Tag Archives: Brexit

Comfort-Delgro – The impact of BREXIT

UK/Ireland is the second largest revenue generating market after Singapore for Comfort Delgro (CD). As of Q1 2016, CD derived about 23% and 11.4% of its total revenue and operating profit respectively from this market. This translates to an amount of S$228.5m and S$1.25m respectively for that quarter. As news is still coming forth from UK as a result of the Brexit, it is difficult for one to able to know when the sterling pound will stabilise against the Singapore dollars (SGD). Hence, it is difficult to assess the effect of the sterling pound depreciation on companies such as Comfort Delgro, which has on-going exposure to the UK/Ireland market. Even if it stabilised, it also depends on how and when sterling pounds were realised against SGD. However, we do now that the sterling pound has depreciated and is likely to be weak in the months ahead as the fallout of the Brexit has not been fully discounted by the market. As of today, the sterling pound has approximately depreciated more than 10% since the beginning of the year, and a good approximation would be to make an assessment based on 10% or 15% depreciation of the sterling pound against SGD.

Using the recent quarter financial results as a backdrop, (see table 1 and table 2), a depreciation of 10% in sterling pound translates to about $23m and S$1.8m loss in revenue and operating profit respectively for the recent quarter. This should represent about 2.3% and 1.6% loss in the revenue and operating profit respectively.  Similarly, if the sterling pound depreciates 15%, then the revenue and operating profit loss would be 3.4% and 2.5% respectively.

Of course, there were very simplistic assumptions that we had made these calculations.

(1)    We assume that other economies like China and Australia did not (and will not) also weaken their currency to counter the weakening sterling pound. If they do, then the overall revenue and operating profit loss including those from China and Australia may become higher after converting to SGD. In a similar manner, the MAS may also weaken the SGD in view of the strength of SGD.

(2)    The mode of travelling by commuters in UK remains fairly unchanged after the Brexit. This is probably a valid assumption as CD’s land transport operation represents an essential transport service, and it is unlikely to affect the commuters’ behaviour significantly due to unfavourable exchange rate which is external to UK.

(3)    It is also assumed that there is no significant seasonal change in the travelling mode. Hence, the quarterly result is a good representation of the whole year results.

(4)     The operating cost components remain fairly unchanged with respect to the revenue. Thus, the only effect is the exchange rate difference.

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.

Just stay on course

In the blink of our eyes, we are at the half-way mark of calendar year 2016. So, where are we now? The ST Index closed at 2882.73 on 31 Dec 2015, and today it closed at 2840.93, a difference of 41.8 points down (or a loss of about 1.5%) since the beginning of the year. After battling with the Chinese stock market rout in early part of the year, the possibility of interest hike and, very recently, the Britain exit from EU or Brexit in short, we are still more or less where we were since the beginning of the year.  So, generally speaking, the market has been quite resilient.

In fact, the bonds and perpetuals that were raised in the last few months were several times oversubscribed, and many companies actually raised more debts than originally planned. This shows that there is indeed a lot of liquidity at the sidelined waiting to pounce on opportunities that may surface from time to time.

Even in the latest happening that led to Britain, the world’s 5th largest economy, having to break away from the European Union (EU), it did not impose any real threat after one to two days of market disorientation. In a situation when central bankers are prepared to do whatever it takes to stabilise the market, it probably pays to be in the market and not to sell out prematurely. It is like playing football with the referee on our side. The outcome is slightly biased favouring those who hang on.

 So, what do we really learnt from this episode? During times when the market gyrations are expected to be significantly violent, all we need is to stay calm and rationally think through how to react (or even not to react) to the changing situation going forward. Usually, it is the calmness that helped us think rationally. Furthermore, there is ‘Hands of God’ (the central bankers) a term used by Diego Maradona in 1986 world cup to help along. Suppose when we go into a panic and sell out on Friday, 24 June, it is very certainly that one is not able to buy back the stocks that they had sold without incurring some additional costs. Today may be the end of the 1st half of the year, and there is a possibility that there was some kind of window addressing that drove the ST index up. Of course, there can be profit taking in early July. However, the way I see it, the depth of the market rise appeared to be more than just window dressing as the market anticipates that interest rate hike may take a back-seat. Also, almost certainly, there will be stock market volatility ahead as the breakaway of Britain may result in more uncertainties brewing in the EU. And, perhaps, some black-swan events can pop up unexpectedly. But these happenings are not something that we can control and there is no point to lose our sleep over it. What we really can do is to stay on course in our investing journey. Many stock market routs actually got diffused over time. As new ones come along, the old ones get blurred out of the picture.

After having gone through so many ups and downs of the stock market during all these years, I find that most of the time, we do not need to be too reactive to the market gyrations.  The market may have gone crazy momentarily, but we really do not have to go along with it. In fact, there is more to lose, not only financially but also mentally when we react too much to the market gyrations. Unless that we hold on stocks that totally lack fundamentals, the market normally heals itself after some time. Perhaps, we should treat such isolated events as if the stock market is offering some discounts, just like the supermarkets do from time to time. Once the discount period is over, we find ourselves much better off than we originally were.

To me, stay on a long-term course is the best policy.

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.

Brexit: My take on the sterling pound

Even though the sterling pound was bashed badly on Friday, 24 June to as much as 10% against the US dollars, my take is that it could be in for more bashing. While I cannot profess myself to be an expert in the forex market, I am of the view that England’s decision to leave the EU may cause disunity among the GB countries. England’s huge voters by proportion had overwhelmed the stand of the other economies such Scotland, Wales and Northern Ireland. A post examination of the poll results showed that Scotland, next biggest economy after England has a voting population of only 2.6 million voters compare to England’s 28.4 million, let alone that of Wales and Northern Ireland of 1.6 million and 0.8million respectively. In other words, the English’s votes on Brexit may not be representative of the other three economies. In fact, the post examination results showed that Scotland and Northern Ireland had more than 50% on the ‘remain’ camp. This could further surface the disunity of the Great Britain (GB) leading to holding more independent referendums. Needless to say, it is to likely to further affect the value of the sterling pounds.  

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.

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.

Brexit – The impact on us

In a few hours’ time, we should know the results of the referendum as to whether Britain is out or is to remain as a member of the European Union (EU). Ranked as the world 5th largest economy behind US, China, Japan, Germany, and with a GDP of nearly US$3.0 trillion, the results of the polls will have significant impact on the financial markets directly or indirectly. Although I am of the view that final results is for Britain to remain in the EU, there could be unpleasant surprises in view of how divided the parliament is on this issue. Furthermore, Britain, which is part of United Kingdom, in many ways are ‘more different’ than most countries in continental Europe. They continue to use the sterling pounds and, historically, they have been driving on the right side (I mean to say ‘correct’ side of the road as we have adopted the British’s traffic system here.), just to name one or two examples.

As one of the world’s largest economy and with London being one of the most important financial centres in the world, this referendum is closely watched by many countries on both sides of the Atlantic.

What really can be the impact on us? First and foremost, it is the world currency. If Britain chooses to leave EU, then the first direct hit is the British pounds. Being one of the major currencies in the world, its depreciation would mean appreciation in other major currencies such as US Dollars and the Japanese Yens. While, the past several months had seen the British pounds depreciated against many major currencies, the current state may not have priced in a full-scale BREXIT because the Brits were still quite divided over this major decision. Certainly, with a rather stagnated global economy, no country would want their currency to appreciate significantly. In fact, the Brexit had been quoted as a key reason for the chair of FED, Janet Yellen, to delay the decision to hike up the interest rate as it may result in a huge appreciation of the USD. In a similar way, an appreciation of Japanese Yens could negate years of effort by the Japanese government to export its way out of recession.

The other impact is the contagion effect.  It may become a precedent for other EU economies, in particular the weaker ones such as PIGS (Portugal, Italy, Greece and Spain), to call for referendum to choose between ‘ín’ or ‘out’. Even within the United Kingdom (UK), Brexit could cause disarray between the countries in UK. Ireland belongs to the EU but depends on Britain to enable labour and goods movement in the enlarged market. With the high-growth rate in the recent years, Brexit will certainly have impact on the economic growth on this much smaller economy.

Being the second largest economy in Europe, Britain would be a more than welcome to join EU as a member. In similar way, Britain is also very dependent on continental Europe for trade and services as an enlarged market. Brexit could weaken the EU as an economic bloc, and possibly, on its own, sabotage its cutting edge areas such as banking, finances and trade services in serving the common market in the EU. In summary, Britain needs the EU just as the EU needs Britain.

At business level, the impact of Brexit is less apparent. It is likely that those companies who are exposed to the British pounds are more at risk. City Development, which operates hospitality services, and Comfort Delgro, which operates the bus services in England are more likely to be affected due to the currency movement. There are perhaps several more companies affected, but the situation should be relatively contained. However, the negative sentiments will still prevail if Brexit becomes a reality at least for the start. If Brexit degenerates into more referendums being held by member countries in the EU, then it is likely to throw more uncertainties for the stock market.

Keep our fingers crossed, guys!

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.