Brexit sees rising risk of foreign portfolio outflows

June 24, 2016

Markets deeply shocked and hit by the Brexit news and gave up risky assets in wake of increased uncertainty on UK’s economic prospects sans EU’s membership. Today’s vote, if ratified by Parliament, would immediately invoke Article 50 of the Lisbon Treaty, which provides for members leaving the EU.

Article 50 gives the country electing to depart two years to agree on terms with the EU, then their membership of the Union lapses.

In 1973 Britain joined the EU Common Market, a free trade area that would evolve over the coming decades to a very close geo-political and strategic entity. The benefits from that membership are much deeper than those of merely a Free Trade Agreement (FTA).

With Britain out of the EU, the EU-Asia FTA’s that have been signed will have to be re-negotiated at an individual level. The negative risk sentiment could see foreign portfolio outflows emerge in Asia, putting more downward pressure on currencies and bonds. Potential outflows are more likely in equities than bonds.

Equity inflows have been rising in the lead-up to the Brexit vote. How much more Asian currencies weaken further is also dependent on the USD and if Brexit changes the Fed’s view on further policy normalisation.

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