NOMURA: Brexit will cause widespread 'contagion' in Asia
In a special report on the Asian Markets following Britain's Brexit vote, Nomura analysts argue that the impact of Brexit is going to be felt widely across the globe, but suggests that the impact on Asia could be potential the most significant and least noticed of any financial impact from the referendum which has sent financial markets across the globe tumbling.
Here is a key extract from the research report sent to clients earlier on Friday (emphasis ours):
"At first glance, it would seem that the financial and economic impact of this result should be largely confined to the UK, given that its economic size is quite small at less than 4% of world GDP and world imports in 2015. However, we believe that this is too simplistic of a view and that the impact of the Brexit will be far reaching and long lasting."
"To assess the global impact of this surprise result, it is important to look beyond the trade channel. Once the financial, confidence and psychology channels are taken into account our warning is to not underestimate the depth and reach of financial market contagion to Asia."
As a result, Nomura argues, it is likely that central banks across Asia will need to engage in monetary policy easing. The bank has adjusted its forecasts accordingly:
"We now expect significantly more monetary policy easing in Asia. Between now and year-end, we expect the central bank of India to cut by 25bp (no cut previously), Korea by 50bp (25bp previously), Indonesia by 50bp (25bp), Thailand by 50bp (50bp), Malaysia by 25bp (no cut previously). For China we have increased the number of RRR cuts by year-end from two to three (in addition to one interest rate cut). The only Asian central bank that we expect to keep rate on hold is in the Philippines. We now expect the Monetary Authority of Singapore to re-centre the midpoint of the S$NEER policy band lower at, or before, its October policy meeting."
Being a Japanese bank, Nomura is clearly heavily focused on the Asian markets, and as a result of the Brexit vote has not only predicted more monetary easing, but also cut all of its forecasts for growth in Asia's main economies in 2016 substantially. Here is the chart from the bank:
And here is the key takeaway provided by analysts led by Rob Subbaraman (emphasis ours):
For Asia ex-Japan, we have tentatively lowered our aggregate GDP growth forecast in 2016 from 5.9% to 5.6%. The sheer size of China's internally driven economy - its share in Asia ex-Japan's GDP was 53% last year - masks larger cuts and variation in our GDP forecasts for other individual economies. In terms of our 2016 GDP growth forecasts the percentage point (pp) downgrades are largest for Hong Kong (1.0pp) and Singapore (0.7pp), reflecting their very open economies, status as financial hubs and their managed exchange rates, especially the HKD peg to USD.