The pound and businesses

Britain triggers Brexit today: Analysts see little impact on Asia, but sterling may take a hit

British Prime Minister Theresa May signs the official letter to European Council President Donald Tusk invoking Article 50 and the United Kingdom's intention to leave the EU on March 28, 2017.
British Prime Minister Theresa May signs the official letter to European Council President Donald Tusk invoking Article 50 and the United Kingdom's intention to leave the EU on March 28, 2017.PHOTO: REUTERS

Britain's move to formally begin divorce proceedings with the European Union is unlikely to have much of an impact on Singapore or the wider Asian region.

The triggering of Article 50, used by any nation wishing to exit the EU, is unlikely to cause even a stir in stock markets, as it has been long expected, analysts say.

However, the move could set off further slides in the British pound.

"When the Brexit process was first started in February 2016, when then British Prime Minister David Cameron called for the referendum, the pound declined but stocks were muted," noted United Overseas Bank economist Lee Sue Ann.

A similar reaction followed the June 24 Brexit vote, a further sign that stocks in general will likely stay resilient, she noted.

 

Credit Suisse's Asia-Pacific chief investment officer, Mr John Woods, agreed. "We do not foresee significant impact of triggering of Article 50 on Asian equities, given the region's low trade and financial exposure to Britain," he said.

"In a scenario of an organised and smooth negotiation process, Asian markets could benefit from reduced European political risk."

Investors will be eyeing the sterling more nervously, noted Mr Kelvin Tay, UBS Wealth Management's regional chief investment officer for the southern Asia-Pacific.

Should there be extreme pound volatility, it is likely to result in the US dollar strengthening significantly against all currencies, including the Singapore dollar, he noted, but this is likely to be short-lived.

Singapore's economy is also unlikely to suffer any direct negative impact from the Brexit negotiations, he added.

"We expect growth in the British economy to slow down to 0.7 per cent next year, but Singapore's non-oil exports to Britain are only 0.7 per cent of total exports. Likewise, British exports to Singapore are non-meaningful."

Still, volatility is likely, said Ms Lee, with any Brexit twists and turns affecting the sterling.

Markets will be closely watching how the two parties bang out hot- button issues such as immigration, she said.

Bank of Singapore chief investment officer Johan Jooste said: "We suspect the process to be a long- winded one, without obvious upside for Britain in the long run. Europe has little incentive to make the process smooth as it has a vested interest in keeping its remaining members in line. "

Already, Schroders' senior European strategist Asad Zangana expects one pain point. He noted that Mr Michel Barnier, the European Commission's chief Brexit negotiator, has indicated that Britain may be asked to pay up to €60 billion (S$91 billion) to cover the cost of existing EU commitments.

"A significant political fight over Britain's exit bill could jeopardise the chances of a favourable and friendly trade agreement at a later point. Despite Britain's desire to negotiate a trade deal in tandem with the divorce proceedings, there is no requirement for trade to be concluded under Article 50," he said.

 

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A version of this article appeared in the print edition of The Straits Times on March 29, 2017, with the headline 'Analysts see little impact on Asia, but sterling may take a hit'. Print Edition | Subscribe