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After their <a href="http://www.businessinsider.in/BREXIT-IIM-Bangalore-Students-analyze-the-market-implications-ahead-of-the-divisive-EU-UK-referendum/articleshow/52881118.cms">pre-Brexit analysis</a>, <keyword id="60501" type="COMPANY" weightage="20" keywordseo="IIM-Bangalore">IIM Bangalore</keyword> students have now assessed the results, why <keyword id="6355333" type="UNKNOWN" weightage="20" keywordseo="Brexit">Brexit</keyword> wasn’t anticipated, its impact on Indian equities among certain other key observations.<br />
<br />
Here take a look at what they have to say about Brexit:<br />
<br />
<strong><u>Why wasn’t this anticipated?</u></strong><br /> As seen in the polls data, even till the last day there were more votes in favour of <keyword id="3430454" type="UNKNOWN" weightage="20" keywordseo="bremain">Bremain</keyword>. However, the key folly is that the markets over-discounted the Remain stance when the fact is that it was always going to be a close call to begin with. Moreover, less than 5 hrs before the results came clear, the betting markets gave Remain a 88% chance of winning. According to us, some of the critical reasons for the deviation in expectation and actual result are as follows:<br />
<br />
- The markets expected that the undecided voters would go towards status-quo i.e. Bremain.<br />
- There was a big disconnect between the frustrated population and the political establishment<br />
- The concern of UK citizens towards immigration overcame the fears of economic disruption that a departure could cause.<br />
- The betting markets were confident that Brexit would not happen. Though there is no right reason, but it could have been due to a lot of rich gamblers betting on Bremain. According to Betfair, the odds of Britain staying in the UK was 1.13 ( an 88% probability) and odds of leave is 8 (a 12% chance). Over 55 mm pounds have been traded making it the biggest political speculation in history.<br />
<br />
As we can see in the 2 graphs below, the 3 month GBPUSD options volatility spiked up a lot and so did the Libor – OIS Spread (because of underpricing) as soon as the event happened.<br />
<br />
<br />
<br />
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<strong><u>Movement in Asset Classes</u></strong><br />
The financial markets also didn’t expect it and hence there was a big correction in equity, currency and bond markets that otherwise would have been priced into trading. Referring to the assets in our <a href="https://macrohappenings.wordpress.com/2016/06/19/353/">earlier blog</a>, there was a big movement towards safe haven assets.<br />
<br />
<em>Note – The graphs below have been adjusted to a base of 100 as on 17/3/2016. Hence, a value more than 100 means that respective asset is appreciating.</em><br />
<br />
<br />
<br />
<br />
<strong><u>Brexit – Impact on Indian Equities</u></strong><br />
The negative impact of the Brexit vote was felt on Indian equities with nearly every stock in the Nifty plunging near the opening bell on Friday, 24<sup>th</sup> June. Overall the Nifty fell to a low of 7927 Pts from its opening at 8270 Pts before recovering to close at 8075 Pts. The major impact was felt on the IT, Pharma, Auto &amp; Metals sectors.<br />
<br />
However, a key takeaway after observing the intraday activities is to segregate the impact on stocks from (i) fundamental and (ii) sentimental perspectives.<br />
<br />
In anticipation of a situation such as the Brexit when global volatility spikes and risk aversion in the market goes up, negative impact on equities can be expected. But if one keeps track of individual stock fundamentals closely, there are some great investment opportunities there for the taking.<br />
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<br />
As can be seen from the Figure 1, all the stocks initially fell once the news of the Brexit started coming in. However there are some stocks that recovered during the mid-day and closed in the positive, while others closed 5-8% below the opening stock price. A couple of quick comparisons to illustrate why this happened:<br />
<br />
1. <strong>Mahindra &amp; Mahindra versus Tata Motors-</strong> <keyword id="42747" type="CITY" weightage="20" keywordseo="Tata-Motors">Tata Motors</keyword> has significant exposure to the European markets with both customers and production facilities located there, especially that of its Jaguar Land Rover business, which it acquired in 2008. On the other hand M&amp;M’s export markets are majorly based in Africa and Asia. As can be seen in the graph while Tata Motors fell and closed in the negative, M&amp;M recovered quickly and closed in the positive.<br />
<br />
2. <strong>Aurobindo Pharma versus Dr.Reddys-</strong> While Aurobindo Pharma has ~28% revenue exposure to the EU markets, Dr.Reddy’s exposure is ~10-12%. While Aurobindo Pharma fell by ~3%, Dr.Reddy’s closed in the positive. Another key reason why such a negative impact could have been felt is that investors often put their money in a market fund (example- Nifty Auto) comprising a portfolio of companies (instead of individual stocks). When global volatility spikes, FII’s begin selling part of their investments in favor of safer investment options. Thus the stocks end up taking a beating.<br />
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<strong><u>What happens now?</u></strong><br />
This referendum doesn’t mean that Britain will exit the Euro immediately. From a legal point of view, <a href="http://www.theguardian.com/politics/2016/jun/25/article-50-brexit-debate-britain-eu">Article 50</a> sets the clock ticking from the moment that the UK notifies the Council of its intention to leave. If an agreement is not reached and if there is no unanimous decision to extend negotiation between UK and EU, all existing EU treaties may cease to apply after 2 years.<br />
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<strong><u>Regulatory Aspect</u></strong><br />
In order to contain the risk, we expect BoE to ease rates, though its not clear cut given the fact that as growth slows and unemployment rises, fall in sterling will lift inflation. The BoE has stepped in to provide $345bn liquidity in financial system. The ECB is also expected to open up so-called swap lines with BOE, allowing euros and sterling to be exchanged and effectively make funding in both currencies available to European banks. However extending its QE, which has already saturated markets with $1.1 trillion might be contested by some members, given that it is gradually running out of bonds and securities to buy.<br />
<br />
If peripheral financial market pressure is intense enough to threaten the integrity of the region, it could alternatively introduce a new instrument to limit contagion. This could involve country-specific bond market intervention (like the <a href="https://en.wikipedia.org/wiki/Outright_Monetary_Transactions">OMT</a>). Regarding potential bank funding pressure, banks already have access to unlimited liquidity in the weekly and three-monthly operations. If needed, the ECB could adjust the timing of these operations. <a href="http://www.bloomberg.com/news/articles/2016-06-24/carney-on-financial-turmoil-front-line-as-brexit-hits-markets">Click Here To Know More</a>.<br />
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<em>(All the above views are expressed by member of the finance club of <keyword id="19478" type="CITY" weightage="20" keywordseo="IIM">IIM</keyword> Bangalore – Madhur Bajpai, Spriha Saggar, Madhav Marda and Dinkar Mohta) </em><br />

IIM Bangalore students tell you what really led to a BREXIT and it's possible impact on Indian equities

<br /> It’s final. The United Kingdom will ‘LEAVE’ the <keyword id="6355110" type="ORGANIZATION" weightage="100" keywordseo="European-Union">European Union</keyword>. It will no longer be a part of the 28 member European nation’s bloc that constituted the EU. As historic a decision as it is, it will also have a sure shot impact on India as well. This is what will happen now:<br />
<br />
<strong>Volatility in the Stock Market</strong><br /> As a result of huge sell-offs by foreign investors, to hedge their losses in emerging markets. While stock markets in the UK are expected to tumble as much as 20%, in India, post an immediate knee-jerk reaction in the markets given sell-offs, it will largely smooth out. In fact, Sensex opened 780 points down at 26227, while the Nifty was down 247 points at 8022. That said, Indian markets are expected to largely stabilise over a 10-15 day window, given domestic indicators like monsoon and inflation are largely stable and healthy. The Government in India and its other independent regulators protecting its currency are however in full charge of the situation. In a statement released on June 22, the Reserve Bank of India said, “In the run up to the referendum in the United Kingdom on its continuing in the European Union, uncertainty about the poll outcome has resulted in some amount of turbulence in global financial markets, including in India. The RBI is maintaining a close vigil on developments, and will take all necessary steps, including liquidity support, to ensure orderly conditions in financial markets.” There is an impending worry by experts who fear the rupee could fall to Rs68 to a Dollar, now that <keyword id="6355333" type="UNKNOWN" weightage="100" keywordseo="Brexit">Brexit</keyword> is a reality.<br />
<br />
<strong>Trade</strong><br />
India will largely benefit from the Brexit. India’s trade with the UK has been significantly rising over the last decade, more so over the last 5 years, whereas it’s trade with the rest of the EU has seen a steady decline, given unclear and confusing regulations along with tariff issues. India will now have greater flexibility to negotiate a bilateral Trade Agreement with the UK that has been languishing mostly given the ambiguous and extremely confusing laws governing the EU. India for the last 8 years now has been trying to strike a Free Trade Agreement with the EU, but again, given the complexity of the laws that require it to keep in mind and safeguard economies of 27 (post Brexit) member nations, it hasn’t seen the light of the day yet. Meanwhile, India’s bilateral trade with the UK stood at $14bn in 2016, with India exporting goods and services worth close to $9bn and imports from the UK counting at just over $5bn.<br />
<br />
<strong>Indian Companies in the UK</strong><br />
There are over 800 Indian companies with operations in the UK, employing over a million people. However, the biggest company to get impacted will be Tata Motors, which owns UK’s largest carmaker, JLR. Tata Motors stocks were already down over 12% as soon as trade opened this morning. The others to face the music will be Motherson Sumi which was down over 10% as soon as trade opened. Then there are Pharma companies like Aurobindo Pharma and banks like ICICI and Axis Bank that have significant UK exposures. Most Indian companies in the UK use that country as an exporting base to the rest of the EU and some of their strategies will now have to be relooked into, given how domestic laws in the UK now change with regards exports and imports.<br />
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<a href="http://static3.uk.businessinsider.com/image/5639ee4bbd86ef185c8bbfb0/david-cameron-is-letting-his-ministers-campaign-for-a-brexit-if-they-want-to.jpg"><em>Image source</em></a><br />

It’s a BREXIT! This is how India gets impacted

<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><p class="source"><span>Andrew Kelly/Reuters</span></p><p class="caption">People gathered in The Churchill Tavern, a British themed bar, react as the BBC predicts Britain will leave the European Union, in Manhattan.</p></div><p></p></div></div>Good morning!</p><p>On Monday morning here in New York markets are still digesting the news out late last week that the UK has voted to leave the European Union. As was the case on Friday, <a href="http://www.businessinsider.com/trader-chat-before-the-opening-bell-june-27-2016-6">stocks are sliding</a>, the British pounding is tumbling, and gold is rallying. </p><p>And since no market-moving event can be official without some annoying name attached to it, here we go: <strong>welcome to the Brangover. </strong></p><p>In a note to clients on Monday morning, Peter Tchir at Brean Capital said, "<span>I wanted to use the term 'Brangover' but that would go against my vow to stop putting BR in front of words now that the Referendum is done."</span></p><p><span>We applaud Tchir's discipline to not continue putting BR in front of things - remember we had "Bremain" as the expected outcome of the Brexit vote - but we'll take the other side of this and call it. </span></p><p><span>As long as markets are unsettled after the Brexit vote, a process that could take days, or weeks, or months, we're going to be stuck in a Brangover. </span></p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/how-to-iron-a-shirt-properly-2016-6">You've been ironing your shirts all wrong - here's a simple guide to get a wrinkle-free shirt </a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="gwMjVodjoAJOICHm-ZuGL5UQuv1XsO1T" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

Welcome to the 'Brangover'

<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><p class="source"><span><a href="http://pictures.reuters.com/C.aspx?VP3=SearchResult&amp;VBID=2C0BXZI25OODD&amp;SMLS=1&amp;RW=1440&amp;RH=722#/SearchResult&amp;VBID=2C0BXZI25ON6B&amp;SMLS=1&amp;RW=1440&amp;RH=722&amp;POPUPPN=14&amp;POPUPIID=2C0408TGR8LN2">REUTERS/Lucy Nicholson</a></span></p></div><p></p></div></div>Britain's financial market players are becoming less and less worried about the prospect of Britain leaving the European Union - dubbed a Brexit - as they are increasingly pricing out Brexit risks.</p><p>According to a new report on the British economy from Deutsche Bank strategist Jack Di-Lizia, market volatility has stabilised after <a href="http://uk.businessinsider.com/ipsos-mori-shows-18-point-lead-for-remain-2016-5">recent polls showed that the remain camp is pulling away</a>.</p><p>Financial players now generally believe that remaining in the EU is a far more likely outcome on June 23, soothing fears about what a post-EU Britain might mean for the finance industry.</p><p>Following interventions in the debate from the likes of the IMF, US President Barack Obama, and the Bank of England, there's an increasing consensus that Britain will stick with the status quo come June. <a href="http://uk.businessinsider.com/ncp-research-shows-196-chance-of-a-brexit-2016-5">This week, Matt Singh, the polling analyst who predicted a Tory majority at last year's general election</a> - the only person to do so - said that there is less than a 20% chance of Brexit.</p><p>That consensus, Deutsche Bank says, is driving growing strength in the markets.</p><p>Here is what Di Lizia has to say (emphasis ours):</p><p style="padding-left: 30px;">The upcoming EU referendum continues to represent a significant driver of risk dynamics. However, with the referendum now less than 5 weeks away t<strong>he market has shown signs of increasingly pricing out the likelihood of a Brexit across a range of financial market variables</strong>. Over the past week, a shift in the latest opinion polls towards a stronger lead for remain together with bookmaker's implied probabilities underlining a clear lead for "Bremain" has <strong>helped drive more hawkish front end pricing, a tightening in basis markets and an appreciation in sterling.</strong></p><p style="padding-left: 30px;">From next Friday (27th May) the pre-referendum "purdah" period begins which will restrict the ability for those connected to government to campaign for either outcome. <strong>As a result, some of the noise surrounding the current campaign should be expected to die down</strong>, which may help the market consolidate around current probabilities as we approach the 23rd June. However, given the speed of this upward revision in the market's probability of a "Bremain," the risk remains for some retracement in the polls, which would become increasingly significantly as the vote gets closer.</p><p>Here are the charts Deutsche argues have helped the market start to price out Brexit:</p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Deutsche Bank</span></p></div><p></p></div></div></p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Deutsche Bank</span></p></div><p></p></div></div></p><p>Deutsche Bank pointed to increased expectations going forward across a variety of asset classes, including the pound, sovereign credit, and equities:</p><p style="padding-left: 30px;">Ultimately, the signal to noise ratio from these polls remains poor while a wide spread exists between telephone and online polls. Nevertheless, these recent moves have led the market to revise lower the expected Brexit probability across a range of variables, repricing expectations of easing at the <keyword id="6354868" type="COUNTRY" weightage="60" keywordseo="UK">UK</keyword> front end, strengthening sterling and driving UK basis and sovereign CDS spreads to retrace from their wides.</p><p>This isn't the first time that a seemingly decreased likelihood of Brexit has helped drive strength in the UK's markets. <a href="http://uk.businessinsider.com/british-pound-erases-year-to-date-losses-against-the-dollar-2016-5">Earlier in May, Business Insider reported</a> that currency traders in the UK were getting less and less worried about Brexit actually occurring, which helped the pound rebound strongly from multi-year lows early in 2016.</p><p>Deutsche Bank added that the recent strengthening in the pound, which has seen it gain more than 5% since the lows seen in February, has been strongly tied to Brexit polling - if polls favour remain, then sterling will move higher, and vice versa.  </p><p>Here is the chart:</p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Deutsche Bank</span></p></div><p></p></div></div></p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/red-flags-goldman-sachs-interviews-2016-5">This behavior could kill your chances in a Goldman Sachs interview</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="wxbjFnMzE6KLizh2hBTQSDvLOgNQGzpH" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

Markets in the UK are convinced there's not going to be a Brexit

<br />
 <br /> Initial data on <keyword id="6355333" type="UNKNOWN" weightage="100" keywordseo="Brexit">Brexit</keyword> vs Remain polls suggested results in favour of Brexit, which impacted currencies all over the globe this morning, including India.<br />
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Rupee stumbled 63 paise against the US dollar to 67.88, while it had closed 23 paise higher at 67.25.<br />
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Reportedly, the finance ministry has asked the RBI to keep an eye on the rupee volatility, and the central bank has assured that if need arises, it will inject liquidity.<br />
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As per the poll results, 54.5% vote count was in the 'Leave' camp, with 51.4% support, leaving the 'Remain' camp behind with 48.6% votes.<br />
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After these reports, the British pound fell 8% to its lowest level against the greenback since 1985, while the euro fell 1.5% to 1.12 per dollar. Yen, on the other hand, jumped to its highest level in three years on safe haven demand.<br />
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"The domestic currency market will have a deeper impact if Britain breaks from the Union as US dollar will gain strength in such a case. The exchange rate has moved from 52/$ level to 68/$ in the last three years and I do not think fundamentals have changed that much," Rajat Sharma, CEO, Sana Securities, told <a href="http://economictimes.indiatimes.com/markets/forex/brexit-fear-haunts-rupee-currency-tanks-63-paise-to-67-88/articleshow/52894732.cms">ET</a>.<br />
 <br />
Sugandha Sachdeva, AVP &amp; In charge- Metals, Energy &amp; Currency Research at Religare Commodities said that she expected the rupee to move in a band of 66.50-67.70. "On the downside, in case 67.70 is pierced through, we may even see it hitting record lows," she added.<br />
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The Nifty50 slipped below its crucial support level of 8000 because of losses in realty, power, metal, consumer durable, and banking stocks.<br />
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<strong>Things to know about today's market, as per <a href="http://economictimes.indiatimes.com/markets/stocks/news/black-friday-sensex-plummets-nearly-1000-points-nifty50-below-8000/articleshow/52893735.cms">ET reports</a>:</strong><br />
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1) Brexit might cause up to 5% correction<br />
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2) Bremain might cause risk-on rally<br />
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3)Strong resistance for Nifty seen at 8,310<br />
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4)Initial results showed a close contest between the two <br />
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5) Asian markets stay nervous<br />
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6) S&amp;P futures slip on early results<br />

Bloodbath in the Indian markets as Brexit causes panic

<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><p class="source"><span>Independence Day 2 the movie</span></p></div><p></p></div></div>Britain leaving the European Union - known as a Brexit - will not only kill property prices, it will also drag the <keyword id="6354868" type="COUNTRY" weightage="60" keywordseo="UK">UK</keyword> banking sector down with it, say analysts at research house Bernstein.</p><p>While Britain's Chancellor George Osborne already warned in May that a Brexit would make house prices crash by 10% to 18%, Mark Burrows and his team at Bernstein say it would be much worse. In fact, they think that property prices could crash by as much as 30% - that's nearly double the upper estimate from the Chancellor.</p><p>Furthermore, Burrows and his team have painted a rather bleak picture of how a Brexit will affect the economy, following the knock-on effect from house prices falling (emphasis ours):</p><p style="padding-left: 30px;"><strong>The UK is obsessed with house prices. House prices down = Consumer Confidence down = Bank stocks down.</strong> Right now, each and every negative in the country is being blamed on Brexit. An exit is not in our base case but as we have mentioned in the past, if it were to happen, we wouldn't be surprised to see house prices down 20-30%.</p><p style="padding-left: 30px;">After all, the market was propped up by foreign investors and given 1) Sterling is predicted to fall in the 20% range and 2) volatility is likely to remain for at least a year post-event, it's unlikely that there will be a bid on an asset class that is already overheated. BUT even if we were to get Bremain, it's not really a cause for celebration.</p><p style="padding-left: 30px;">UK bank investors would be wise to get out if there were to be a pop given the housing market has not one but a motley collection of headwinds going against it for the next two years.</p><p>The biggest reason for property prices having a huge effect on banking stocks is pretty simple. If there is a property market crash that means the institutions that lend people money to buy a home - the banks - will be hit. Bernstein analysts point out the exposure Britain's biggest banks have to the mortgage market:</p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Bernstein</span></p></div><p></p></div></div></p><p>The average house price in Britain is currently at £292,000 ($422,099), according to the latest data from the Office for National Statistics for March. Meanwhile, the average price to buy a home in London is now more than £550,000. Properties in London are now <a href="http://uk.businessinsider.com/latest-ons-house-price-data-for-the-uk-2016-5">almost 60% more costly than they were prior to the 2008 financial crisis.</a></p><p>On Thursday, the <a href="http://uk.businessinsider.com/rics-uk-and-london-property-price-forecast-in-may-and-2016-2016-6">Royal Institution of Chartered Surveyors</a> warned that Britain's property prices are going to fall for the first time since 2012, and London's house prices will be affected the most.</p><p>However, RICS' chief economist Simon Rubinsohn said that "there is not at this point a sense that a fundamental shift is taking place in the market," which shows how property prices are likely to experience a flash crash - a short-term burst of cratering prices.</p><p>Britons vote on whether the UK should remain or leave the EU on June 23.</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/alibaba-jack-mas-secrets-to-success-2016-5">REVEALED: Alibaba founder Jack Ma's secrets to success</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="htYmNtMzE6dD7eBpI_wAtO8n2X-00eMe" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

The Brexit effect on Britain's property prices will be a lot more devastating than anyone has predicted before

As Britain holds a referendum today, everyone's talking about the pros and cons of both the probabilities - whether it remains a part of the European Union or leaves.<br />
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<a href="http://www.businessinsider.in/LIVE-BRITAIN-IS-ABOUT-TO-VOTE-IN-THE-HISTORIC-EU-REFERENDUM/articleshow/52879823.cms"><strong>ALSO READ: LIVE: BRITAIN IS ABOUT TO VOTE IN THE HISTORIC EU REFERENDUM</strong></a><br />
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​Notably, the British Prime Minister David Cameron had promised a referendum on this issue during his election campaign back in 2015. He felt that the EU had gradually evolved into a powerful bureaucracy that was infringing on British sovereignty and issues of national importance such as trade, labour immigration, financial and labour regulations, and social spending.<br />
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Going back to a few major reasons that triggered Brexit:<br />
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<strong>Net Contributor</strong>-The <a href="https://fullfact.org/europe/our-eu-membership-fee-55-million/">UK is a net contributor to the EU budget</a> around 8.5 billion pounds per year.<br />
<strong>Immigration</strong>-The EU’s rules on free movement of labour have led to addition of 285,000 people each year (an increase of 0.4% in population) for the last 3 years which is creating social problems for Britain.<br />
<strong>Red Tape</strong> – Some of the EU rules such as maximum work hours of 48/week, same working conditions for full time and part time employees, apply to small businesses. This creates a large hole in their balance sheets.<br />
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Although the vote is not binding, the possibility of Brexit creates a lot of uncertainty for the EU. It can significantly impact trade, investment and economic growth in the region and weaken the bloc’s effectiveness.<br />
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<strong>Escalating Brexit Fears</strong><br />
<br />
The Brexit polls have drawn significant attention in the financial markets for the past 3 months. Over the last 2 months, the 10-day moving average of Brexit polls has been increasing. Around the first week of June, Brexit fears escalated to such an extent that the Brexit polls trend line moved above the Bremain polls trend.<br />
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<em>(Source – Bloomberg)</em><br />
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<strong>Current Market Perception</strong><br />
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Volatility has increased in the markets and investors are being more concerned. Here's how:<br />
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1) <a href="https://research.stlouisfed.org/publications/es/09/ES0924.pdf">Libor – OIS Spread</a> : As the uncertainty increases, LIBOR increases as banks will be skeptical to lend. The OIS is the overnight rate and hence can be considered to be almost risk free in the UK’s case. The greater the spread (difference), the more the uncertainty. While the LIBOR-OIS spread has been fairly consistent around the world, the UK LIBOR-OIS spread has widened starting mid-April. This indicates rising concerns for the UK’s economy. <br />
2) GBPUSD (3 month option) volatility and FTSE 100 Vol index – In anticipation of Brexit, the markets saw significant pressure in the GBPUSD currency pair and FTSE 100 Index. This is evident from the spurt in the 3-month GBPUSD Vol and FTSE 100 Index Vol around the first week of June.<br />
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<em>(Source – Bloomberg)</em><br />
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<strong>Movements across Major Asset Classes</strong><br />
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This is clearly a risk-off situation. In a risk-off scenario, investors are expected to move from risky assets towards safe haven assets. The appreciation in safe haven assets has been significant over the last 2-weeks which coincides with the escalation of Brexit fears. This is complemented by an outflow of funds from the UK FTSE Index. <br />
<em>Note</em> – <em>The graphs below have been adjusted to a base of 100 as on 17/3/2016. Hence, a value more than 100 means that respective asset is appreciating.</em><br />
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<br />
<br />
<em>(Source – Bloomberg)</em><br />
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<strong>Implications of Potential Brexit</strong><br />
<br />
1) Trade Impact<br />
<br />
45-50% of the UK exports go to the EU. Additional tariffs will be imposed with the main implications being on the automobile and aircraft sectors. The uncertainty regarding the trade model that Britain will follow – the Norwegian, Swiss, WTO models or create its own model – is what is concerning Global CEOs. (Click Here To Know More (Page 6))<br />
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2) Financial Impact<br />
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Uncertainty around the UK’s trading regime is likely to defer investment decisions and limit household spending. Brexit will impact both Britain and the EU. We expect the BOE and the ECB to ease rates and initiate some temporary liquidity programs to induce growth.<br />
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On the currency front, GBPUSD is expected to depreciate by around 15 -20%. Current account deficit of 7% of GDP and potential reduction in foreign direct investment are the major factors that might amplify currency depreciation.<br />
<br />
3) Chain Reaction<br />
<br />
We expect David Cameron to resign because he firmly wants Britain to stay in the EU as it will help in maintaining its economic relations with the rest of the world. It is expected that other countries such as Denmark, Spain and Portugal might not hold referendums to exit, but hold referendums against specific EU clauses, thereby aggravating problems for the EU.<br />
<br />
<em>(All the views expressed are opinions of Punit Parekh, Shreya Aggarwal and Dinkar Mohta – Finance club members at IIM Bangalore)</em>

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