Brexit: Asia’s investment industry reacts

Britain has voted for 'Brexit', it has been confirmed. The result - which flew in the face of expectations for a 'remain' vote in Thursday's historic referendum - has sent Sterling tumbling and led to chaos on Asian markets in early trading on Friday.

Reporters from FinanceAsia, AsianInvestor and The Corporate Treasurer are gathering instant reaction from key players in Asia's financial industry. We will continue to update this page throughout the day.

7pm

Norman  Chan, chief executive of the Hong Kong Monetary Authority, said: "The financial markets have reacted immediately to the outcome of the Brexit Referendum, with notable volatilities in the exchange rate of the British Pound and the Japanese Yen.  Stock markets in Asia, including Hong Kong, have seen significant selling pressure.

 "In Hong Kong, Hong Kong Dollar exchange rate and interest rates remain stable.  The CNH market has also functioned smoothly throughout the day.

 "I should reiterate that the Hong Kong banking system is highly liquid.  And our financial system is robust and resilient, and is able to withstand possible market shocks from different sources.

"In the months ahead, the UK will negotiate with Brussels the arrangements for leaving the EU.  The outcome is highly unpredictable, and will lead to great uncertainties.  Hong Kong people should stand ready to cope with continued market volatilities and to manage their risks prudently."

A head of Japan investment banking said: "There will be a long period of uncertainty which is bad for corporate finance. The strong yen makes overseas assets cheaper so outbound M&A will continue, however UK assets will not be as attractive to Japanese buyers given the uncertainty and UK companies can no longer act as a platform for expansion into Europe."

Julian Wee, senior Asia markets strategist at National Australia Bank, said: “The Brexit vote obviously creates a risk-off environment, which will not be beneficial for Asian markets and Asian currencies. On this note, the SGD is probably the most susceptible to further weakness. The KRW and TWD are also likely to prove amongst the more vulnerable as well given their sensitivity to the global economy. Within the Asia FX space the INR and the PHP might be somewhat more insulated given their strong relatively-domestically driven growth coupled with a healthy carry buffer. Going forward, the key thing for market sentiment will be the spillover that the Brexit vote has on Euro-scepticism on the European continent.”

Cheah Cheng Hye, chairman and co-CIO at Value Partners, said: “The British vote to leave shows clearly that the biggest investment risk today is social unrest.  All over the world, including in Hong Kong, societies are divided and political unity is breaking down.  It is difficult to make investments in this climate of growing uncertainty, which now covers not only the developing countries but also the developed world.”

“As countries and societies become less willing to cooperate with each other, we can see further pressure on global trade and this will put even more pressure on the global economy. This will certainly add to the pressure on the Hong Kong economy, which depends heavily on global trade.

“This is the same message that the unexpected rise of Donald Trump in the U.S. is giving.  Should Trump become the next American President, the impact on the investment environment would be even bigger, much bigger, since the U.S. is the world’s biggest economy and only superpower.”

CreditSights analysts said: "From a technical standpoint, we wonder if a withdrawal of investment from the UK could benefit Asian credit. Some funds may be redeployed in the US or other developed markets, but perhaps Asia could see inflows too, as a “safer” emerging market than Latin America or Eastern Europe. The quick emergence of buyers of Asian bonds today suggests that investors have cash to invest and are waiting for buying opportunities. Anecdotally, we heard that some investors are switching out of European bank AT1 bonds and into Chinese bank AT1 securities. This could eventually lead to a repricing of the Asian high yield sector if new supply remains limited."

Blackrock strategists and portfolio teams said: "We see the vote leading to declines in global shares and other risk assets. Yet indiscriminate selling could translate into opportunities. US and Asia markets are only marginally affected by the UK’s exit from the EU, and are supported by a mix of easy monetary policy and economic growth. In the UK, we expect the large-cap FTSE 100 Index to outperform the more domestically focused FTSE 250 Index. A UK currency drop benefits large companies with overseas earnings, whereas domestic sectors such as homebuilders, retail and financials look vulnerable.

"Commercial property values could fall around 10% over the next year, led by declines in oversupplied central London, we believe. We expect sharply reduced tenant demand and a shift toward shorter lease terms. Overseas investors are set to demand a larger risk premium, or more compensation, for holding UK assets. We see little risk of debt-forced sell-offs, however, as developer financing is mostly long term."

Azad Zangana, senior European economist and ctrategist, Schroders, said: "The UK choosing to leave the EU comes as a major shock for investors, and risk assets have sold-off in reaction. Uncertainty will remain high for some time, and the full extent of the damage done to the economy will not be visible for many years. In the near-term, the UK is likely to experience a stagflationary period of lower growth but higher inflation."

4pm

Douglas Flint, group chairman of HSBC, said: "We are today entering a new era for Britain and British business. The work to establish fresh terms of trade with our European and global partners will be complex and time consuming. We will be working tirelessly in the coming weeks and months to help our customers adjust to and prepare for the new environment.

"As one of the largest, most stable, liquid and prudent financial institutions in the world, HSBC is well placed to support our customers and the markets as they deal with the challenges that will arise. Our commitment to British businesses, customers and staff in the UK remains undiminished."

Niccolo Manno, head of Asia equity syndicate at JP Morgan, said: “Today’s underperformance in Asian equities [as a result of Brexit] has been widely expected, so the stock market performance next week will be crucial for banks to gauge investor sentiment. There are a number of ongoing IPOs in Asia that are likely to proceed as usual, but it remains to be seen how detrimental the UK decision is to other equity transactions in the pipeline.”

Richard Jerram, chief economist, Bank of Singapore, said: "More positively, Brexit will send a strong message to European Union institutions that might help to drive reform, but this is likely to be slow-moving compared to the rise in nationalist sentiment among some EU members.

"Less specifically, the failure of opinion polls or prediction (betting) markets to foresee the result means that markets will see greater unpredictability around future events. This is relevant to the approaching US presidential election, where it might be difficult to have a reliable guide to the chance of Donald Trump winning."

A senior corporate finance lawyer in Tokyo said: “The debt deals we have in the pipeline for the next few weeks are likely to be postponed as spreads widen.

“Over the long term this is going to have a huge impact on Japanese M&A in the UK. Japanese acquirers previously viewed UK targets as hubs for their European operations – no more. 

“The yen’s appreciation on the back of its safe-haven status will be negative for exporters. Japanese firms’ heavily invested in the UK such as automakers may rethink their position. The impact on trade is unclear.”

A bond trader in Singapore said: "The market has walked into Brexit with a fair degree of complacency, with spreads largely unchanged since April, so we are now seeing a sharp knee-jerk correction. Near-term focus will be on the central banks' shock-and-awe reaction but longer-term volatility will remain as Europe returns to crisis. The EMBI gapped 200bp in 2011 on Grexit [Greek exit risk] et al. The investor base has changed since 2011, let alone 2008, and we do expect 'developed Asia' and China IG to outperform, but emerging Asia will quickly reverse this year's gains.

The Monetary Authority of Singapore (MAS) said: "Singapore’s interbank money markets continue to function in an orderly manner and its banking system remains sound.

"The liquidity positions of the major banks in Singapore are healthy, and overall banking system liquidity remains adequate. MAS will provide additional liquidity to the banking system if needed.

"The trade-weighted Singapore dollar remains within its policy band, notwithstanding heightened volatility in international foreign exchange markets today. MAS stands ready to curb excessive volatility in the Singapore Dollar.

We have been prepared for the market volatility. MAS had been in close contact over the past weeks with banks in Singapore, foreign central banks and regulators to take preparatory actions to ensure the resilience of our financial system and markets in the event of Brexit.

"MAS will continue to be vigilant and stay in close contact with fellow central banks and regulators, as uncertainty is likely to persist following the referendum outcome."

Tim Orchard, chief investment officer, Asia Pacific ex Japan, at Fidelity International, said: “From an Asia-Pacific perspective, a ‘risk-off’ environment doesn’t bode well for emerging markets or perceived higher risk assets like Asian equities. However, the majority of our Asian holdings have a domestic focus; Asian corporates earn around 60% of revenue and profits from the actual Asian region.”

Michael Strobaek, global CIO at Credit Suisse, said: "From a financial market perspective, this outcome has far reaching implications, as it demonstrates that EU membership can be reversed:  This will immediately be priced into sovereign European credit spreads. We expect weaker countries to see higher yields on their government bonds, while yields on safe-haven German bonds may slide into negative territory up to very long maturities. It will most likely also lead to a political risk premium being included in EUR exchange rates, with the EUR possibly weakening against other major currencies as a result."

3pm

Nathan Chow, economist at DBS Bank, said: "The potential Brexit causes notable disruption to global capital flows as investors pull funds from riskier assets. Emerging market currencies including the RMB are under pressure.

"While selling pressures are expected to remain in the near term, the Chinese currency is not as vulnerable as some other EM currencies like South Africa’s rand. Should Brexit unleashes a bout of financial volatility that sinks the GBP further, UK banks may need to shore up defences by calling in debts and holding back on new lending. In South Africa, reliance on funding from UK’s banks exceeds its forex reserves, limiting the central bank’s ability to defend the rand. But according to the Bank of England, direct UK bank claims on China and Hong Kong represent only about 17% of China’s US$3.19 trillion forex reserves. Meanwhile the impact on trade would also be limited as the UK accounts for a mere 2% of the mainland total trade.
 
"The most important implication perhaps lies in the longer term. In particular, many Chinese companies would consider moving their European headquarters to other countries. Even the spokesperson for the Chinese Foreign Ministry recently stated Beijing’s position, saying: 'China has always supported the European integration process'. It is highly unusual for Beijing to be this overt about its opinions on another country’s domestic affairs. The emphasis that Cameron and Xi put last year on the new Sino-British 'special relationship' could backfire for both leaders."

Christophe Bernard, chief economist at Vontobel Asset Management, said: "Clearly, the European Central Bank will not tolerate higher borrowing costs, particularly in the European 'periphery'. The Bank of Japan and the Swiss National Bank are likely to act to curb excessive currency appreciation. The Bank of England might cut policy rates and re-establish a liquidity programme. The US Federal Reserve for its part will become even more patient regarding interest-rates hikes. As a result, global liquidity will increase meaningfully."

Rick Lacaille, global chief investment officer at State Street Global Advisors, said: “While the vote to leave has immediate market implications, over the longer-term observers will be wary of the impact the vote has on other nationalist and protectionist movements – both in Europe and elsewhere. In Europe, nationalist parties will feature prominently in elections next year in Germany and France.

"There is the potential for knock on consequences for market-moving issues like trade, labour mobility and foreign investment. How the EU strikes a balance between facilitating a swift UK exit to reduce risk as quickly as possible, and discouraging similar movements in other countries, will be important."

Richard Buxton, head of UK equities at Old Mutual Global investors, said: "Early indicators included declines in the Australian, Hong Kong and Japanese equity markets, which were still in session as the results were being announced. Bond yields immediately declined (prices rose), as investors began to seek perceived safe havens.

"Investors should now brace themselves for an unpleasant period of relatively indiscriminate selling as funds aim to meet redemptions in conditions where liquidity may be more limited than usual.

"In terms of international markets, there seems to be a real possibility that the result could contribute to tipping the US economy into recession.

Neil Williams, group chief economist at Hermes, said: "The UK’s vote to ‘leave’ provides a massive ‘curve ball’ for financial markets, which now need time to assess the policy path that a likely, new political line-up will eventually choose to go down. All of this will take time.

"Equities and the pound may remain vulnerable given the likely hit to UK growth, and risk now of weaker ties with our main trading partner, FDI foregone, and a diluted relationship with the US and other third parties that use the UK to access the Single Market.

"The UK economy will of course ‘survive’, given its entrepreneurial flair, increasing focus on non-EU trade, and likely policy accommodation by the Bank of England and UK Treasury. However, getting to the next stage looks a long, drawn-out ‘can of worms’, leaving considerable uncertainty for UK assets and markets. The extent of this damage now rests on the manner of the exit."

2pm

Bryan Goh, CIO, Bordier & Cie private bank, said: "Leave has won the day. This only introduces more uncertainty and does not settle anything.

"Will the government stand? Will Cameron fall? Will the referendum result be honored if the vote brings down the government? There is a risk that Labour calls a vote of no confidence.

 "The UK has two years to effect exit. How it does this will depend on the political developments in the coming days and weeks.

 "The impact on the EU is also in question. If anything, the signal this sends to EU members is that membership is not permanent. France and Germany will have to work extra hard to hold the union together. Spain has an election this weekend. France and Germany face elections next year. The political uncertainty is considerable.

 "Short term, the momentum will mean weaker GBP into next week, although we see this as technical rather than fundamental. ECB and BoJ may have to increase their liquidity support. Fed rate hikes are off the table for July, possibly even for September."

Stewart Aldcroft, Hong Kong-based senior fund advisor, on the impact of Brexit on fund distribution in Europe: "Asian fund managers expanding fund distribution in Europe would need to set up a Luxembourg or Dublin fund, that still hasn’t changed. The question is: where do they set up their marketing office.  if they set up in Paris or Frankfurt, they may need to start learning another language, which is going to be a challenge. If they set up in London, that still doesn’t stop them from going to the rest of Europe.

"Undoubtedly, Brexit will mean less efficiency in fund distribution within Europe. If they set up a product in Luxembourg it may mean they won’t be able to market it in the UK (the same way they do now through fund passporting regime). But this remains unclear and open a this stage. We are not in a position to make a conclusion.

 "Britain may perceive itself as isolated and because it is in advance talks in setting up a stock connect with China, it’d want to have to prove that they are still worth dealing with.

"With Brexit, there will then be no interference from EU, firms do not have to worry about AIFMD (Alternative Investment Fund Managers Directive) restrictions, for example. But we have to remember that it will take at least two years for UK to exit.

 "Firms will rethink their strategy and some may put on hold plans of expanding fund distribution in Europe."

Jacky Scanlan-Dyas, partner at Hogan Lovells, said: “There is a great deal of concern amongst Asian corporates with interests in the UK but now, also, there are concerns that other countries will put their membership of the EU up for discussion in coming weeks and months. This will have an inevitable impact on how Asian corporates view doing business in the EU. The aftermath of this vote, and the impact on Asian markets over the coming days remains to be seen, but we are already seeing a sharp market reaction and increased volatility, especially in Japan. From a legal perspective, it is important to stress that on Brexit occurring (which will not happen immediately), all existing UK trading arrangements with EU, EFTA and rest of world will lapse, unless replacements are agreed. So decisions will need to be made on which new trading arrangements to prioritise. We will help our Asia-based clients engage in this process early to ensure their priorities are heard. Needless to say, from an M&A perspective, deal activity is likely to be depressed as this uncertainty continues.”

1pm

A senior Asia-Pacific M&A banker at a global investment bank, said: “The Chinese will not suddenly become buyers of UK-listed assets, people are not as opportunistic as that. A 10% drop in sterling does not change the fact that the Takeover Code in the UK makes it very difficult to achieve sign off for a bid from Chinese regulators. A buyer has to make a firm offer and have the finance committed to the offer.

"Over time this is a value opportunity for Asian buyers, but first people will watch to see what happens to asset prices. This is definitely a buying opportunity for unlisted assets such as real estate.”

Cheong Wing-Kiat, Singapore-based family strategist and private equity investor, said: "The UK leaving the EU will reverberate beyond Europe in the financial markets, including major financial cities in Asia. The value of investment instruments has already been discounted. Sophisticated investors have positioned themselves well to make money from this event. Retail investors are paying the price. When there are risks, there are opportunities. The British currency and economy will be weakened after leaving the EU. Asian investors will take advantage of this to invest in UK companies and properties. The impact for most Asian businesses (except China) and trade will be minimal."

Raymond Yeung and David Qu, ANZ Research, said: "China can exhibit its status as a global citizen and signal its willingness to lift market sentiment due to Brexit. This morning we have seen significant increase in market volatility globally and we would not overlook any PBoC action this weekend.”

12noon

Craig Chan, Nomura FX analyst, said: "The potential for the UK to vote to leave the EU presents significant risks for Asia FX through financial and economic channels, as well as via a near-term shock in risk sentiment.

"Following recent signs of a potential Brexit vote, we now marginally change our portfolio by converting some of our short CNH vs. CFETS basket positions to long USD/CNH; we also build on a long USD/KRW cash position. In the medium-term, we believe there are prominent risks ahead for Asia FX – besides Brexit – from ongoing weakness in China’s economy and risks to global growth." 

Stephen Innes, senior trader Oanda Asia Pacific, said: “My hope would be that corporates would have heeded all the warnings and hedged sizable portions of current exposures  .But given the unprecedented moves we've seen in the currency market this morning, and given just how divisive the referendum has been, we're likely for more fallout for months if not years to come. Given the uncertain times ahead, we will likely see an increase in hedging activities throughout global markets.”

Alexander Lee, research director at DBS Vickers, said: “We expect global currency and equity markets will suffer and how long the market will linger at this low range depends on whether there is further EU fragmentation risk.
 
“Exporters to the US will be relatively better off due to expected CNY movements. Companies with European exposure or Chinese companies with USD debt will be worse off.”