Gauging the knock-on effects of Brexit

Britain’s exit from the EU caused immediate cascades in global stock indices Photo: Duy Minh

On Friday, the UK held a referendum on whether to remain within, or leave the EU. Informally, this vote was dubbed the “Brexit” referendum. Despite widespread predictions to the contrary, the pro-leave side has proclaimed victory with 51.8 per cent of votes. This means the UK will no longer be part of the EU trade bloc, although the leaving process will likely take some years to complete.

The Vietnamese market crashed last Friday in reaction to the Brexit news, with the VN-Index dropping by 11.5 points from 632 to 620.77. At 1pm, the index even plummeted to 597, which means a loss of 5 per cent of its total points before Friday. However, the index later recovered to 620.77 as investors took advantage of the dip to buy in stocks.

Due to mass selling and buying activities last Friday, liquidity soared to a two-year record level at VND6.1 trillion ($275 million) on both the Hanoi and Ho Chi Minh City stock exchanges.

Similar gloomy sentiments have pervaded Asian stock markets, with the Japanese Nikkei Index dropping by 7.92 per cent while the Hong Kong Hang Seng plunging by 2.9 per cent. The Straits Times Index in Singapore also fell by 2 per cent.

According to analysts, the Brexit could spark uncertainties about the future of the UK and EU, ultimately meaning that investors may flock to safe haven assets such as gold or the Japanese yen. Conversely, the global stock market, which is considered a risky investment tool, will suffer from the mass retreat of investors. This may affect overseas capital flows to developing countries like Vietnam, said Nguyen Duc Hung Linh, head of retail research at Saigon Securities Incorporation.

According to analysts from BIDV Securities, investors in Vietnam may act more carefully towards listed firms with high amounts of debt in the yen, as the Japanese currency is expected to surge following the Brexit. Companies with strong trade ties with the UK and the EU, typically in seafood or garments and textiles, may also be negatively affected.

“The Brexit results were a bit surprising as global markets, including Vietnam, had predicted a win for the pro-remain side. The stock market could see short-term disruptions following this update, and so investors are advised to tread carefully and stick to safe stocks,” read the report.

Reports from Maybank Kim Eng Securities, however, noted that Vietnam and Thailand have the least exposure in terms of capital flows from both the UK and the EU, and as such the Brexit would have little direct impact on Vietnamese equities.

“[The Brexit effects] will be driven by domestic factors, namely GDP growth, of which the figures for the second quarter of 2016 will be released next week; credit growth; the new UK government and Parliament’s initial policies; and corporate earnings. In other words, the VN-Index may have a higher chance of moving higher in the second half of 2016. This is unchanged from our recent commentaries on credit growth and fiscal balances,” Maybank Kim Eng noted.

Le Thi Hong Lien, head of institutional research at Maybank Kim Eng, also noted that last week’s equities sales by foreign investors may be more related to the quarterly portfolio shuffle of exchange-traded funds like Market Vectors Vietnam, than by the Brexit.

After leaving the EU, the UK will have to negotiate a slew of trade agreements with the EU for the next two years. As a result, experts noted that it may take a while to see concrete effects of the Brexit on Vietnamese listed firms that have trade relations with the UK and the EU.

Meanwhile, gold prices in Vietnam rose to VND35.3 million per tael ($1,375 per ounce) on Friday, a 10 per cent rise from the previous day, as gold in international markets rallied from the Brexit results.