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Brexit: market implications from an Asian perspective

Brexit: market implications from an Asian perspective

UK prime minister Theresa May has officially triggered Article 50 of the Treaty of Lisbon.

The UK now has two years to negotiate its withdrawal from the European Union.

The move is unprecedented, marking Britain's departure from the EU in 'a historic moment from which there can be no turning back', the prime minister said in the official letter to Donald Tusk, president of the European Council.

For some market participants in Asia, the development has no significance. Sean Taylor, Apac CIO at Deutsche Asset Management told Citywire Asia: 'The triggering of Article 50 will have zero impact on Asian equities from our standpoint.'

UBS Global Asset Management's head of emerging markets debt Federico Kaune has echoed Taylor's stance.

Against such a backdrop, Citywire Asia collates views from top asset managers to find out what the major impact is for Asian markets and how those managers are positioning their portfolios.

Smriti Shekhar, NN Investment Partners

Portfolio manager, emerging markets equity

Triggering of Article 50 on Wednesday was anticipated so was less of a market event. However submission of the “EU directives report” (public document) later in April will probably set the tone for the pace and character of negotiations, and swing the speculations between soft to hard to “cliff-edge” Brexit.

While it will go beyond 2017 for a clearer picture to emerge, the market will likely react to several speculative talk and periodic impactful headline news.

The key focus for us would be to understand the tone of future trade relations between the EU and UK, how free or otherwise they would be.

It might have second order implications for a series of future events right from Scottish referendum to other EU country elections.

From an Asia perspective, the direct exposure to UK is small. Implications are more stock specific and will come from the movement of the Sterling.

We have seen the pound depreciate quite convincingly since the Brexit referendum. Further impact will be a function of the deals that UK makes over the next two years.

Richard Jerram, Bank of Singapore

Chief economist

We fear that the process will be more difficult than the market expects and this could produce one final leg down in GBP. With large budget and trade deficits, the UK is not well-placed to bear the costs of a messy exit.

The EU has suggested that the UK will need to pay around €60bn to cover existing obligations. This is around 2.5% of the UK’s annual GDP and is meeting strong resistance from pro-Brexit politicians.

Arguing over money will reduce the time available to discuss market access.

This could be the trigger for another drop in GBP and we would be looking to buy if it heads towards GBPUSD1.15 given that valuation for the currency is looking very cheap.

So far it has remained steady, but the UK property market looks vulnerable to exiting with no deal in place. 

London will still have the attraction of being a great global city with a solid rule of law, but the financial sector has been an important source of wealth and that is likely to be eroded.

Neil Dwane, Allianz Global Investors

Global strategist

The complexity of the Brexit undertaking will require tenacity and a technocratic attention to detail, which is at odds with some of the populist rhetoric and political expediency on show.

We expect negotiations to take at least two years, with reasonable scope for accidents along the way. Election outcomes in the EU may change the tone and context of the discussions – for better or worse.

If negotiations sour, undervalued sterling could move lower, spurring foreign purchases of discounted UK assets; firms with large UK exposure could suffer, but active strategies can capitalize on undue weakness.

We do not expect sterling to strengthen significantly any time soon, even if there isn't too much more downside from current levels. All asset markets currently seem to have priced in the Brexit news; however, we expect volatility as the negotiations get underway.

The euro's biggest test in the coming months will come from national elections, but it may also be susceptible to weakness if the Brexit discussions reveal differences among member states.

Given the potential for the UK to leave the EU without transition arrangements or a new trade deal in place, investors would be wise to stay on the alert. 

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Related Fund Managers

Federico Kaune
Federico Kaune
122/136 in Bonds - Emerging Markets Global Local Currency (Performance over 3 years) Average Total Return: 10.01%
Sean Taylor
Sean Taylor
114/507 in Equity - Global Emerging Markets (Performance over 3 years) Average Total Return: 32.42%
Neil Dwane
Neil Dwane
549/609 in Equity - Europe (Performance over 3 years) Average Total Return: -6.69%
Smriti Shekhar
Smriti Shekhar
43/300 in Equity - Asia Pacific Excluding Japan (Performance over 1 year) Average Total Return: 30.46%
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