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Asia markets look to shrug off Brexit concerns

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By Narae Kim
23 Jun 2016

Markets watchers in Asia said they were optimistic, as GlobalCapital Asia went to press on Thursday, that next week would be a return to business as usual, given their widespread expectations that the UK would choose to remain in the European Union. But some warned that, irrespective of the outcome, currency risks could spill over to other asset classes, adversely affecting bonds and equities.

While observers in Europe bit their nails over the UK referendum and the impact it could have, their counterparts in Asia were comparatively calm on Thursday, either enjoying some free time or preparing for a busy week next week. GlobalCapital Asia went to press before the UK referendum result was announced.

“While a lot of investors are waiting on the sidelines until Brexit, we are expecting momentum to pick up shortly following the result,” said a Hong Kong-based M&A banker, as he was about to board a flight for a business trip, his second of the week, he added.

“I think there won’t be a direct impact throughout Asia regardless of result," he said. "This week, I’ve actually been really busy because there will be many deals starting next week. We’re trying to catch the short window before everyone goes on holiday for the summer."

This sentiment was also reflected in the region’s primary bond market, with debutant Jiangsu Hanrui Investment Holdings launching a three year dollar bond via Guotai Junan on Thursday.

In equity capital markets too, bankers went about their business, launching three IPOs this week.

“Brexit is not making any issuers or investors nervous in Asia as we have multiple deals ongoing and more to launch next week,” said a Hong Kong-based head of ECM for Asia. “We sent out a covered book message for one of our $1bn IPOs in HK on Thursday morning so it shows that investors haven’t fled the market.”

For those just sitting out the volatility, there has been plenty of free time in the office. “I need to enjoy this freedom as much as possible because it’s not going to last for long. I had a long lunch off my desk – first time in many months,” said a Hong Kong-based bond syndicate banker, adding that he was preparing for two deals to launch next week.

One Hong Kong-based asset manager said that he had had an entirely productive Thursday thanks to the referendum, as he took a driving test in the morning and wrapped up some administrative tasks in the afternoon.

Muted impact

Most market participants GlobalCapital Asia spoke to this week expected the UK to remain in the EU, in which case business would return to normal next week. But if Brexit did happen, they said the impact on Asia would be muted.

“We wouldn’t expect any impact on the Asia Pacific region other than some initial financial turbulence as markets digest the outcome of the referendum. Real sector effects should be minimal,” said Paul Gruenwald, chief economist for Asia Pacific at S&P Global.

Another economist at a buy-side firm said that if Brexit were to get the nod, a more important question should be whether it would trigger a domino effect.

“Volatility will definitely rise if Brexit happens, but how long that volatility persists and to what degree depend on whether other countries would want to have referendums too. If that’s the case, volatility will be severe for EU, but not necessarily for UK or Asia,” the economist said.

He said he was more worried about the Spanish general election on June 26 than Brexit, adding: “If a left-wing, anti-austerity party takes power, it can disrupt the current European fiscal austerity consensus."

Currency fears

While market participants reckoned bond and equity markets in Asia would be less affected by the outcome of the referendum, they said currencies would not be buffered from the shock.

“If voters vote for out, the euro will weaken," said the second economist. "Sterling may weaken initially but the euro will do more substantially for a longer period of time depending on how other countries react to this. It’s an EU risk rather than an individual country’s."

Julian Wee, senior markets strategist at NAB, said the People’s Bank of China was likely to demonstrate an increased tolerance for RMB index (RMBX) upside against the backdrop of a rising dollar index.

“Given our estimates of a 10% fall in both the GBP/USD and EUR/USD, we estimate that the USD/CNY should rise by less than 5% if the PBoC accepts some amount of RMBX upside," Wee wrote in a note on Wednesday. "The CNY’s appreciation against the euro and pound will be largely negated by depreciation against US dollars, Hong Kong dollars and Japanese yen."

Other Asian local currencies such as Korean won and Taiwanese dollars would be affected by a sharp €/$ fall but the spikes of most of the $/Asia pairs were contained at less than 5%, Wee said.

Spillover effect

But a third economist warned of a possible spillover effect from currency volatility.

“Hong Kong tycoons are showing their concerns and have gone on TV to oppose Brexit, which means that there will be consequences for Asia if Brexit happens,” he said. “Currency will be most impacted if the UK leaves and if US dollars get stronger, then it will also drag Asian equities down. Even if the UK doesn’t exit now, there will be lingering concerns and we can’t go back, pretending as if nothing ever happened.”

The Brexit-induced volatility could pose a similar threat to currencies as what was witnessed last summer.

“I don’t think it’s of the same magnitude but think about what happened to the Chinese equities rout and RMB devaluation last summer. It jolted the whole market and everything was put on hold abruptly,” said a Hong Kong-based bond syndicate banker.

“I’m not predicting the same scenario but we should always be prepared for the worst.”

By Narae Kim
23 Jun 2016