How a Brexit will Impact your Investment Portfolio

On 23th of June, The citizens of the United Kingdom will come together to vote for one of the most important decision in their life, to stay within the European Union or to withdraw from it. A few weeks ago, polls indicated that the "Stay" camp was leading but the lead has narrowed in recent days leading to a razor thin advantage for the "Stay" camp. Given the potential implications both politically and economically, we have to take a closer look at the worse possible scenario of UK leaving the EU zone and its immediate repercussion for investors in Singapore.


Sharp fall in UK Pound and Euros

As a result of the recent crash in the oil prices and China's stock market, The SGD has been rising rapidly against USD from 1.42 to the 1.34 range during the 1st quarter of the year, which result in MAS suddenly easing the SGD in April. The recent disappointing US jobs data report has pushed SGD up again and any adverse news from the Brexit vote will lead to a higher SGD. The Sterling pound is expected to fall as much as 20% according to an estimate by Goldman Sachs. Due to it's open and small markets, the Singapore government uses currency exchange to manage its exchange rate and a higher SGD is similar to a tightening in monetary policy in Singapore. The stronger SGD will hurt some of the key industries such as tourism and manufacturing which has been slowing radically in recent months. The lack of inflationary pressures and low commodity prices do not justify any need need for a strong SGD and this will put further pressure in the profit margins of Singapore corporations and their share prices.

Global Stock Market Correction
A Brexit will lead to a sharp correction in the European stock markets and its associated currencies and will probably spark off another major correction in the export driven Asian markets. The lower Euro and Pounds will lead to the US Federal Reserves reconsider the need to raise interest rates as the USD will become increasingly noncompetitive in the global markets which will push SGD stronger again, which will again lead to more downward pressure on our stock market.

China May Increase its Speed of Yuan Devaluation

A major devaluation in the European currencies will lead to increased pressure on the export oriented Asian market. China, which is caught in between the desire to devalue the yuan and make its export more competitive and at the same time, not allowing too rapid a devaluation for fear of a capital flight is at a course of devaluing the yuan at a measured pace. A sharp fall in EU currencies may force the hand of the Chinese central bank, leading to a faster rate of devaluation, which will be detrimental to its key importing partners, of which Singapore is one of them.

Question of EU Unity

When Greece threatened to leave the EU a few years ago, the economy of Greece is not big enough to threaten the union after the EU central bank had sort out the toxic debt spread among its EU members. However, the clout and economic might of UK is a different matter. The Syrian immigration crisis has also sowed the seeds of fracture and discontent among the newly joined eastern European nations. Should UK leave the EU and continue to prosper after leaving the membership, members of the EU will question the benefits of the union and it may result in the break-up in one of the largest economic bloc in the world.        

A Trigger Point for an Economic Downcycle?

While the economic implications will be felt most keenly by the EU zone, the impact of a Brexit might trigger the next down cycle of the global economy as investors will pull out of risky asset while waiting for the global economic markets to find a new balance as a result of a more politically unstable EU. The polls still indicate that there is 30% undecided of undecided voters. The recent referendum result for the Scottish independence may give us a clue how the undecided voters will vote, given that the "Stay" vote won by a huge margin despite an even probability during the pre-voting polls. The "Stay" vote for Brexit will probably win the day and the world will move on, but as like all eventualities, good investors must have a game plan in the case the unexpected occurs.

Portfolio Strategy

In view of the potential volatility from the Brexit, I have reduced the weightage of the European exposure and removed the entirety of the Asian exposure as I believe that the Chinese short term stimulant during the January China stock market crash will start to lose its effect in coming months. There is no doubt that the Chinese government will put their back into support the market again should that happens, but I am not willing to be caught in another China lead correction should that happen. In any case, market demand for Asian equities for the past few months after the crash has been muted and as such, the potential rise in Asian equities will be lower than that of US and Europeans should there be an economic status quo for the next few months. The rise in USD has benefit our portfolio tremendously with a good return of 2.8% for the month, reducing the damage caused by the January correction by half. Meanwhile, I will probably move into more conservative range months down the road after a possible market rally as a result a highly probable "Stay" vote from UK. However, should the "Leave" faction prevails, our exposure to USD will probably offset the fall and gives us the ammunition to take advantage of the sharply lower European markets.