On Friday 24 June financial markets around the world awoke to a post-Brexit hangover. The UK voting to leave the European Union left many investors surprised and the uncertainty of the situation and what comes next hit all markets.
The emerging world was far from exempt, with the MSCI EM index experiencing a sharp decline. However, most quickly rebounded. We believe the longer-term impact for emerging markets could actually be positive, since the centre of gravity for capital markets activity could move away from London toward the Far East.
What is more, emerging markets’ trade and investment is widely diversified. In fact, the amount of trade with the UK is relatively small for most. There are some markets where ties to the UK are greater and the impact could be felt more acutely: for example, some Southeast Asian nations with historic connections could be negatively impacted. However, there could be a silver lining for certain Eastern European countries in the EU, with the potential move of some manufacturing and services from the UK to keep costs low.
As markets begin to rebound from the Brexit shock, investors should recognise the unique differences among individual emerging countries. I recently had the opportunity to visit Thailand
and observe that, thus far, its stockmarket has been relatively resilient amid the bouts of global market volatility following the EU referendum. Indeed, we believe the economic impact is likely to be relatively light for countries in Southeast Asia in general.
And while the British people’s decision to leave the EU has sparked fears of a rise in discontent with government and policy in other countries, including Thailand, discontent can be constructive if it results in positive economic and social reforms. Thailand’s government has been pursuing pro-growth agendas and seems committed to extensive market-friendly reforms and infrastructure investment, which should be an important driver of economic performance going forward.
“The Brexit vote shows the world that political instability is not concentrated in emerging markets”
Additionally, officials in Thailand have commented that, while the impact of Brexit may shave 0.1 per cent off 2016 GDP growth projections of 3 per cent, trade talks with the EU will not likely be affected and the country could potentially implement new deals with the UK as an individual nation more quickly than in the past.
Although there appears to have been a general flight out of so-called “risk assets” in late June, which has impacted emerging markets in general without regard to individual country or company fundamentals, the Thai equity market has been rather resilient.
Thailand’s GDP growth has been stable, with a rise in tourism and domestic demand helping to offset the impact from a contraction in merchandise exports this year. With this in mind, we remain optimistic on the market’s longer-term prospects and are not overly concerned about recent Brexit noise.
Generally speaking, Brexit actually brightens our view of emerging markets and the investment potential we see for the long term. The vote shows the world that political instability is not concentrated in emerging markets. While volatility may be with us for the foreseeable future, the markets have already begun to readjust. Part of the volatility was related to the surprise element of the vote; the leave scenario simply was not priced in properly.
When it comes to monetary policy in emerging markets and the US, the Brexit result should not impact it too much. Once the volatility is over, the Federal Reserve will likely continue its policy analyses based on the numbers coming out of the US on employment, growth and inflation.
The big question for market observers, of course, is the knock-on effect in the EU more broadly. If it is perceived that other members may decide to leave, then the uncertainty will continue and that could be bad for both European and US markets. However, emerging markets should be able to differentiate themselves, and individual countries should be able to bounce back.
Mark Mobius is executive chairman at Templeton Emerging Markets Group