On June 24, 2016, UK voted to leave the European Union which brought uncertainty with respect to political, economic and financial situations for both UK and Europe. This news led S&P/ASX 200 (INDEXASX: XJO) fell over 3.2% on June 24, 2016 along with fall in its global counterparts during the day. However, the S&P/ASX 200 (INDEXASX: XJO) recovered over 5.43% from June 25, 2016 (as of July 13, 2016) due to easing Brexit fears, rate cuts from RBA and companies’ repositioning efforts post Brexit.
Impact from bond rates: The major issue has been about understanding what money could enter or leave the country after Brexit. Australian sectors like banks, diversified financials (in particular the global fund managers) and industrials that have exposure to Europe and the UK still felt the Brexit pinch with the second wave of Brexit effects post a short period of calm. In addition, the sell-off in the stock market is not good for investors who depend upon superannuation funds and would have deflationary consequence which has put pressure on RBA. For instance, QBE Insurance Group Ltd (ASX: QBE) had fallen over 9.07% (as of July 13, 2016) from the June 24, 2016 closing due to Brexit effect as management reported that they might require a revised approach for their GBP500 million insurance and reinsurance premium business. The insurance products which QBE gets from EU member countries are written via branches of UK regulated entities under current EU passporting rules. In addition, if existing EU passporting rules are not preserved, then QBE will be required to renew this business into newly established licensed EU entities. However, lower bond rates owing to depressed economic conditions at the back of Brexit may lead QBE earning less on its investment portfolios.
Impact on stocks with great pie of international sales and exposure to UK market: Among other stocks, GBST Holdings Limited (ASX: GBT) stock has almost fallen 15.21% from the June 24, 2016 closing price (as of July 13, 2016) post Brexit as the company focuses on international sales which has now exceeded domestic revenue due to the strong revenue and profit growth driven by UK expansion as per FY 2016 financials. The domestic revenues and earnings for the group are already impacted by temporary delays in major client projects. The ongoing Brexit fears seem to have dampened its international performance as well. Qantas Airways Limited (ASX: QAN) stock has fallen 5.2% from the June 24 (as of July 01, 2016) due to Brexit impact. Qantas Group Revenue per Available Seat Kilometer (RASK) declined in the month of May impacted by International RASK. Iress Ltd (ASX: IRE) stock has fallen 7.08% from the June 24 (as of July 01, 2016) post Brexit outcome. Henderson Group plc (ASX: HGG) also witnessed the fall of about 24.56% (as of July 13, 2016) on ongoing Brexit fears. BT Investment Management Ltd (ASX: BTT) stock also fell 18.33% from June 24, 2016 (as of July 13, 2016) as Brexit’s outcome seemed to impact the fund’s potential performance. The group has significant exposure to the UK market. BTT UK based business is managed by J O Hambro Capital Management (JOHCM) while the group reported that there would not be much change on how the region’s funds are managed.
However, some of the Australian banks showed resilience with signs of averting the risk while there may be slight impact in the ongoing month as well. Bank balance sheets have been strengthened since 2008 with higher capital ratios and there has been a lower reliance on off-shore funding. Australian banks have done a lot of work to increase their term deposit funding and have completed 70-80% of their 2016 wholesale funding requirements.
Potential impact on Australia’s trade: On the other hand, uncertainty increased on account of Brexit which was thought to affect Australia’s trade. The exports had contributed to the GDP of Australia significantly according to the latest data and if there is a decline, then the Australian economy would have an effect which would hurt the investments. There can be fall in portfolios and the funds under management. For instance, CYBG PLC CDI 1:1(ASX: CYB) stock plunged over 24.91% since June 24, 2016 (as of July 13, 2016) as the group has high exposure in UK assets.
Potential impact from fall in pound: Fall in pound as seen in last few weeks, is expected to have negative consequences for several Australians who have pensions and other assets in the UK. UK is the second largest source of foreign direct investment in Australia and second largest destination for Aussies investing overseas which is something that is unlikely to change even after Brexit. Macquarie Group Ltd (ASX: MQG) is one such stock which is witnessing the impact of falling pound and accordingly the stock has fallen 6.6% (as of July 13, 2016) from the June 24, 2016.
Among the uncertainties, the stock price of gold mining firms kept soaring and resulted in flow of funds to this commodity given its “safe haven” status. Re-balancing of Australia’s economy away from mining boom coupled with the country’s efforts to rebalance its relationships with Europe is expected to drive its economy on a long term perspective. Repositioning trade with British exposed businesses for a temporary period could ensure limited exposure before leading to a negative economic activity.
Further, latest Bloomberg report reveals that global financial markets are depicting signs of recovery and the fallout from Britain’s vote to leave the European Union is under control. Particularly, global stocks are seen to rise for a fifth day with almost $4 trillion being recovered in value lost in the days following the referendum. Commodities such as Copper are rising with efforts from across the globe to limit the fallout from Brexit. At the same time, acquisitions have resumed and corporate bond sales are also picking up. Thus, the Brexit impact on various Australian stocks may have taken a temporary momentum or may be even negligible at the back of on-going gradual recovery. On July 13, 2016, most of the aforementioned ASX stocks did recover in the range of about 0.1-5%.
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