Brexit aftershock: Experts forecast \"choppy\" trading of domecstic stocks

New Delhi: Hit by tremors of Britain leaving the European Union, domestic stocks are likely to see "choppy" trading in the next few sessions before a moderate recovery, which will also depend on progress of monsoon, say experts.

Still, the "correction" in the markets presents long-term buying opportunities for investors till normalcy returns once dust settles down on the overall Brexit impact, they added.

Wiping off nearly Rs 4 lakh crore of investors' wealth during the day, benchmark Sensex took a big 1,058-point plunge in the morning on Friday as it became clear that Britain would be leaving the EU, a development that also sent global markets into a tizzy.

"We believe that as the dust settles, markets will revert to normalcy with a moderate recovery," said Dhananjay Sinha, Head Institutional Research, Economist & Strategist, Emkay Global Financial Services.

"In that scenario, we see markets trading sideways and economic uncertainty lingering on as the UK works towards re-establishing its global economic relationship, which is likely to take at least a couple of years," he added.

Soon after the markets opened this morning, heavy selling was seen across all sectors, including realty, industrials, metals, auto, banking, finance, capital goods and power, as Brexit news began to pour in.

"We see Brexit as a buying opportunity in the long term. While it is difficult to predict market movement in the short term, recent correction offers a long-term buying opportunity for investors. There will be concerns if monsoon turns adverse, (and) not Brexit," said S Naren, ED and CIO, ICICI Prudential AMC. "We believe a normal monsoon is one of the most important factors for the markets."

SAMCO securities, CEO, Jimeet Modi, said that while markets are jittery, this is a god-send event, especially for Indian investors. "While we saw a steep fall in the indices, the trajectory of Indian markets remains upwards. After some stability that will come next week, investors should be lapping up good quality stocks," he noted.

According to him, stocks of IT and other companies which have significant revenues coming from Europe and the UK will be affected. They may be avoided as the extent to which the pound will be impacted will be unknown, he added. In a development that would have far-reaching consequences for Europe as well as the global economy, Britain has voted to exit the 28-nation EU.

"Brexit has come as a shocker to markets who were expecting Britain to remain in the EU. There was mayhem in global markets as the news trickled in though some semblance of normalcy came in the final hour of trading," said Hariprasad M P, Senior Vice-President & Head Treasury & Banknotes Business, Centrum Direct.

"In the days to come, markets are bound to be quite choppy and volatile till more clarity emerges from the UK and the EU." After recovering some ground, the Sensex still ended the day with a sharp loss of 604.51 points at 26,397.71.

"Though Indian economy is unlikely to have a major direct impact, it will certainly influence the liquidity to the EMs like India during such global chaos. This will downgrade the FII inflows and depreciate the rupee," said Vinod Nair, Head of Research, Geojit BNP Paribas Financial Services.

HSBC Global Research said the exit of Britain from the European Union might not have a major impact on Asian economies as most of them have minimal trade exposure to the United Kingdom.

"Britain may have voted to exit the EU and markets are in a tizzy, but Asia should come through this episode with only a few scratches. The trade exposure to the UK is minimal for most Asian economies, and risks to direct bank financing from UK financial institutions appear manageable," it said in a report.

However, the impact of currency swings, in particular a stronger yen, is harder to judge, tightening financial conditions for emerging markets in the region, it added.

Noting that Asia is in a reasonably strong position to withstand the latest tremors from Europe, HSBC Global Research said broadly the impact should prove manageable.

"The fragility of the West, economically as well as politically, is a reminder that Asia can't count on an export rebound any time soon to lift ailing growth. Reforms are urgently needed to put local demand growth on a more sustainable path. Time to get to work," the report noted.

Fitch Ratings said the development is credit negative for most sectors in the UK due to weaker medium-term growth and investment prospects and uncertainty about future trade arrangements.

"Failure to agree favourable trade arrangements would also be a significant negative for some sectors. The UK's status as a major international banking hub could be damaged as some business lines shift to the EU. "Higher import costs and pressure on exports due to the potential imposition of tariffs would be broadly negative for corporates.

The extent to which the UK would be able to limit net inward migration could be significant for some asset classes," Fitch said in a report.

Brokerages and fund managers feel that the downside risks on the Dalal Street are for the short term and the Brexit-induced fall today is an opportunity for value-buying as the potential for extended downside is low.

Anand James of Geojit BNP Paribas said: "A good deal of negativity has already been priced in today, and the potential for value-buying or a bounceback is higher than the potential for extended downside."

His optimism stems from the fact that only a few stocks have significant exposure to the EU or Britain. But he was quick to add that companies with exposure to the yen can see significant volatility.

On the rupee, he said it is likely to weaken against the US dollar as the greenback is expected to see demand as a safe haven currency against the Brexit backdrop.

But with forex reserves hitting a record and recent instances of RBI stepping in to arrest volatility, the rupee is less expected to weaken much beyond 68, he added.

On the macro front, he says the country is well placed from a current account and forex perspective to alleviate any impact on currency from portfolio outflows.

Lakshmi Iyer of Kotak Mutual Fund said the country is relatively insulated from Brexit to some extent. Liquidity situation globally is likely to improve from the current levels, which would mean positive for world interest rate. But the rupee is likely to come under pressure in the near-term, Iyer said.

Mihir Vora of Max Life Insurance said while there are no immediate negatives for the country, a general risk aversion will mean reduced foreign flows in the short term.

"We expect the rupee to weaken a bit and equity and fixed income markets to be volatile in the next few weeks," he said.

Pankaj Sharma of Equirus Securities sees volatility in the markets and the rupee to continue for an extended time as the market was not expecting a British exit.

Ankit Agarwal of Centrum Broking said Brexit may not have an immediate fundamental impact on the companies and countries that are exposed to Britain as the real act of leaving the union is at least two years away during which all trade treaties would be intact.

Navneet Damani of Motilal Oswal Commodities feels that the bigger worry is of a contagion now "as we have already been hearing rhetoric from certain sections in the Netherlands and France about leaving the EU. Scotland may also call for another referendum to decide its fate in Britain".

"In light of this, from a medium term perspective, the best strategy is to hold on to gold and silver and remain neutral to negative on base metals and crude oil," he suggested.

Ajay Bodke of Prabhudas Lilladher concurred, saying the British move strengthens the centrifugal forces advocating dismemberment of the EU as other disgruntled EU members may demand similar referendums, which can open fissures that would increase acrimony and social discord in the political discourse.

"Overall investors need to take a measured approach and not get carried away by doomsday scenario insofar as impact on our economy and markets is concerned. Once the dust settles down, we'll be a net gainer and inflows would continue to gravitate towards our shores," he concludes.