Jun 4, 2016

How the Brexit Vote Will Affect Your Singapore Investment Portfolio

On 23th of June, The citizens of the United Kingdom will come together to vote for one of the most important decision in their life, to stay within the European Union or to withdraw from it. A few weeks ago, polls indicated that the "Stay" camp was leading but the lead has narrowed in recent days leading to a razor thin advantage for the "Stay" camp. Given the potential implications both politically and economically, we have to take a closer look at the worse possible scenario of UK leaving the EU zone and its immediate repercussion for investors in Singapore.


Sharp fall in UK Pound and Euros

As a result of the recent crash in the oil prices and China's stock market, The SGD has been rising rapidly against USD from 1.42 to the 1.34 range during the 1st quarter of the year, which result in MAS suddenly easing the SGD in April. The recent disappointing US jobs data report has pushed SGD up again and any adverse news from the Brexit vote will lead to a higher SGD. The Sterling pound is expected to fall as much as 20% according to an estimate by Goldman Sachs. Due to it's open and small markets, the Singapore government uses currency exchange to manage its exchange rate and a higher SGD is similar to a tightening in monetary policy in Singapore. The stronger SGD will hurt some of the key industries such as tourism and manufacturing which has been slowing radically in recent months. The lack of inflationary pressures and low commodity prices do not justify any need need for a strong SGD and this will put further pressure in the profit margins of Singapore corporations and their share prices.

Global Stock Market Correction
 
A Brexit will lead to a sharp correction in the European stock markets and its associated currencies and will probably spark off another major correction in the export driven Asian markets. The lower Euro and Pounds will lead to the US Federal Reserves reconsider the need to raise interest rates as the USD will become increasingly noncompetitive in the global markets which will push SGD stronger again, which will again lead to more downward pressure on our stock market.

China May Increase its Speed of Yuan Devaluation

A major devaluation in the European currencies will lead to increased pressure on the export oriented Asian market. China, which is caught in between the desire to devalue the yuan and make its export more competitive and at the same time, not allowing too rapid a devaluation for fear of a capital flight is at a course of devaluing the yuan at a measured pace. A sharp fall in EU currencies may force the hand of the Chinese central bank, leading to a faster rate of devaluation, which will be detrimental to its key importing partners, of which Singapore is one of them.

Question of EU Unity

When Greece threatened to leave the EU a few years ago, the economy of Greece is not big enough to threaten the union after the EU central bank had sort out the toxic debt spread among its EU members. However, the clout and economic might of UK is a different matter. The Syrian immigration crisis has also sowed the seeds of fracture and discontent among the newly joined eastern European nations. Should UK leave the EU and continue to prosper after leaving the membership, members of the EU will question the benefits of the union and it may result in the break-up in one of the largest economic bloc in the world.        

A Trigger Point for an Economic Downcycle?

While the economic implications will be felt most keenly by the EU zone, the impact of a Brexit might trigger the next down cycle of the global economy as investors will pull out of risky asset while waiting for the global economic markets to find a new balance as a result of a more politically unstable EU. The polls still indicate that there is 30% undecided of undecided voters. The recent referendum result for the Scottish independence may give us a clue how the undecided voters will vote, given that the "Stay" vote won by a huge margin despite an even probability during the pre-voting polls. The "Stay" vote for Brexit will probably win the day and the world will move on, but as like all eventualities, good investors must have a game plan in the case the unexpected occurs.

10 comments:

  1. Would you care to share with me what is your game plan if BREXIT vote to leave EU?

    ReplyDelete
    Replies
    1. Sure. After the recent rally in equities in US and Europe, I have trimmed down on the equities portion holding mainly in USD to hedge against the risk in the case of a falling EUR & Pound as a result of Brexit. I have removed all of my Asian allocation in the case the fallout will trigger further economic problems in China and a probable downward adjustment in yuan. Yen and Gold prices will probably shoot up in the case of a Brexit vs SGD while USD probably will move up as well as global investors take flight in the safety of USD while waiting for the new equilibrium in global currencies to settle. The bigger question is what to buy next after the Brexit will depend on how the chain of events will pan out.

      Delete
  2. Nice article Xeo, good explanation and easy to understand

    ReplyDelete
  3. Hi Xeo. In retrospect, Brexit appears to have minimal impact on the financial market. Market has generally recovered from the initial sell down. The strength of USD n yen has abated in the past days. Meanwhile, gold and silver have continued their appreciation, probably not due to brexit but a perceived longer than usual low interest rate environment.

    ReplyDelete
    Replies
    1. Hi,

      You are right about the financial markets recovering quickly. That's good for everyone who are caught in it in the first place (Me included) giving them a chance to decide if they believe if things will get worse or better. As this is a political crisis, the impact will take time to filter through. Base from the reports I have been reading, consumer confidence is down and people are saving up for an imminent recession, companies decide to put off investments, and the political crisis in UK is getting from bad to worse. The sharp reversal in the market is due to the market optimism that US Fed and EU will put in more market friendly measures. The real economic data which will reveal the slow down will come 3-4 months down the road when companies start to report their Q3 earnings which will be when the real test to be. Whether the measures implemented between now and than be enough to arrest the potential slow-down is anyone to guess. In any case, the EU monetary bullets are exhausted and global developed market bond yields are extremely low which is an indication that the market is still extremely risk adverse. The crisis may just be starting, much like how the slow initial crash seen at the start of the housing crisis when most people in US thought that subprime property crisis is too small to have a real impact to the overall economy and that is the prelude to the 2008 financial crisis.

      As I mention in the article, the impact on Singapore will mainly come from China as an indirect result of the slow down in EU as EU is the largest trading partner to China. With a sharp fall in Euros and Pounds, China Yuan will become expensive again and they need to continue with the devaluation of yuan, which has reached a new low in recent days. The last time China yuan devaluated sharply during August 2015, we saw huge turmoil in the financial markets. This time, they are able to stealth devalue the yuan slowly as the attention is now all focused on the EU. But those who are watching will see the difference between Yuan and USD.

      Lastly, if you have some fundamental knowledge about technical analysis, there are a couple of major lower low trends in major markets in Asia and Europe over the past 1 year.

      As US and China are the two biggest trading partner for Singapore, our SGD is balanced between yuan and USD so we won't see too much impact but I understand from MAS latest review is that they are going to maintain SGD depreciation as our export manufacturing is dying and inflation is pretty low in Singapore right now, so I still have high hopes for USD. Gold looks pretty good but I am uncomfortable at the speed at which it shot up. Between Gold and USD as a safe haven hedge, I picked USD as it looked much more undervalued to me as compared to Gold.

      Delete
  4. This comment has been removed by the author.

    ReplyDelete
  5. "Longer than usual" is a recurring theme which I have noticed. Longer than usual low interest rates, longer than usual slow growth and longer than usual bull market. Given the huge liquidity floating in the market, the market is unlikely to tank is a big way. The liquidity must go somewhere and I am pretty sure some of it has flown to the gold and silver market.

    Another observation which I have made is the resilience of the reits market, probably due to the hunger for yield. Investors may want to pay attention to the real economy as an economic downturn will inadvertently impact the real estate market.

    Our largest trading partners are China followed by Malaysia. I think US is third while Indonesia is fourth. Beyond looking at our immediate trading partners, we should also look at where are the final destinations for our exports. I think we would have better clarity on how these would impact the future movement of S$.

    ReplyDelete
    Replies
    1. Good analysis there!

      I feel that the economic downturn this time round will hit selective countries badly like the 1997 asian financial crisis than the 2007 global financial crisis. Asian property market was relatively unaffected by the 2007 crisis due to the awash of liquidity from China even though US and Euro property. Given that Asians have a larger than proportionate percent of wealth parked in real estate as compared to US and Europe, a property crisis will hit us much harder than a stock market crisis. As long as the property markets in Asia can hold up, we shouldn't suffer that much.

      Delete
  6. Brexit will definitely effect your investment trends, the pound have crashed already, you need to see every option available to reduce your risks in the investment.

    Delta Capital Markets

    ReplyDelete

Related Posts Plugin for WordPress, Blogger...