The Resurgence Of Global Markets

Global markets are quickly adjusting to new realities. It’s just been a few days since the Brexit vote, but the global markets are already up and running. The US markets have rallied significantly, and the major indices have recouped almost all their post-Brexit losses. The Dow Jones has recovered nearly 90 per cent of its Brexit losses, and is back close to 18,000 levels to 17,929.99.

The Financial Times Stock Exchange is higher than it has been before the ‘leave’ vote. The index has surged 8.7 per cent this week, which is one of its best performances in a long time. Not many expected the markets to recover so much this soon. But the markets have a mind of their own. Part of the reason the markets are discounting is that ‘Brexit’ may not eventually go through in its current form, or could take a long time to execute.

Says Ramesh Damani, member of the National Stock Exchange: “This is a momentous decision. On reflection, whatever happens could be a watered down version of Brexit. It won’t be a bitter divorce that we are contemplating. The market will absorb it and move on.”

By the looks of it, the markets are ready to absorb some more. All the major global indices are up 3.1-8 per cent. Global investors have been looking at the turmoil as an opportunity to grab stocks at lower levels, and also reading cues from the recent events that suggest a further quantitative easing soon.

Global currencies are also swiftly adjusting to the new realities. As the UK stands to lose the most due to Brexit, with about 50 per cent of its exports to the EU, the pound lost nearly 8.8 per cent immediately after Brexit and continues to reel in international markets. Cumulatively, the pound has lost 11.75 per cent. However, over time, investors are expecting the diving pound to boost UK’s competitiveness in international markets.

Safe haven currencies such as dollar and yen have strengthened after Brexit. Japanese yen is also being looked at as a safe haven currency as investors look to hedge their euro assets. Meanwhile, Chinese yuan is trading lower; the currency lost 2.9 per cent against the dollar in the last few months. A re-adjustment is taking place in the Chinese economy, which is trying to move inwards from the export-led growth. So investors will be on the lookout for other emerging markets, according to market experts.

All in all, some of the currency equations in the global market are still being written, and will take time to stabilise. Hence, the global currency markets will now be in a constant state of flux, as the final impact of the ‘leave’ vote will continue to be calculated long after.

To India’s credit, the external account balances have kept the currency relatively steady in the forex market. India’s current account deficit stands at 1.1 per cent of GDP, which is relatively healthy. Besides, India has a strong buffer of foreign exchange. After reacting negatively to ‘Brexit’ and breaching past the levels of Rs 68, the rupee has stabilised at Rs 67.5 levels to the dollar.

In the larger scheme of things, however, the UK’s ‘leave’ vote hardly impacts India’s trade balances. India forms only 2 per cent of trade with EU, and has a negative trade balance of €1.3 billion with the Union. Besides, the leave vote is overall positive for the Indian economy as it boosts individual countries’ economic co-operation on better terms.

Trade agreements can be negotiated better with individual countries, depending on each country’s needs and priorities. If the UK does indeed exit, companies would be able to negotiate with UK separately, and separately with the EU, thus boosting business opportunities.

Says Kaku Nakhate, president and country head, BofAML India: “Britain accounts for only 3.4 per cent exports and 1.4 per cent imports — so there is likely to be limited direct impact on earnings. While some companies with large exposure in the UK and Europe will likely get affected in the near term, we will have to wait for clarity on how things pan out over the next few months to understand the long-term impact. British and European banks are likely to shrink their loan exposures further as they continue to de-leverage and banks will gravitate to better risk.”

The markets are now also factoring in the possibility that the US Fed may postpone rate hikes for a few more months due to the events. This should keep the fund flow taps flowing towards India. In the course of time, rupee may depreciate, but it is expected to be slow and gradual, and not likely to impact foreign flows into the Indian markets.

Says Mehraboon Irani, principal and head, private client group at broker company Nirmal Bang: “How things finally shape up remains to be seen, but India does stand to gain a lot in the new world order.”

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