Tata Asset Management Brexit and Its Implications The Beneficiaries and Impact On India

BREXIT and Its Implications - the Beneficiaries
and Impact on India

June 16, 2016
by Ritesh Jain
of Tata Asset Management
The European Union (EU) is an economic and political partnership involving 28 European countries
formed after World War II. It has since grown to become a "single market" allowing goods and people
to move around, basically as if the member states were one country. The EU is founded on laws, and
Britain, as a member of EU has to abide by these laws. In return, Britain, like any other EU member,
gets relatively liberal trade access within the EU member countries. Supporters of BREXIT believe that
Britain is being held back by the EU, which they say imposes too many rules on business and charges
billions of pounds a year in membership fees for little in return. As per some estimates, 100 most
burdensome EU regulations cost Britain GBP33.3bn in 2014-15. BREXIT supporters also want Britain
to take back full control of its borders and reduce the number of people coming to UK to work. Those
campaigning for Britain to stay in the EU say it gets a big boost from membership citing reduced cost
of trade with other EU countries and, they argue, the flow of immigrants, most of whom are young and
keen to work, fuels economic growth and helps pay for public services.
On 23rd June, Britain will vote whether it wants to remain a part of EU or it wants to leave. A vote to
leave the EU would start a long and complicated process that would result in a fundamental change in
the UKs relationship with the other members of the EU. There are pros and cons for both parties.
Increasing restrictions and introduction of political borders increases the cost of trade and services.
Financial Times estimates the GDP hit to be at 2-7% with most of the losses front-loaded if Britain
leaves the EU and fails to strike a deal or reverts into protectionism. On the other hand, as per an
independent think tank, Open Europe, if the UK stays with the EU and manages to strike liberal trade
agreements with the members, the benefits would be 1.6% of the GDP by 2030. The EU remains the
largest market for Britains exports, constituting 40-45% of its exports. The UKs primary goal is likely to
be to retain access to the EUs internal market but it will find it difficult to gain liberal trade terms from
the EU if it chooses to exit the EU. Economic factors will hurt both the parties. Britain is a strong
member of the EU and losing Britain will weaken the EU, both economically and politically. A BREXIT
could stoke separatist pressures within the EU, threatening its cohesiveness, something which the EU
is already grappling with. This could also give Britain a headache as BREXIT could lead to demands of
referendum within Britain (read Scotland) in the longer term.
BREXIT could trigger capital flight from Britain. It could have a profound effect on Londons real estate
market, among the most vibrant in the world. Stricter regulations will curb capital flows both from within
the EU and outside it (read China & Russia). Britain has among the highest current account deficit
(~7% of the GDP) in the developed world and is dependent on foreign investors to plug the gap.
BREXIT will only compound inflation and the sterlings worries. London is widely regarded as the
springboard to Europe. Given Londons status as a global nerve centre outside New York, BREXIT
Page 1, 2016 Advisor Perspectives, Inc. All rights reserved.
could weaken the EU as far as it share in world trade and commerce is concerned. For Britain,
separation from the EU will mean stricter immigration laws. Pertinent to note that Britain has benefitted
from the influx of skilled immigrants. The number of EU workers in Britain is now estimated at roughly
2.15mn. As per the OECD, immigration accounts for half of the UKs growth since 2005 and
immigrants have filed 2.2mn jobs since that period. Stricter immigration laws could make it difficult for
EU skilled workers to work in UK.
Likely beneficiaries of BREXIT: In my view, dollar assets will emerge as the biggest beneficiaries of
BREXIT. Events like these are usually followed by periods of volatility and economic pain. Given the
current state of global economy, investors will be quick to rush to safer havens. Few asset classes can
cope with capital flows of this magnitude. I believe that capital will flee to near-dated US Treasuries in
the short term and will ultimately find its way into other dollar assets in the medium to longer term.
Impact on India: As far as India is concerned, in the near term it will heighten global volatility thereby
impacting capital flows and in medium term we will most likely be impacted through currency exchange
. India has a substantial trading corridor with EU. Any material depreciation of the Euro/Pound could
lead to increased headaches for India in a sluggish export environment. Indian businesses have a
material presence in both the UK & Europe. As per The Guardian, there are more than 800 Indianowned businesses in the UK, with more than 110,000 employees. Besides, BREXIT could also
endanger the flow of investment and personnel by diminishing Britains role in providing access to
Europe.
To conclude: BREXIT if it happens, will have implications; UK Real estate prices may correct (on
account of thinner capital flows from EU), inflation will climb on expensive imports, Londons financial
centre status may get threatened if money flow and settlements are hampered. Goldman Sachs
estimates 15-20% drop in the sterling as a response to BREXIT. As of now, the British public is evenly
split on BREXIT with 45% wanting to stay with the EU while 43% want to leave the EU. The long-term
economic impact of BREXIT is hard to discern, but the short term disruption while the UK negotiates
and renegotiates is only likely to be bad news for both sterling and Euro assets. So near term effect of
BREXIT on both the currencies is pretty easy to predict.
It is difficult to gauge the precise medium to long term economic impact of BREXIT on both the parties
concerned. However, the outcome of BREXIT in my view is the biggest macro risk affecting fund
managers and investors bigger than oil price or even the FED rate hike. Having said that, at this
moment, it is almost impossible to predict the outcome. We will have to wait till June 23rd to know the
future of EU and Britain.
Disclaimer: The views expressed are of Tata Asset Management Ltd. and are in no way trying to
predict the markets or to time them. The views expressed are for information purpose only and do not
construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the
information contained herein is your responsibility alone and Tata Asset Management will not be
liable in any manner for the consequences of such action taken by you. Please consult your
Financial/Investment Adviser before investing. The views expressed may not reflect in the scheme
portfolios of Tata Mutual Fund.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
before investing.
Tata Asset Management Ltd.

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BREXIT and Its Implications - the Beneficiaries

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