Market Trend India: Brexit impact on India
Britain’s decision to move out of the European Union (EU) comes at a time when the global economy is not in great shape and growth forecasts for 2016 have been marked down.
‘Brexit’, therefore, has added to the weakness, fragility and uncertainty, and not surprisingly, roiled markets. Auto, IT, textiles, pharma, leather and metals are the most vulnerable sectors.
“The political situation in Europe at the moment adds to the economic and financial uncertainty. This is because important elections are due in France in May 2017, and in Germany in June 2017. More immediately, the October referendum in Italy will likely turn the Italian government’s attention to more domestic issues. What all this means is that from a European standpoint, one can fear that the real negotiations between the UK and the EU may not begin in earnest before the middle of 2017, after the political air has cleared,” said Chief Economist, Europe, the Middle East, and Africa of S&P Global, Jean-Michel Six in a note titled ‘Why Brexit is Rocking Global Markets.’
These developments will shape the direct and indirect effects of Brexit and its short-and medium-term dimensions.
Impact on India
Indian companies are likely to be impacted in multiple dimensions such as:
• Demand weakness on account of potential slowdown in the EU and the UK;
• Volatility in commodity prices; currency impact on account of the potential depreciation of the rupee, euro and the pound;
• Translation losses for companies with significant operations in the UK and the EU; and,
• Balance sheet impact on account of exposure to unhedged overseas borrowings.
The most vulnerable sectors
Companies in sectors such as automobiles, auto components, information technology services, textiles, pharmaceuticals, gems and jewellery, leather, and leather products are most vulnerable to changes in demand and currency value. Metal companies would be hurt by the likely downward pressures on prices and potential slowdown in demand, at least in the near-term. Sectors such as shipping and ports that are reliant on global trade will also have to grapple with lower growth and consequently lower freight rates and utilization. Further, companies with unhedged overseas borrowings will be affected by volatility or temporary sentiment-driven weakness in the rupee.