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Asia scrambles in wake of Brexit call error

David Cameron_1_Brexit_230px
By Jonathan Breen
24 Jun 2016

Asian markets went to sleep on Thursday confident that the UK would still be part of the European Union the following morning and that business would go back to normal. But the UK’s public defied expectations and voted to leave the EU, forcing Asia bankers to completely rethink their plans.

Bankers and investors in Asia had been nonchalant about the result on Thursday, but any pre-referendum calm vanished on Friday morning as shock waves spread through the world’s financial markets after the UK voted to exit from the EU. As a result, prime minister David Cameron announced his resignation. 

Across all asset classes in Asia, bankers were scrambling for a way to respond.

The investment grade iTraxx widened 10bp on Friday to 145bp, as bond bankers predicted a deal vacuum to follow in the primary debt market.

“I don’t think any issuer would dare to come to a market like this. This is going to be for a while, and I don’t know how long it would be,” said a Hong Kong-based DCM banker. “Everyone’s calling it a Black Friday and it’s carnage. Everyone on the trading floor is panicking and it’s crazy. It’s time for drinks I guess.”

Most market participants GlobalCapital Asia  spoke to this week foresaw the UK remaining in the EU and either way expected a muted impact on Asia. But the mood changed dramatically on Friday.

“I didn’t see this coming at all, and it was totally unexpected,” said a debt syndicate banker in Hong Kong. “I don’t know what’s going to happen now. We are busy at the moment having emergency calls and meetings with clients on upcoming deals.”

Panic also engulfed ECM desks on Friday afternoon, with bankers struggling to find the words to describe the impact of Brexit on Asian markets. One banker predicted it would be “suicide” to push out any deal right now.

The shock of the result was amplified especially as markets had been pricing in a vote to remain in the EU up until the day of the referendum, said an ECM syndicate banker. Hong Kong's Hang Seng Index reacted by shedding 623.06 points, or 3.88%, by 1pm, although it reversed slightly to close at 20,259.13, down 2.92% on the day.

“No one expected this and investors are being badly burnt,” said the ECM syndicate banker. “The worst case scenario is that every deal gets pulled. Although we are in Asia, the impact of this is going to be pretty big.

“Until things calm down we won’t know whether any deals will get pulled. For now the live deals are still on track, but who knows what will happen after the dust settles a bit over the weekend.”

Two large IPOs have been straddling the build-up to Brexit in Hong Kong this week, CDB Leasing and Orient Securities, which are still in the midst of bookbuilding for billion-dollar deals. Despite their size and strong links to China, both transactions could be under threat as volatility peaks. 

“Even an IPO with heavy support from cornerstone investors and [China] state-owned friends and family accounts like CDB Leasing may not be safe from all this volatility,” said the ECM syndicate banker. “It’s not just about listing — no investor would want to take any aftermarket risk right now.”

Bankers were largely glued to their television screens throughout the morning on Friday and some predicted that the reason they had no calls from investors was because they were doing the same.

“Brexit has put the brakes on potential primary offerings,” said an equity-linked banker in Hong Kong. “We’re trying to figure out what all this means for Asia.”

Take a breath

Global investors acknowledged the potential damage from the Brexit fallout, but pointed to Asia’s isolation from Europe as a reason to remain calm.

“From an Asia Pacific perspective, a ‘risk-off’ environment doesn’t bode well for emerging markets or perceived higher risk assets like Asian equities,” said Tim Orchard, chief investment officer, Asia Pacific ex-Japan, at Fidelity International in a note on Friday. “However, the majority of our Asian holdings have a domestic focus; Asian corporates earn around 60% of revenue and profits from the actual Asian region.”

HSBC’s co-head of Asian economic research Frederic Neumann went further to predict a minimal impact on Asia.

“Asia should come through this episode with only a few scratches,” he said in a note. “The trade exposure to the UK is minimal for most Asian economies, and risks to direct bank financing from UK financial institutions appears manageable.”

Shares of London-headquartered HSBC, which is listed in Hong Kong and London, tumbled on Friday, closing down 6.6% at HK$47.45 ($6.12). Fellow London-based bank Standard Chartered, meanwhile, closed down 9.48% in Hong Kong. 

The Brexit result has also caused large moves in currencies, with the pound losing about 9% against the dollar, while the Japanese yen rallied 4.5% against the greenback.

“The proof is in the pudding so we’ll see what happens over the next few days,” said the Hong Kong-based equity-linked banker. “But we’re definitely seeing a violent reaction in the market. All the bank stocks are down and volatility is up.

“Maybe this is the new normal.”

By Jonathan Breen
24 Jun 2016