of the largest investors in India and has an exposure of about 8% to FDI equity inflows as per the Department of Industrial Policy and Promotion.
Many analysts, however, are of the view that after an initial knee-jerk reaction, the Indian markets should be able to stabilise and Brexit's impact may not be felt in the medium- to long-run.
However, companies with high exposure to the UK market may get impacted in the long run and this could weigh on their stock prices. According Bank of America Merrill Lynch, the IT industry, which has substantial exposure to the UK market, would get hit in case of a Brexit. This can have an immediate impact on the IT stocks such as Infosys, TCS, HCL Tech, and Wipro.
The other companies having higher operations in the UK include Tata Motors, Tata Steel, Apollo Tyres and Wockhardt, which too could see some selling.
Brexit is also likely to cause a 'run to safety' among investors, which could see prices of gold and developed world bonds gaining. Also, the markets would keenly watch the action of central banks in Europe, US and Japan if Brexit happens.
If UK remains in EU...
If the UK decides to stay in the EU, in many ways, it would be business as usual. There would be economic as well as political stability within the region. This could spark a relief rally in the global markets and Indian markets might also benefit in the immediate short term. Post that, investors' focus could once again shift to domestic events such as the progress of monsoon, first quarter earnings and reform measures by the government. On the global front, the focus would shift to the US Federal Reserve's views on interest rates. "Currently, the expectations of Brexit are low. However, opinion polls could swing at the last moment. If that happens, there is a large risk," says Andrew Holland, CEO, Ambit Investment Advisors.
