Brexit is the event of Britain exiting the European Union post the referendum held yesterday to determine whether the nation must continue to stay with the European Union or not where 51.6% of the British voted to exit.
Britain and the European Union are considered to be stable economies and avenues for investment. With Britain leaving the European Union, this image was shaken. That is why markets world-over reacted negatively to this event. Indices across the world crashed; Sensex fell by over 600 points (2.24%), Hangseng fell by 609 points (2.92 %), Dow Jones fell by 490 points (2.6%) at the open.
Fig 1. Sensex last 5 days
Brexit also resulted in a flight of capital. The pound-sterling, the currency of Britain, fell by more than 5% and now is at its lowest value since 1985.
|GBP ⇨ USD||$ 1.3616||-0.09429 (-6.476%)|
|GBP ⇨ JPY||¥ 139.1850||-13.54790 (-8.870%)|
|GBP ⇨ EUR||€ 1.2273||-0.05683 (-4.426%)|
|GBP ⇨ AUD||A$ 1.8274||-0.10392 (-5.381%)|
|GBP ⇨ CAD||CA$ 1.7586||-0.10847 (-5.810%)|
|GBP ⇨ INR||Rs. 92.3811||-5.49898 (-5.618%)|
Table 1. British pound against other currencies on 24th June
The Indian Rupee too fell by 72 paisa to the dollar due to heavy selling of the Rupee.
The emerging economies- which are seen as more risky than the European Union, will see an outflow of investment in the immediate term. This outflow of capital will be invested in other perceived stable assets and hedges, namely the dollar and gold. This can be seen in how the dollar and the gold have risen dramatically in just 1 day. Gold prices surged by 8.1% in just one day to $1358.1/trounce.
Fig 2. Gold Rally over midnight of 24th June
While Dollar assets may rally for some time, the US economy in its current state is not quite equipped to handle the excess flow of capital. This would result in a dollar bubble. Eventually the capital will have to flow to other destinations for investment. India being the fastest growing major economy in the world will thus be the best destination for investments.
While the markets will experience some volatility in the short term, there will be major growth in the longer term. As seen in Fig 1. Investors have already begun to cash in on the market crash. While Sensex fell by 1000 points at the open, it rallied by a remarkable 400 points through the rest of the day. While the prices are still low, now would be the best time to invest. The more you delay the lesser your gains will be.