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Brexit – How It Will Impact Your Personal Finance In Long Term

Brexit is a once in a lifetime event. I read this quote in one of the leading newspaper of UK. It may sound frivolous but has a deeper meaning. I was following this historical event of Brexit from the beginning. My key source of information was international newspapers and blogs. There was not much coverage in Indian Media on Brexit except “There will not be any impact“. We are too occupied to cover the sensational news. Only Masala news can increase the readership or TRP. Coverage of Intellectual topics like Brexit takes a back seat.

I was quite shocked to read/watch the post-Brexit coverage in the newspapers and TV channels. As anticipated, one of the business newspaper quoted that there was not much impact of Brexit on Indian Stock Market. In other words, he was referring to limited next day impact of Brexit on Indian Stock Market. After reading the post i got a feeling that Brexit is OVER. Let’s get back to work :). Another international news report quoted that intervention of DII’s and one of the leading insurance company saved the day for Indian Markets.

Most of the business newspapers sign a relief that markets and Indian Rupee recovered the shock. “Thankfully there was not too much downside compared to European Markets“. At best, i found a common conclusion that market will remain volatile in coming days. I loved some of the headlines like “Travel to the UK is cheap and Education cost will come down”. The reason being, sharp fall in the Pound compared to USD. Pound was at a historical low of 31 years against the USD. These headlines sounded more of an Advertisement and Promotion of UK Tourism and Education. This is basically called a myopic or short term approach.

In contrast, the international media was flooded with intellectual posts on how Brexit will shape the future of the world economy. This is called vision and long term thinking. One of the main reason for this difference might be that Indian readers are not interested in long-term impact. Another reason can be that the media is sounding too optimistic and don’t want to trouble the calm waters. Last reason can be that we only see what we want to see. I don’t know the truth or real reason.

The conclusion is Indian analysts tried to put forward very brave face that Brexit will either have negligible or NO impact on Indian Economy. In other words, we are trying to say that Indian Economy is immune to what is happening outside India. If that is the case then 2008 crisis would not have impacted Indian Economy so hard. You know how many people lost their money in stock market and jobs post 2008 crisis. I think i made my point and nothing more to add.

Brexit – A Long Term Impact

The readers who closely followed Brexit know that it will have a long-term impact. It was just a referendum wherein people expressed their desire to move out of EU. If everything goes well then UK will be out of EU only by 2019 or 2020. There will be a long spell of uncertainty. Now similar demand is being heard from other European countries like Netherlands, Italy etc. Some international experts are of the opinion that it is the beginning of the recession.

Already there are concerns on the Chinese economy, Negative bond yields, delay in Fed rate hike etc. In Hindi, there is a famous proverb that “Musibat chaaron taraf se aati hain“.  It means when you are in trouble then it will be from all sides. For example, in the case of job loss, an individual is troubled on all the fronts i.e. financial, professional, personal and emotional.

Brexit will have a ripple effect on World Economy. In past, there are very few events that impacted the economy for quite long. In other words, these events have long term repercussion. In some cases, these events kicked off chain events similar to Nuclear chain reactions. Brexit itself is a big catastrophe to cause ripples in the world economy. If few other European countries also decide to exit EU then it will be Nuclear chain reaction. In recent history, we always recall Economic liberalization of 1991 or 2008 financial crisis as Nuclear chain reactions. Trust me now Brexit is also added to the list. Though we will discuss it openly a few years from now. Therefore point i am trying to make is that impact of Brexit will be long term.

Brexit – How It Will Impact Your Personal Finance In Long Term

Have you ever wondered whenever we drive on a road what makes us reach our destination? The most important factor is an eye on traffic from opposite direction. If we take off our eye then there is always a possibility of head-on collision/accident. An alert driver can reach the destination faster than others. The reason being he/she can overtake the slow vehicles.

Similarly, the success of your personal finance portfolio is dependent on keeping an eye on what’s coming your way. As i shared my experience in my post, Equity Investor – 5 Biggest Mistakes I should have avoided. Any mistake means financial loss. You cannot be right 100% time but the success of 3:1 is good enough to achieve your goals. In the said post i mentioned that you should never listen to the analysts. I am again proved right by Brexit referendum. All the analysts, experts, and opinion polls proved wrong in their judgment on Brexit results. In fact, markets rallied in anticipation of the referendum in favor of Remain.

Before Brexit, i shifted my investments to Gold ETF. This was based on my analysis and judgment of the situation. Though it was a big risk but i am responsible for my decision. If you invest based on analysts opinion then you might regret in future. It is important to understand and analyze all the opinions. After that, you should take your own decision. In this post, i am sharing my own conclusion related to the impact of Brexit on my personal finance in the long term. This post is not for traders or the short-term investors as there will be turbulence in the short term. The long-term investors will be benefited based on their judgment of Brexit impact. I am highlighting the impact on key asset classes evaluated by me i.e. Property, Stock Market, and Gold.

1. Property:

As i keep highlighting that real estate sector is not doing well. Specifically from Brexit perspective, there will be a negative impact on the real estate sector in India. The UK is one of the costliest property markets in the world. For Indians, it is always a dream to own a property in the UK. The UK has large no of migrant population from India. The UK NRI’s are big time investors in Indian property market. One of the reasons can be affordable property in India compared to the UK.

Post Brexit, the pound tumbled to its lowest level against the dollar in last 31 years. The pound will further devalue. Therefore, it will have dual impact

(a) Repatriation of money from the UK to India will fetch less Indian Rupee. In other words, it will reduce the earnings of NRI’s in the UK in Indian Rupee. Therefore money flowing from NRI’s in the UK to Indian real estate sector will slow down considerably.

(b) On the contrary, the property in the UK will become affordable for Indian investors. In other words, they will get more pounds in exchange of Indian rupees. Therefore big investors in India will prefer to buy property in the UK compared to India. The time to realize their dream of owning a property in London has come.

2. Stock Market:

The stock market has rallied from a low of 6800 to around 8300 in less than 6 months. This was predominantly because of NO Fed Rate hike. FII’s invested heavily in Indian Stock Market. In the stock market, if you know FII buying in stocks then you are home. Obviously, it is not that easy.

One of the best thing about investors is that they can’t keep their money idle. Therefore, investment is a zero-sum game. Any investment in the stock market means money will be pulled out from real estate or gold. On the other hand, if i exit stock market then i will invest the same money either in Property or Gold or debt instruments.

As i shared, Post Brexit, the DII’s are supporting the Indian Stock Market. Now million dollar question is how far they can support. Secondly, the analysts are suggesting that FII’s will not exit EM (Emerging Markets) including India. On the contrary experts from western world suggest that FII’s exit EM (Emerging Markets) FIRST. Therefore both are contradictory theories. Indian retail investor can stay invested till the time Panic Selling trigger with a caveat “at own risk”. I wish and pray that day never come but let’s be more practical in our approach. The probability of the same cannot be ruled out.

Whether we like it or not, in the long term Brexit will have a negative impact on the stock market. The experts are bearish on IT companies and companies with significant exposure in European countries. If you would like to stay invested in the stock market then experts suggest selecting companies with a domestic focus.

My 2 cents on expert’s suggestion is that the market is driven by sentiments as i always share in my posts on the stock market. When the sentiments turn bearish then no one is spared. In other words, there is across the board selling. The only difference is in the quantum of beating. If there is panic selling because of Brexit then IT and Europe focused companies will take more beating compared to rest. I will trust foreign experts in this regard. As i shared that some of them are linking Brexit to the beginning of the recession in the world economy. Therefore personally i prefer to quit the stock market.

3. Gold:

As i mentioned in the previous section that investments are zero sum game. If the investment will not flow in real estate and exit the stock market then where it will land. During the turbulent time, investors rush towards safe heaven. Currently, experts are of the opinion that Gold, Dollar and Yen are three safe heavens during uncertainty or if world economy slips into recession. In India, the 4th one is Fixed Deposits :).

I beg to disagree that currencies like USD and Yen are a safe heaven. The reason being these are controlled by the respective central banks. Central banks are comfortable if their currency trade in a specific range. Too much strengthening or weakening of the currency is not good for the economy of the country. As we observed in India, RBI intervene if the Indian Rupee trade outside comfort zone/range. Therefore an investor cannot rush to buy currency like dollar or yen during uncertainty.

Normally dollar and gold move in opposite direction. Post Brexit a unique phenomenon is observed i.e. both dollar and gold are moving up. Basically, it is limiting the upside of Gold. Therefore, experts are of the opinion that true potential of gold will be unlocked once the dollar is stabilized.

Now we are left with only safe heaven on earth in true sense i.e. Gold. In one of my post, i highlighted that Gold is Non-Productive Asset. I still maintain my stand but now economic conditions are different.

There are no permanent friends and foes in politics. Similarly, in personal finance space, none of the asset class is untouchable. Depending on the macroeconomic indicators you need to keep rotating your investments. The reason being world economy is more volatile and turbulent than ever before.

Events like Brexit always keep you on your toes. You will come across instances that we or our previous generations never thought of. Recently gold jumped 8% intraday. My father was shocked and he told me that he has seen such a high volatility in Gold only in recent times.

Recently i shifted my investments to GOLD as i learned my lessons from 2008 crisis. The post-2008 crisis the gold doubled in 2-3 years. This time, i am expecting better returns :). In other words, gold will double at a faster rate. Due to volatility and uncertainty, we always think short term. Because of this reason the heading of this post is “Brexit – How It Will Impact Your Personal Finance In Long Term”. I have observed that investors who made money always have a long-term view of the economy. I feel pity for the so-called experts who feel the Brexit is over. It is the height of optimism. On the contrary, it is the beginning. No one knows we are on the cusp of once in a lifetime money-making opportunity.

In my next post, i will discuss besides Brexit what other factors are driving me to invest in Gold.

Copyright © Nitin Bhatia. All Rights Reserved.

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Kapil Kalia
Kapil Kalia
8 years ago

Thanks Nitin ji, For sharing such a great insight related to aftermaths of Brexit episode that shall have impact upon Indian market. In last you have shared that it’s good in current scenario to switch to Gold ETF’s for investment. Related to that I have also hear about term E-Gold.Is both are same or differnt? if different then in what sense and which is better pout of two? kindly share your opinion about the same.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Kapil Kalia

E-Gold is offered by National Spot Exchange Limited (NSEL) whereas Gold ETF is managed by fund house or Asset Management Company. Gold ETF and E-Gold are same except the cost/fees charged. For Gold ETF you need to pay fee of the asset management company plus storage and custodian charges. It is also known as expense ratio. Normally it is under 1%. Secondly the expense ratio is recurring i.e. it is charged every year by fund house. On the other hand cost of trading of E-Gold is nominal and is one time. Therefore, in long term the returns of E-Gold will be slightly better compared to Gold ETF.

Personally i prefer Gold ETF because during bull phase, the Gold ETF trade at premium. At one time it was trading at 10% premium. During bear phase it trade at discount therefore any cost advantage offered by E-Gold is nullified and if your timing is correct then you can generate higher returns in Gold ETF depending on the market sentiments.

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