Brexit – this word has caused more turmoil in the world markets in the past weeks than any other word. Is it a good word or a bad word?
On June 23rd 2016, the United Kingdom of Great Britain voted to leave the European Union (EU). In keeping with the times, we abbreviated the British exist as Brexit. David Cameron, the prime minister of Great Britain, resigned very soon after the result was announced.
The financial markets have been wondering how to handle the uncertainty since then. The world currency markets, debt markets and equity markets have been jumping up and down. However, the impact on the Indian market has been quite benign and the investors have not seen too much erosion in their portfolios. On June 23, 2016, the citizens of the United Kingdom of Great Britain voted 52:48 to leave the European Union.
With more than 50% of trade with the EU and more than 34% of its financial and other services going to EU a fair question is ‘why did Britain go out of the EU’. Importantly what is the implication of this for UK, for the rest of the world, and more importantly for India?
It is almost impossible to know why Britain voted to move out of the EU – so let us not try playing that game. The Brits were best placed to find jobs all over Europe – English language was one of their best exports for sure!
Markets hate uncertainty and the impact of this was seen in the pounding of the pound (!). With the British interest rates not going up, the Sterling could remain weak for a longer period. Many hedge funds had bet against the Sterling and they surely took money home. It is always in such times of turmoil that the investor should revisit his goals and focus on the long term. In most cases of course, not doing anything would be good and correct strategy. The real driver of the market volatility has arguably not been the immediate economic impact, but the impact that it can have in the immediate future. The referendum and political outcome in the UK may lead to a rethink in other Rich European countries that have been unhappy with their plight in the European Union. This can create a ‘Lets also quit the EU’ which means a new form of ‘EU breakup ’ fear may be taking hold.
What it means for Britain?
It means tremendous hard work and a lot of clerical and managerial work. Britain will have to enter many multi-lateral, and bilateral agreements. This will cover trade, airline flying rights, manufacturing, etc. etc. Take for example Tata Motors will have to set up a plant outside UK and in EU for accessing the EU markets like France and Germany. It will mean something good for the weaker economies of EU as most manufacturing shift from UK is likely to happen into those countries. Now the worry for a Ta Mo will be whether EU itself will remain or just disintegrate. If I were Ta Mo I would rather put up a plant in a strong economy like Germany – at least you can expect the home market in case of EU disintegration.
Even though we are ASSUMING Brexit, the official stand of the Brit Parliament is still to be seen. They have to officially ask for leaving the EU. France and Germany go to polls in 2017 and to expect their current political party is a surely far-fetched. What will the British Parliament really do? Will it worry about the SURE loss of jobs with more manufacturing moving into EU (not just getting out of expensive UK, but more positively getting into EU)? Or will it worry about the huge infrastructure changes that the law will cost? Will the EU make it easy for UK to get out? Will the negotiations of a strong EU with UK be very difficult to handle?
All these are not easy to answer. With negative interest rates all over the world, this is not a great time for UK to take the final call.
What is the implication for the EU?
Well the Pound took a bigger hit, but people are questioning the longevity of EU. If a strong country were to move out, will France and Germany consider similar moves? The jump in the price of gold is again a volatility and fear indicator. Gold has hit a long time high, and looks strong.
What is the impact for the rest of the world?
First of all a lot of administrative and legal work to be done. For Pharmaceutical companies it will mean a whole lot of inspections, certifications, etc. A lot of them who were accessing the UK market from other countries will have to open shop in UK.
Impact for India?
Not much immediately and we will know only as we go along. Legal and administrative formalities is bound to be high. There has been talk of major implications of some pharma companies and software companies. India’s biggest auto company has a huge division in the UK and there were rumours that all these companies will be impacted. Surely the impact on the auto giant has to be more than marginal. The loans will look costly (it was syndicated in US $) – however the weak pound will make exports easier. Most of the Indian investments are in Telecom, IT sectors. With UK’s exit, all these companies will have to open an EU office. Will they locate it in Greece (no chance of leaving EU) or Germany (at least if Germany left EU, they will have access to the German market!!
Auto and steel manufacturers will have to live with the EU tariff – creating some hassles for the Tata Group. Will they shift the plants outside Britain?
Asians (including Indians) are big buyers of property in London, they will see a great opportunity to buy those big nice houses in London’s suburbs. British investments may flow into India as a bilateral agreement falls in place. Britain is a big educational destination for Indians – and if the Pound were to remain weak, more Indian students will go to Britain to study. Caveat is – Brexit is happening to reduce/ avoid immigration.
Remember the most important thing though. No country has exited the EU so far..so one will have to see how all the concerned parties handle it. That will be reality. What is written here is pure imagination of ‘what could happen’.