Brexit: The days after the pounding

The final verdict is out and Britain is now out of EU. The result has taken the financial market by surprise. Even until the 22nd of June, financial markets all over the world were predicting that Britain would stay within EU. Most of the stock markets, whether it is Nikkei or the Dow Jones, were up from Monday till Thursday, but ended up in the negative territory after the Friday plunge. Even the European markets such as FTSE, DAX and CAC were exhibiting the same upward trend only to crash down significantly on Friday. So, the Brexit had indeed caught the financial markets by surprise. Those in the wrong side of the bet in the forex market would have lost a lot of money. Going forward, the only certainty is more UNCERTAINTY!

Despite a small difference of less than 4% between the ‘remain’ and ‘leave’ camp, there are significant divides between different age groups and different counties. The older ones tend to go for autonomy, while the younger ones go for the union with EU. Also, the Londoners were generally in the ‘remain’ camp while those outside London tend to be in the ‘leave’ camp. Even between the 4 economies that use the sterling pound, England and Wales have more ‘leave’ voters while Scotland and Northern Ireland have more ‘remain’ voters. As 85% of the voters came from England, which chose to leave the EU, it completely overwhelmed the voices of the other economies on their stand towards the EU. It is likely to trigger the next biggest economy, Scotland who has EU leaning, to hold independent referendum, thus weakening the unity of Britain further. Even Northern Ireland, which has more ‘remain’ camp by proportion, but significantly less populated may seek to break away from Britain and join the Irish Republic, which is in the EU.

The situation is no better in continental Europe where almost all the EU member countries sit. Losing about 15% of the total GDP is like losing an arm or a leg for the EU. Britain is the 2nd largest economy after Germany and, this could weaken the EU as an economic bloc.

Predictably the sterling pound was the 1st currency to get the bashing dropping as much as 10% against the USD on Friday, 24 June. The already weak Euro, after the ECB’s initiation of the bond purchase program (Europe’s version of QE), also fell about 3-4%. Going forward, if the GB breaks up due to the above-mentioned differences, the sterling pound is likely to get further bashing. Also, true enough, as mentioned in the earlier post, the USD and Japanese Yens were the ‘beneficiaries’ of this currency exodus, even though both the US and Japan are not the willing parties to have this honour given the state of their economy.

To foreigners, the UK is always seen as a gateway to Europe due to its language similarity to American as well as its colonial influence amongst the commonwealth countries across the globe. As an endorsement to this observation, UK had just recently received prominent guests like President Xi JinPing of China and President Barack Obama respectively during October last year and April this year respectively. With the Brexit already a reality, this position may get relegated, and perhaps, even put its status as a financial centre at risk.

On the stock market, only a handful of Singapore listed companies are directly exposed to UK and the Eurozone market. But still, the repercussion of the foreign exchange market on the local stock market can be significant. On Friday was a sea of red across the board driven by sentiment. The general market mentality was ‘sell first and then decide later.’ In such sentiment-driven drama, pocket of opportunities can surface as a consequence. The share price of unexposed good companies to the European saga can be driven down without any change in their fundamentals. And when the market becomes rational again, the share prices of these companies are likely to be the first to go up.

It’s all about positive thinking.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.