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Brexit’s Impact in the Short Term and the Long Term Featured

The UK conducted a referendum on June 23, 2016, and the British populace has voted to exit the European Union (“EU”). Global financial markets reacted strongly as they do to any black swan events that can create uncertainty. The long term impact of Brexit outside of EU, however, should be limited. In particular, the emerging markets largely remain insulated from the adverse consequences of such risks due to their strong fundamentals and economies that are largely led by domestic consumption. This was reflected in the more muted response among the emerging markets.

The Brexit vote is only step one in a long and tedious process to finalize the parting of UK from the EU. If Article 50 of the EU’s treaty is indeed invoked, the UK will have two years to exit the EU. It remains to be seen how the other European countries will treat the UK after the Brexit polls. There is a possibility that the EU may be strict with the UK during negotiations to prevent future scenarios such as the Brexit. In a scenario of an increasingly fragmented EU, it might become more difficult to invest in European countries. This could potentially make Asian emerging markets more attractive as investment destinations compared to their European counterparts. While investors might experience some financial dislocations over the next few months, emerging economies, with strong domestic drivers, are relatively well insulated from an economic perspective.

The Excel investment funds are largely positioned in emerging economies, such as India and China, which remain relatively insulated from the adverse consequences of Brexit. As far as India is concerned, the UK is only its 18th biggest trading partner and consequently, the UK’s exit from the EU should have a limited impact on India. India’s growth is largely led by domestic consumption. A strong monsoon season would insulate India from any potential short term consequences since it will favorably affect the agriculture sector, which is still a significant contributor to the country’s GDP. Similarly, the domestic secular themes in China remain strong and are relatively separated from Brexit. Moreover, the large foreign exchange reserves in the two countries, namely India and China as well as other EM countries, provide their respective central banks with the ability to intervene and stabilize their currencies. The impact of Brexit on Excel funds’ portfolios is anticipated to be minimal in the longer term. Ultimately, rationality and pragmatism will prevail.

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