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Asia needs a dose of EU scepticism

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By John Loh
28 Jun 2016

Financial markets had something of a horror movie moment last week when the UK voted to leave the European Union. The reaction in Asia though has yo-yoed from panic to indifference in a matter of days, as markets quickly regained their composure. But this is a mistake — there is no going back to business as usual.

What a difference a weekend can make. Asian markets went to sleep on Thursday confident that Brexit was a distant possibility, only to wake up to a day of terror. That prompted the usual flurry of panicked responses, as bankers scrambled for cover and denounced all possibility of primary issuance.

Then Monday rolled around and several Asian indices barely budged, with a few even moving higher. The response since then to Brexit among bankers in the region has been a shrug of the shoulders.

But it’s worth noting that this won’t go away quietly. The UK suffered two ratings downgrades in the span of a day, the first coming from S&P and the second from Fitch on Tuesday. S&P even took the UK down by two notches to AA from AAA. Yields on 10-year Gilts have dropped below 1% to a record low, and sterling and FTSE 100 index have continued to swing wildly this week.

The big story on Monday was that maverick investor George Soros lost money betting that the pound would rise in the wake of Brexit. Elsewhere, Goldman Sachs is predicting that the UK will enter a mild recession in 2017, as bank shares took a drubbing across the globe and banking stocks in London fell to seven-year lows.

But Asian market participants are taking the signs of post-Brexit activity in equity and debt capital markets as evidence that all is well. In bonds, Citic Envirotech is seeking a tap of its $175m notes on Tuesday, making it the first issuer in the region to brave the G3 market since the weekend turmoil. In equity, Greentown Service Group launched a $221m IPO in Hong Kong on Tuesday with books covered.

Clearly, the window for issuance has not snapped shut in Asia, and these issuers will in all likelihood, get their fundraisings past the finish line.

But anyone looking to follow suit should beware. This is hardly the end of the fallout. Asia has many things going for it, but being Brexit-proof is not one of them.

It is true that a relatively closed capital account in places like China and India has worked in their favour over the past few days. But China, for example, can hardly claim to be decoupled from the fate of the EU, its biggest trading partner, or the UK, with whom it has aggressively courted investments. Neither can India, where many corporates have strong ties with the UK and the rest of the Europe.

As the implications of Brexit unravel, their impact on capital markets should not be underestimated. The risk-off sentiment is set to continue and the political uncertainty will keep investors and issuers on their toes. Issuers are most likely to be reluctant to hit the market, while investors will be equally reluctant to put their cash to work in a market like this.

And the uncertainty is far from being fully priced in. Those flashes of green in the early part of the week do not indicate an end to the selling, but merely a rebound from oversold positions. The market can only price in what it knows at any point in time, just like how a Bremain, not a Brexit, was the only thing stamped into asset prices last week.

Clearly, Asia and the rest of the world erred on the side of Euro-optimism, and a Brexit outcome has cost everyone dearly.

The reality is that no one can answer for what happens next, but complacency is certainly not the answer. There is very little market participants in Asia can do about Brexit. One thing they cannot do is be in denial about the risks. 

By John Loh
28 Jun 2016