Why Brexit isn't a reason to exit Indian equities

The Brexit camp, which supports the exit of UK from the European Union, won the June 23rd referendum by more than 1 million ballots.

There exists "certainty of uncertainty" on the outcome of Brexit. There is a lack of clarity on how it would impact the global economic linkages. But there is no need to panic on the domestic equity markets in the short to medium term.

During the Lehman crisis, payments and settlements came to a sudden stop. No such magnitude of disruption in the economic activities is expected this time. UK's engagements with the EU, including trade agreements, will be negotiated over a period of years. By Sunday, over 3 million people have signed a petition in the UK calling for a second referendum over the country. By any chance, if a second referendum is held, Brexit may not happen eventually. Even if it happens, its process itself is a long-drawn one and hence, there is no need to panic so badly now.

Brexit also added certain advantages now. The US Fed may not hike the interest rate at this juncture. Moreover, many central banks have expressed willingness to take up appropriate monetary policy to manage any possible crisis. Bank of England is ready to pump over $345 billion into the financial system and also said "it has further measures if needed to deal with the period of uncertainty and adjustment".

In any case, India is better positioned to manage this global event. While India's short-term debt is just 17% of total external debt, forex reserves are at a record high level. India's exports to the UK were just about 3% of total exports in FY2016. Hence, the overall economy would remain largely insulated.

Of course, the Indian companies operating from the UK could be impacted due to any possible slowdown in the UK economy. Europe is the second largest market for the Indian IT and BPO industry, contributing almost 30% of the industry's export revenue. Now, for the disruption in the exchange rates of pound and Euro, renegotiations on prices would happen. At worst, the IT may be required to set up separate offices in EU. However, the pharmaceutical industry may not be impacted much as Britain accounts for just 5-6 % of India's pharmaceutical exports.

Brexit referendum has once again brought down the prices of resources, especially the oil prices. Monsoon has also picked up. Focus would once again shift to moderation in inflation, improvements in current account balance, fiscal gains and corporate earnings. Hence, there is no need to panic on the domestic equity markets now.