Yes, it has happened!
The United Kingdom (UK) has voted to leave the European Union (EU).
The results of the EU Referendum have shown the ‘Leave’ camp winning with 51.9% against 48.1% for the ‘Remain’ camp. The results have sent shockwaves throughout the world economy, with the Pound plummeting from 1.50 to 1.30 against the dollar, within 48 hours of the EU Referendum outcome. Stock markets around the world have had to bear the brunt of the panicking investors, pulling out their money just minutes after the opening. The Nikkei, for instance, plunged as low as 8.3%, triggering circuit breakers and causing trading to halt for 10 minutes – an occurrence not seen since 23 May, 2013. The integration of financial markets and the impact of globalization meant that the outcome of the EU Referendum would be felt throughout the world.
It has been reported that a record $3 trillion (source: CNN money) have been wiped off global markets, while the International Monetary Fund (IMF) has revised global growth forecasts down, from 1.7% to 1.6%. The UK, on its part, is expected to go into technical recession following its downgrade from triple A rating, while the Eurozone is expected to see lower economic growth, 1.6% this year and 1.4% from 2017 onwards. (source: IMF) While the market turbulences and uncertainty surrounding post-Brexit have revealed the impending economic difficulties looming, should we all give in to the conclusion that the world has reached an irreversible point of economic doom?
Opportunities from Brexit : Who will benefit?
Luckily, no! The economics work out differently than common belief. Economic phenomena, as they occur, are more or less zero-sum games – the losers of the outcome are equally compensated by the gainers, such that the overall outcome is no less different than previously. Hence, opportunities from Brexit do exist! 1. Investors in emerging markets. Brexit has weakened the Pound indefinitely and it will need strong fundamental boosts which is highly dependent on the outcomes of the UK fully coming out of the EU to bring it back to its usual trading range. The Euro, already pounded by the economic intricacies of some of its members, overall growth concerns and negative rates, now has to price in the effects of Brexit in the medium and long term. Consequently, the US dollar emerges as the leading currency amidst all these concerns. Emerging markets investors should once again follow the world’s biggest reserve currency. Although several emerging markets export to the UK and EU, Brexit should nonetheless be a short-term risk-off event, which will be more than evened out over the medium and longer term.
UK Investment outside the EU. While many economists and strategists predict further economic woes for the UK, such forecasts should however be taken with a pinch of salt. The UK government will be re-constituted in October following David Cameron’s impending departure from 10, Downing Street, and the strategy of the new leader will be closely scrutinized by many around the world.
Brexit has opened the door to a lot of opportunities for UK investment outside the EU. Logically, the UK should explore possibilities of investment in the African continent – predicted growth forecast of at least 3%. Africa currently has a power shortage situation which turned into a crisis; to the extent that only one person on five has access to electricity in Sub-Saharan Africa. Now think of the impact on the manufacturing sector and on the economy of the individual countries. However, here lies the opportunity for the UK to step up and develop power supply plants in African countries. Energy Africa campaign launched by the UK International Development Minister needs more to gain more momentum in the coming years.
Investors looking for value
With Brexit, the panic that markets have witnessed has resulted in a situation where price anomalies will keep on happening. Those who can analyze assets based on their financial fundamentals will keep on seeing opportunities in the near future. We unfortunately live in a world where nowadays everybody can invest/trade their savings or even borrow funds to do so, and where not necessarily everyone has the right technical knowledge, patience and risk appetite to carry out such transactions. ‘Bad news’ is nowadays immediately followed by massive liquidations across the world, and clearly the tolerance rate of investors has gone down over the years. Thus, buyers will be on the lookout for good ‘longs’ in oversold assets. Bear in mind that the UK still has to negotiate its full exit with EU leaders, and the former’s situation could be better than expected. The rush for safe assets could be short-lived. 4. Hello to UK Tourism!
The depreciation of the Pound makes the UK an interesting tourism destination for many potential visitors from the developing world, previously outpriced by the unfavourable exchange rate. Brexit can take away the stability of the economy and render London’s position as leading financial centre vulnerable to corporate exodus, but it cannot take away the main tourist attractions of the UK. Visitors, take this opportunity and visit the UK!
Written by Nuvin Bholah, our collaborator
Who is Nuvin Bholah?
Nuvin Bholah holds a BSc (Econ) Economics from University College London (UCL). He is currently an Economics Postgraduate student at the University of Manchester. He has previously worked as Derivatives Trader in Mauritius for 3 years. Nuvin has also some working experience in the field of Equity Research, Finance and Education.
