Research & Knowledge Management
Strategy & Portfolio Investment
27 June 2016
FOR INTERNAL CIRCULATION ONLY
UK Referendum Vote &
Implications on Global Markets
1
UK Referendum: Final Results
“Leave” votes amounted to 17.41 million or at 51.9% of total votes vs. “Remain” votes were at 16.141 million or
at 48.1%.
Source: Bloomberg
Final results 48.1% / 51.9%
2
While investment community and politicians are still coming to terms with the result of the EU referendum vote, Moody’s
revised downward the outlook of UK’s long-term issuer and debt ratings to negative from stable, premised on
expectations that medium-term economic growth would be weaker.
A negative outlook reflects the danger of the sovereign credit rating being downgraded in the next 6 to 12 months.
Moody’s cut Britain’s AAA rating three years ago.
S&P had earlier warned that it is likely to downgrade Britain’s sovereign credit rating from the current AAA-rating if
the UK voted to exit the EU.
The referendum decision will set in motion a formal withdrawal process that will likely take two years to conclude (under the
Lisbon Treaty provisions). The UK will have to renegotiate its trade relations with the EU, resulting in heightened uncertainty,
diminished confidence and lower spending and investment.
In the event that the country would not be able to secure a favorable alternative trade agreement with the EU and
other countries, growth prospects would be materially weaker than currently anticipated.
Moody’s revised the outlook of UK sovereign to negative from
stable, rating remains at Aa1
UK’s GDP Growth Trend (2000-2017f)
-5
-4
-3
-2
-1
0
1
2
3
4
90 92 94 96 98 00 02 04 06 08 10 12 14 16f
GDP growth is expected at
1.3% in 2016 and 1.1% in
2017, down from earlier
expectations of 1.8% and
2.1% respectively, driven by
lower investment & private
consumption.
Source: Bloomberg, Samruk Kazyna
3
UK’s growth prospects in the medium-term depend crucially on what trade agreement the UK government reaches with the
EU, as well as on the UK government’s trade policies more generally.
The EU is the UK’s biggest trading partner, approximately 48% of exports are destined for EU countries, and similarly
48% of FDI in the UK originating from the EU. It takes time for the UK to redirect trade to other regions in order to
compensate for lower trade with the EU.
In the absence of a trade agreement that preserves core elements of the UK’s current access to the Single Market, UK’s
GDP growth would be materially lower. Barriers to trade will not only result in lower trade but also negatively impact
competition, innovation and productivity.
In addition, the UK authorities will have to renegotiate the UK’s trade relations with a multitude of other countries, as it will
no longer automatically benefit from the more than 30 preferential trade agreements that the EU has concluded,
covering nearly 60 countries.
The EU is UK’s major trading partner and a significant source of
FDI
UK’s Export Destination (2015) FDI in the UK (2014)
EU48%
EU48%
N America18%
Asia Pac16%
Middle East7%
E&W Europe6%
Others5%
Source: Bloomberg
4
While the UK’s institutional framework is considered to be strong (i.e. the rule of law, a strong fiscal framework, highly
credible central bank), policy predictability and effectiveness of economic policy-making might somehow diminished
as a consequence of the vote.
Apart from having to negotiate the UK’s departure from the EU, the government would likely also aim to embark on
significant changes to the country’s immigration policy and possibly regulatory policies, a challenging set of
economic policy decisions under a new government leadership following the resignation of Prime Minister Cameron.
On the fiscal front, Moody’s warned that the UK’s public finances are likely to be weaker than previously projected as
the negative impact from lower economic growth is expected outweigh savings from the UK no longer having to
contribute to the EU budget.
The UK government has one of the largest deficits compared to its developed peers (general government debt ratio of
>89% of GDP in 2015), and lower growth will further complicate the implementation of multi-year fiscal consolidation plan.
Uncertainties in policy predictability & effectiveness of
economic policy-making, public finances expected to be weaker
UK 5Y USD CDS Intraday 24 June 2016 UK 5Y USD CDS (2015-2016YTD)
Source: Bloomberg
UK’s 5Y USD CDS widened by
8.6bps to 44.716bps on 24 June
2016, reflecting heightened
sovereign credit risk
5
UK’s financial markets will remain volatile
GBP-USD Intraday 24 June 2016FTSE 100 Index (2015-2016YTD)
GBP-USD Trend (2015-2016YTD) Gilt 10Y Yield Trend (2015-2016YTD)
Source: Bloomberg
Pound fell 8.1% against USD to
close at 1.3679 on 24 June 2016,
the lowest level since 1985
The 10Y gilt yield narrowed by
28.9bps on the day to close at
1.086% on 24 June 2016
FTSE100 index fell 3.2% to close at
6,138.69 points on 24 June 2016,
volumes surged more than four-folds
6
Bank of England Governor Mark Carney acknowledged that there will inevitably be a period of uncertainty, however
there will be no immediate change to the UK relationship with the EU. Some market and economic volatility are
expected and the central bank is prepared for these, to ensure any effect on jobs and growth is not magnified.
The BOE will make GBP250bln of additional funds available through its normal market operations to stabilize
markets, if needed, and will not hesitate to take additional measures required to address any market volatility.
The central bank highlighted that UK banks are more resilient today than in 2008, with much bigger buffers against
losses (ten times more capital) and more liquid assets. Prior to the referendum vote, banks were instructed to stockpile
cash and ensure ATMs and websites are working in anticipation of large withdrawals.
Reiterating a similar sentiment, G7 issued a statement of its own declaring the UK’s economy and financial system were
resilient, that they still sought to prevent disorderly movements in exchange rates and were ready to pump money into the
financial system to support the functioning of markets.
Key central banks (US Federal Reserve, European Central Bank, People Bank of China) stand ready to deploy
existing swap lines to make liquidity available to other central banks.
Coordinated efforts by key central banks to soothe markets
Source: Bloomberg
UK 1-Month Libor (2015-2016YTD) UK 1-Year Swap Rate (2015-2016YTD)
7
London’s role as a key global financial center and trading of euro-denominated assets is expected to be reduced.
Financial services companies with licenses to operate in Britain can automatically offers it products and services throughout
the EU, reducing compliance and operational costs. Britain could now lose that critical access, making it less attractive to
investing countries.
Asia Pacific companies spent more than USD1.7 billion on greenfield UK wholesale financial services investments
in 2011-2015, with China being the largest average investor.
The referendum vote threatens to redefine Britain’s growing financial services relationship with China, which has agreed to a
number of joint projects as part of the China-UK Economic and Financial Dialogue program to deepen economic ties
between the two countries, based largely on the UK’s membership of the EU and its function as a gateway to the EU single
market.
Last year, the British & Chinese governments have announced plans to launch a London-Shanghai equity trading link, a
mutual recognition scheme for distributing funds products, cooperation on cross-listing exchange products, measures to
cement London as yuan clearing hub, and a commitment on the part of several Chinese financial firms to set up bases in
London – in addition to strategic Chinese infrastructure investments.
Therefore, businesses set up in the UK to serve the entire EU market from within will have to reconsider their
positions. Manufacturers will have to consider how to readjust their structure of production.
Several Asian and European companies with operations in the UK have stated they would reassess their investments in the
wake of the vote results. Some companies might respond by diversifying global production capability, while others might
consider moving their UK offices to continental Europe.
Business that depend on their ability to employ European nationals would have to reshape their operations.
Such business decisions will not have to be made at once, however these decisions will adversely affect investments in
the UK moving forward.
London’s role being a key global financial center with access to
the EU single market is expected to be reduced
8
Brexit impacts the US and its monetary policy
The US manufacturing sector which
relies heavily on trade, it fell into a 5-
month recession last year triggered by
strong USD.
Manufacturing lost a net 39,000 jobs in
the past 12 months.
Concerns have been raised about referedums
from France, Italy and Netherlands. From
within the UK, Scotland is planning to submit
a second referendum to leave the UK.
The EU is a major trade partner with China
and the US. If it breaks, it could lead to global
uncertainty and many trade deals would need
to be restructured.
Volatility in global markets
affect sentiments, which
will adversely impact
consumer spending &
business investments.
The Fed Chair cited Brexit as one
of the key factors in determining its
rate hike decision.
If market volatility continues, US
consumer pare back spending, and
employers slow down hiring even
more, the Fed could be looking at
zero rate hike in 2016.
Concerns that the EU
may be falling apart
Volatile markets
slow down the
engine of US
growth
Brexit triggers a
strong USD, which
hurts US trade
The Fed may have
to rewrite its rate
hike playbook
9
On 24 June 2016, USD-KZT exchange rate closed lower by 1.69% to 340 as the USD strengthened vs. most currencies (except for JPY),
while the KZ stock exchange retreated 2.54% to 997.81 points. Global oil prices fell by 2.5% - Brent dropped to USD48.41pb, WTI closed at
USD47.64pb.
In Europe, the ECB’s accommodative monetary policy, low energy prices, diminishing needs of private sector deleveraging and labor market
improvements have supported domestic demand-led economic recovery this year. Despite these, GDP growth remains moderate and
anticipated at 1.5% in 2016 and 1.6% in 2017. Thus, any significant slowdown to Europe post the UK’s departure would affect the euro, oil
price and imports demand.
The European Union (27) remains Kazakhstan’s largest trading partner, accounting for 52.2% of KZ’s exports in 2015. Trailing behind
was China 11.7% and Russia 9.4%. Muted economic growth, coupled with the depreciation of the effective exchange rate of the euro
would negatively impact the demand for Kazakhstan’s exports.
There has been a strong negative correlation between the USD and oil prices. Prolonged uncertainties post the UK referendum could see the
USD strengthen further on investors flight to safe-havens, putting downward pressure on oil prices. The potential double whammy of slower
exports to Europe, coupled with lower oil prices would in turn affect KZ oil revenue receipts and current account balances further. KZ
experienced current account deficit in the past five quarters, this trend is expected to continue in 2016, with CAD expected at 5.0% of GDP.
London may lose its position as a leading financial center to European markets e.g. Paris, and also its function as a gateway to the EU single
market. Currently, there 17 KZ companies listed in London, this could have implication on future listing considerations for KZ companies.
Potential impact on Kazakhstan
Source: Bloomberg, Ministry of Economy, Samruk Kazyna
Destination of KZ Goods Exports (2015) KZ Current Account Balance, USD mln (1Q14-1Q16)
52.20%
11.74%
9.40%
7.80%
5.69%
4.37%8.80%
European union (27)
China
Russia
CIS except Russia
Switzerland
Turkey
Other-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
10
Global financial markets: equities & fixed income
Global Sovereign Bonds 10Y Yield Intraday
Change, bps, 24 June 2016
Global Equity Markets Intraday Change, %
24 June 2016
Source: Bloomberg, Samruk Kazyna
-14 -12 -10 -8 -6 -4 -2 0
Singapore FTSE
Kazakhstan KASE
Hong Kong HIS
S Korea KOSPI
FTSE 100
Australia ASX 200
S&P 500
Iceland OMX
Netherlands AEX
Belgium 20
Portugal PSI 20
Austrian ATX
Ireland ISEQ
Japan Nikkei
France CAC 40
Euro Stoxx
Italy FTSE
Spain IBEX
Greece ASE
-30 -20 -10 0 10 20 30 40 50 60 70 80
UK
Australia
NZ
US
Germany
Canada
Switzerland
S Korea
Netherlands
France
Japan
Mexico
Brazil
Colombia
Italy
Spain
Portugal
Greece
11
Global financial markets: currencies & commodities
Global Commodities Intraday Change, %
24 June 2016
Global Currencies Intraday Change, %
24 June 2016
Source: Bloomberg, Samruk Kazyna
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4
GBP
ZAR
PLN
SEK
HUF
TRY
Euro
DKK
NOK
RUB
AUD
CAD
NZD
CHF
KZT
SGD
CNY
HKD
JPY
-5 -4 -3 -2 -1 0 1 2 3 4 5
Heating oil
Coffee
Corn
Palladium
Natural gas
Brent
WTI
Nickel LME
Soybeans
Cotton NYBB
Lead LME
Wheat
Aluminium SHF
Sugar
Copper SHF
Iron ore SGX
Platinum
Silver
Gold
12
Global financial markets: credit default swaps
Credit Default Swaps Intraday Change, %
24 June 2016
Source: Bloomberg, Samruk Kazyna
0 5 10 15 20 25 30 35 40
Estonia
Germany
Japan
Switzerland
Norway
Finland
UK
China
Hong Kong
Austria
France
Russia
Kazakhstan
Mexico
Romania
Hungary
Spain
Italy
Markit Itraxx Europe CDS (2015-2016YTD)
Markit Itraxx Japan CDS (2015-2016YTD)
Markit Itraxx EM CDS (2015-2016YTD)
13
THANK YOU