How can Brexit affect us?

Recently there's been quite a lot of talk about Brexit in the financial markets and its impact on the markets. So, what really is Brexit and what is its impact on us here in Singapore?

(Image source: http://www.publicdomainpictures.net/, Petr Kratochvil)

What is Brexit?

Brexit refers to Britain leaving the European Union (EU). There's a referendum scheduled this Thursday being held on whether the British should remain in the EU, but before leaving the EU, they would need to give at least 2 years notice of their intention to leave (unless a shorter period is negotiated), so a Brexit before 2018 is unlikely. And while the results of the referendum are not legally binding, going against the clear intention of voters is probably not the best option in a democratic country.

How would this affect us?

One thought is probably that this is a British-European affair so it's impact on us should be quite limited. But as Singapore is an open economy with trade links with many countries, issues in one part of the world can come back to haunt us. Our merchandise exports to the British account for roughly 1% of our GDP, when compared to our overall merchandise exports which make up ~148% of our GDP., doesn't seem very large.

But Singapore's foreign direct investment in the UK totals $42 billion (2014), making it the 6th country in terms of amount of Singapore direct investment. As investors, we should also look at listed companies with investments and businesses in the UK which would be directly affected, such as ComfortDelgro with its bus operations in the UK and some of our firms having property investments in the UK.  The UK also contributes a large amount of foreign direct investment in Singapore with S$62 billion invested (2014), making it the 6th largest foreign investor (but just to note, the British Virgin Islands, a British territory, has $86 billion of foreign direct investment in Singapore)

These investments might be affected by the Brexit, both positively and negatively. Positively in that investments that were to be made in the EU countries may be now up for grabs by Singapore if EU imposes tariffs and barriers to encourage its current members to remain in the Union, making British investment in the EU less appealing. Negatively in that the uncertainty of the Brexit may lead to British corporations cutting their foreign investment. If trade barriers and tariff were to be imposed on Britain by the EU, it would negatively affect the British economy which would affect our investments and businesses there as well as our exports to them.

Other parts of the world may also be affected. With the current uncertainty with the low oil prices and China's slowdown, Brexit may serve to further spook the markets, leading to more volatility and maybe lower prices as investors leave the market due to the volatility.

What do the results looks like right now?

(Image source: The Economist)

According to the chart from the Economist, the Leave camp is just slightly ahead, but votes from the fence sitters can change the outcome. It also is worth noting that voting in the referendum is not compulsory so those that show an intention to vote for either camp may not actually turn up to vote.

Summary

The Brexit referendum may provide a good chance to pick up some shares whose share prices have been affected by the uncertainty surrounding it, depending on your view of whether the British are likely to stay and its impact on Singapore (but I think it would be mostly negative in the short to medium term at least until they actually leave the EU, but who's to say after that)

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