Brexit: Should You Be Worried?

By BankBazaar | June 28, 2016

Brexit

Talk and concern around Brexit have already caused equity market crashes around the world. There are even murmurs of a 2008-like recession. What is actually happening? Should you be worried? Not really. Here’s why.

What is Brexit?

Britain, through a referendum, has decided to leave the European Union (EU). This has been termed ‘Brexit’ (Britain + Exit).

How will this impact Britain?

Britain will have two years to negotiate its terms with the EU but the EU might talk tough. As Britain leaves the EU, the country might be forced to arrange for its own trade agreements with other nations. The pound has already fallen. It fell by over 7.5% against the dollar on Friday 24th June 2016. Consider this: the daily moving average for this currency pair has been 0.35%. The move is over 20 times that. This should tell you the kind of impact Britain is looking at.

What about global impact?

Britain is the EU’s largest trading partner. It is almost a pillar of the EU (the other pillars being France and Germany). With global growth already faltering, Britain leaving the EU might spur a recession sometime in the future. The International Monetary Fund estimates world economic growth at 3.4% in 2016 and 3.6% in 2017. These figures might go for a toss if Britain goes into recession and it spreads to the rest of the world.

As a nation’s interests come to the forefront, more nations might think about their own interests. Italy and Scotland are already talking about exiting the EU. This will cause fear among countries and decrease in consumer confidence. This is precisely the reason why financial markets are falling.

Will India be affected?

India has remained largely insulated from such global events because we are a domestically driven economy. Commodity prices might fall and India, being a commodity importer, will only benefit from this. The Indian rupee might get affected to a certain extent in the short term but nothing that we should be alarmed about. And, of course, equity markets might turn volatile but that is only speculation.

Should you buy now or sell?

Indian equity markets fell about 600 points on Friday, 24th June. Initially, the markets had fallen by 1000 points but buying by market participants helped limit losses. Should you go all out to buy? Or should you be selling? Actually, you should be doing neither. If you look at whether the Indian market is undervalued, it is not. Markets had run up in the last one month. A month back, markets were at 25,300 and today, they are at 26,400 (after the fall). So, the markets haven’t fallen that significantly. Another parameter is that the markets are still way above the 200-day moving average, which is about 25,544. This means that markets haven’t actually corrected. Another parameter that nails it is the Price Earnings Ratio. This ratio shows the price of the index in relation to its earnings (of course, the earnings of all the companies it has). The lower the PE, the better. Currently the Sensex PE is at 19, which is above the 5-year average of 17. We think these are reasons enough to believe that the market is hardly undervalued. Therefore, putting all your investments into the market now doesn’t make sense. So, what should you do?

You can use this opportunity to average out the cost of your equity investments. Market dips are the time when stock prices fall. The same is true for Net Asset Values (NAV) of Mutual Funds. Investing at lower cost will mean greater returns in the long term. But note that making lump-sum investments may not be advisable given that market bottoms are unpredictable. Our CEO, Adhil Shetty, says “My recommendation (and what I’m following) is stay calm and keep investing in SIPs, have as much insurance as you can and enjoy the tremendous professional opportunities in India.”

So, invest as and when the market falls so that you have invested at lower costs. And of course, keep your asset allocation and goals in mind. Investing in a single asset class will never yield good returns.

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