Will Brexit Trigger Global Financial Crisis For Australian Equities?

Near three and a half years ago, the people of the United Kingdom gave their opinion to exit Brexit, but the ministers of the country did not want England to get out from the European Union. During 2019, the people of UK voted for the ‘British exit’ (BREXIT) deal with approximately 17.4 million voted in favor of the deal as compared to 15.1 million who voted against it. As per the negotiations, UK is going to leave the European Union on 31 October 2019. However, the scenario remains extremely ambiguous because of the absence of a concrete deal. As per commentary from former Australian Prime Minister, Australia does not have a top-tier relationship with the UK while England comes within the top-ten nations having trade with Australia. The former minister is looking forward for the upcoming tie-ups with the United Nations in case of a Brexit deal.

Effects of Brexit for UK

1. If the United Kingdom withdraw its position from the European Union, then there could be a rise in tariffs and would cancel the ‘Britain’s tariff-free trade status’ from other European nations. The above deal will impact the importers as the goods will be sold, including import duty. However, a part of the higher price can be offset by the weaker currency.
2. The United Nation imports one-third of the food products from the European nations and thus there is a possibility of decrease of the real income of the English citizens on account of the higher food products.

• Normal products are imported through cross-boundary and is free from customs. After the Brexit, there will be custom norms and all the major trades would be done through it. Thus, delay in the border check-post is inhabitable, which could create shortage of food and other related commodities for the UK citizens. Because of the higher demand, the pieces of the articles will tend to rise which could create inflationary pressure to the UK economy.

1. The list includes fresh fruits, tobacco and related products, automobiles etc. Thus, the purchasing power of the citizens would decline leading to lower consumption, higher inflation, weaker domestic currency and turbulence in bond market.
2. There could be a decrease in the participants in the equity market because of the fall in the real income of the citizens. This might result in selling pressure across equities leading to bear market conditions and as well as lower investor’s participants.

Effects of Brexit on Australian Equities

1. Brexit may lead to higher commodity prices and weakening of the economy, creating lower savings and job losses. The situation would lead to a stagflation kind of scenario where there could be higher commodity prices along with higher unemployment. Thus, there could be tepid consumption growth as people would lower their discretionary spending. The overall consumer sentiment could be lower, which might result in the lower exposures to the equities. Australian companies listed in the London Exchange might trade at a lower price to earnings multiples as compared to the existing trading price to earnings multiples.
2. Companies which have business exposure in the UK could get affected by lower demand and ultimately, the profitability will be lowered. Thus, at existing price to earnings ratio, the stock price might tend to be lower because of lower earnings per share. The intrinsic value of the company could decrease, due to lower business prospects.

• The overall factors could result in a decrease in the market capitalization of the companies. The dividend payout ratio being the same would decrease in monetary terms because of the lower earnings. Thus, it might hinder the investors’ expectations in the future.

Other Aspects:

610. The day when the UK citizens voted in favor of the Brexit, the Dow plunges 610.32 points on the next trading session. Consequently, the value of pound and euro fell resulting, in strengthening of US Dollars.
611. A stronger US dollar could result into higher value for the importers. Thus, companies with importer of goods in the US would get the benefits of higher realization.

• The pound could trade weaker in terms of EURO which may cause higher oil and gas prices as bulk of the UK’s natural gas is imported from Norway and hence the cost of fuel and gas will likely to increase for the normal citizens.

1. The effect of Brexit is likely to impact the commodity prices such as higher copper prices and brass prices which might affect the demand of the metals across the UK region.
2. As per the Management commentary of RWC, they highlighted there would be supply chain disruption and the company is prepared for additional capital expenditure as the inventory level would delay by 2-4 weeks.
3. The Management of the RWC also commented that the effect of Brexit could hit the certain sector like construction. The business has construction activities in the United Kingdom and the Management believes that the construction activities would be dampen due to shrinking demand.

A Brexit deal would lead to shrinking demand from one of the top economies of the world. Producers and manufacturers would bear the heat as they won’t be able to sell the high margin products to the United Kingdom. Thus, the business houses have to sell their products at a lower price through various discounted piece to maintain their sales volume.

The Brexit would lead to a lower demand not only for the premium category product but also for the regular commodities like consumer discretionary. Several commodities-oriented companies will foresee lower demand for their products.

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