India Markets Weekahead: Brexit – good time to invest in stocks

June 25, 2016

(Any opinions expressed here are those of the author and not of Thomson Reuters)

For stock markets, it’s always “expect the unexpected”. Most opinion polls on Britain’s EU referendum had been pointing towards a “Remain”, helping global markets rally mid-week with the Nifty touching a high of 8,270.

A British flag flutters in front of a window in London, Britain, June 24, 2016 after Britain voted to leave the European Union in the EU BREXIT referendum. REUTERS/Reinhard Krause

A British flag flutters in front of a window in London, Britain, June 24, 2016 after Britain voted to leave the European Union in the EU BREXIT referendum. REUTERS/Reinhard Krause

Friday morning trends caught the world by surprise and resulted in mayhem. The safe haven syndrome resulted in gold touching a 26-month high while the pound sterling got pounded along with global markets.

The Nifty fell over 4 percent intraday before settling at 8,088 – about 2.2 percent down for the day. The rupee succumbed to a massive sell-off in global currencies and posted its biggest intraday fall since August 2015, falling to 68.21 per dollar before closing near 67.80 as the RBI was forced to intervene and sell dollars to curb volatility. FIIs were net sellers to the tune of $92 million for the day.

Before the Brexit mayhem, RBI Governor Raghuram Rajan announced his intention of not seeking a second term. The government cushioned the impact of Rajan’s September exit by announcing liberalization in foreign direct investment (FDI) rules in various sectors.

Other exits included that of LIC Chairman S K Roy, ITC Chairman Y C Deveshwar and Nikesh Arora of

SoftBank Group Corp President and COO Nikesh Arora speaks during a special lecture of the SoftBank Academia in Tokyo, Japan October 22, 2015. REUTERS/Toru Hanai/Files

SoftBank Group Corp President and COO Nikesh Arora speaks during a special lecture of the SoftBank Academia in Tokyo, Japan October 22, 2015. REUTERS/Toru Hanai/Files

SoftBank, which has substantial exposure to India start-ups.

In the coming week, the market is expected to remain volatile as the Brexit aftermath continues to keep investors on edge amid worries over contagion in the EU. Back in India, derivative contract expiry would add to volatility. The progress of monsoon rains will be closely watched, which has been 17 percent deficient so far.

The focus next week will be on comments by global central banks on how they would counter the current situation. The Bank of England has said it will not hesitate to take additional measures if required, which would mean expanding quantitative easing (QE) and cutting interest rates to zero. The European Central Bank is also likely to extend the duration of its QE programme.

The Bank of Japan could step in to limit flows into a safe haven yen. The U.S. Federal Reserve is likely to turn more dovish and refrain from raising rates for a lot longer than previously planned. If global central bankers extend support, a sharp fall could be arrested to some extent. The RBI has also been saying it is willing to do whatever is needed. However, these assurances need to be implemented for markets to find solace.

The European Central Bank starts its three-day forum on central banking in Portugal on Monday. Future interest rates trajectory and the consequences of the UK exiting the European Union will be among the issues discussed.

Also on the watch list is the release of the third estimate of U.S. GDP for the first quarter of 2016 and China’s official June manufacturing PMI on Friday.

As for Indian macroeconomic data, Markit Economics will announce manufacturing PMI for June on Friday and services PMI on Tuesday. Automobile companies will be watched as they start declaring June sale numbers from July 1.

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, February 26, 2016. REUTERS/Shailesh Andrade/Files

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, February 26, 2016. REUTERS/Shailesh Andrade/Files

The coming week will have heightened speculation on the effects of Brexit on the global economy. However, I see India being least affected negatively by these developments. In fact the rupee was among the more robust currencies during Friday’s carnage.

Britain is among India’s largest trading partners from the EU, thus Brexit would provide India with favourable terms for trade with Britain. With so much turmoil, investments would seek a stable economy with growth prospects. With uncertainties in the short term, commodities would again be under pressure which is favourable for a consuming country like India.

Once the dust settles and speculations subside in the next few days, we would again turn our focus on domestic factors like the monsoon. The Modi government is on a reforms overdrive and with the monsoon session of parliament expected to start from July 18, we should see markets discounting the passage of the GST bill.

I do not see a crack below Nifty 8,000 sustaining too long and we should be able to surpass the psychological barrier of 8,300 before the monsoon session, unless the rains play truant. I would advise utilising the current turmoil to deploy cash for the long-term India story.

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