MUMBAI: A rout in equity markets wiped out nearly Rs 2 lakh crores of investors wealth in a single day as Britain’s vote to exit the European Union triggered panic selling across the globe pulling down key benchmark equity indices in Europe by 5 to 10 per cent.
The domestic equity markets opened the day deep in the red and within an hour it was down more than 1,000 points as Britain’s exit from the EU stoked fears about anti-EU forces gaining further strength in other parts of the region. This according to market participants could undermine global growth, threaten the stability of EU and pose a serious risk to Euro.
The Sensex sank over 1,000 points soon after opening wiping out nearly Rs 4 lakh crores of investors wealth before closing the day at 26,397.70, losing 604 points, its biggest fall since February 2016. The Nifty closed the day at 8,088.60, losing 182 points.
“This will lead to a period of uncertainty. Risky assets across the world are witnessing selling pressure, which could intensify going forward. While market participants have been discussing about it, the risk wasn’t priced in adequately. Brexit is not a one-off event but may have far reaching implications. Anti-EU voices in other parts of Europe will gain strength. Anti-globalisation voices (like Donald Trump) will gain strength,” said Navneet Munot, chief investment officer (CIO), SBI Mutual Fund.
While these kinds of events have historically impacted Indian equity markets disproportionately given the excessive dependence on FII flows, Mr Munot said, “With steady flows from domestic investors and improved ma-cro fundamentals, our ability to weather these storms are relatively better”.
In a post Brexit note, analysts at Morgan Stanley said that India and South Korea continues to be their most preferred countries in Asia and their emerging market universe.
Analysts at HSBC Global Research believe Asia is in a reasonably strong position to withstand the latest tremors from Europe. “India, Indonesia, and Philipines, Mexico are more insulated, at least in growth terms (if not in terms of forex volatility) ” said Fredric Neumann, co-head of Asian Economic Research, HSBC. On Friday, the broader markets remained extrem-ely weak with 1,868 stocks traded on the BSE ended the day lower as compared to 655 stocks.
Rupee plunges, RBI intervenes
The rupee witnessed heavy selling in line with most other emerging market currencies amidst a strong rally in US dollar as risk averse investors shunned riskier assets like equities.
After touching an intraday low of 68.21, the rupee ended the day at 67.98 per dollar as compared 67.25 per dollar. There were reports of RBI’s intervention to stablise the rupee. With the near term outlook towards emerging markets currencies looking weak, forex dealers said the rupee is expected see further weakness in the coming days.
According to Arvind Chari, head of fixed income, Quantum Advisors, the pound is likely to depreciate further as UK’s current account deficit is about six per cent of its GDP. “Until there is clarity on the terms of exit from EU, the pound is expected to depreciate. The fall out risk of that is other currencies will also depreciate or might follow suit.”
Cheap oil only silver lining
A cheap crude oil may be the only silver lining in all turmoil unleashed by Brexit on Friday, said said chief economic Advisor Arvind Subramanian. “Let’s not see this as unremittingly gloomy. There are a couple of silver linings. Oil prices have come down. That’s good for India’s macro situation,” he said.
This could result in cut in petrol and diesel prices, which had started increasing recently, if Indian rupee didn’t depreciate much against US dollar. “Brexit should be credit positive for the Indian Refining and Marketing (R&M) industry, as crude oil prices are expected to remain subdued in the near term due to heightened uncertainty about demand growth in the EU,” said K. Ravichandran, senior vice president, ICRA. He said that overall impact should be positive for PSU upstream companies as well, so long as oil prices are within $40-45 per barrel.
