Hi I am Arjun Parthasarathy speaking and this podcast is on “Three Reasons Why Equity Markets are Rallying Post Brexit”
Here’s the sequence of events on Brexit. The approach of Brexit vote on 23rd June sent equity markets globally into a risk averse mode as markets worried about opinion polls that suggested a close call on stay or leave. A few days prior to the vote, markets shook off risk and rallied as opinion polls suggested a stay rather than a leave. However on Brexit, markets fell sharply as opinion polls went wrong as usual.
Now, post Brexit markets are rallying sharply with global equities regaining levels seen pre Brexit. Global bond yields too have fallen sharply and are staying down. The positive reaction of markets post Brexit is confounding investors as Brexit is seen as largely negative for the UK and European economies that can spread across the globe. Even the US Fed has sounded out alarm bells on Brexit and its impact on the US economy.
The Sensex and Nifty too have rallied sharply post Brexit and are currently trading at eight months highs. Government bond yields have fallen post Brexit with ten year Gsec yield falling by 6bps while the INR too has appreciated by over 1% from lows.
Why are the markets rallying post Brexit? There are three reasons for equity markets rallying post Brexit. The first is that the Fed, given their negative view on Brexit, has taken out expectations of rate hikes this year. The Fed along with Bank of England and ECB is ready to standby to provide liquidity to markets if required. Bank of England is likely to cut rates to record lows while ECB could lower deposit rates further into negative territory. Bond yields have fallen to record lows in many countries post Brexit. Read our weekly global bond yield analysis for bond yield movements.
Cheap liquidity is driving flows into risk assets leading to rising equity markets.
The second reason is that UK, post Brexit has fallen into political turmoil with the PM resigning and the primary proponent of Brexit indicating that he will not stand for the post of PM. UK seems clueless on what to do post Brexit and that sends signals to other countries that may have wanted to go in for referendums on staying in or leaving the EU as it may prove more harmful than beneficial.
The third reason for market’s rallying post Brexit is that there is no immediate economic impact on Brexit apart from uncertainty of investments in the UK. Corporate revenue growth and earning growth are not likely to see direct impact on Brexit and markets are ready to give higher valuations to companies that can show growth.
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