Brexit impact may continue, June F&O expiry in focus

The impact of Brexit is like to continue in the near term with volatility seen ahead of June F&O expiry

The impact of Britain's decision in a historic referendum to exit from the European Union would continue to weigh on investor sentiment going forward. Further, volatility will also be seen ahead of the expiry of June derivative contracts.

The week ended June 24 witnessed a carnage on Dalal Street on Friday wiping out over Rs 1.8 lakh crore from total investors' wealth after Britain decision to exit the European Union rattled global markets and the British pound plunged 9% to hit a 31-year low against the US dollar.

The S&P BSE Sensex ended down 0.9% to end at 26,398 and the Nifty50 dropped 1% to settle at 8,089 during the week under review.

"Large portion of the panic can be acsribed to the unexpected nature of the EU referendum verdict and the uncertainty over the near to medium term. While the markets initial reaction might well have been excessively negative and could improce in the coming days, the longer term implications of Brexit would have to be carefully analysed. We don't believe markets
are pricing in the entirety of the negatice scenarios that can unfold for the next few quarters. Firms with large exposure to Europe especially UK are likely to see significant revenue and earnings impact until currencies stabilise," said Tirthankar Patnaik, India Strategist, Mizuho Bank.

The decision by RBI Governor Raghuram Rajan not to renew his term after September 3 and move back to academia disappointed India Inc during the early part of the week. However, the government sought to douse investor concerns by liberalising foreign direct investment in several sectors.

FDI norms were liberalised in aviation, pharmaceutical, defence, food trading, retail and television broadcasting, animal husbandry, broadcasting carriage services and private security agencies.

Civil aviation will see 100 per cent FDI in airlines, except by foreign carriers. In defence, the policy has been tweaked to allow 100 per cent FDI by doing away with the condition of access to 'state-of-the-art' technology.

The government also permitted 100 per cent FDI in teleports, direct-to-home and cable networks as well as mobile TV - without the need for government approval.

Further, the government also announced the biggest ever auction of telecom spectrum. Over 2,000 Mhz of airwaves will be available across spectrum bands from 700Mhz to 2,500Mhz is likely to fetch the government around Rs 5.44 lakh crore, if sale of all spectrum is concluded at the base price.

The government also announced several measures for the textile industry with a view to generate 10 million jobs, boost exports by a cumulative $30 billion and investments by Rs 74,000 crore. The ministry also announced labour reforms.

In the corporate world ITC's longest serving chairman Yogesh Chander Deveshwar decided to step down from executive role at the FMCG major and move into a non-executive role from February 2017.

Shares of Indian companies having operations and exports to the European Union ended mixed with most of them facing  selling pressure after Britain which voted in a historic referendum to exit the European Union would hurt revenues and profitability.

Stocks in export-led sectors such as pharma and information technology along with auto component manufacturers were among the most impacted.

Tata Motors ended down 3%. Jaguar Land Rover, Britain’s biggest car maker, which generates more than 90% of profits for the company, could risk a 1 billion pound drop in profits by end of this decade, if the UK leaves the EU, as per an internal assessment prepared by JLR.

Tata Steel which has large operations in the UK and earns 58% of its total revenues from Europe dropped 4%. Further, the sale process of loss-making UK division of Tata Steel could get delayed because of Brexit also weighed on sentiment.

IT majors Infosys, TCS, Wipro and HCL Technologies which earn 23%-27% of their revenues from exports to Europe ended mixed. Tech Mahindra's income from exports to the UK comprises nearly 30% of its total revenue. The stock settled 5.4% lower.

In the pharma pack, IPCA which has substantial exports to the European region ended down over 5.8% while Dr Reddy's Labs which earns 26% of its total revenue from Europe ended up 4.8%.

Auto component manufacturers which have substantial exports to Europe also witnessed selling pressure. Motherson Sumi which supplies components to several luxury car makers and earns nearly 70% of its revenues from exports to the Europe slumped 5%.

Bharat Forge which had streamed lined operations of its subsidiary in Germany in October last year ended up 2.6%.

Suzlon which has key R&D centres in Denmark, Germany and Netherlands and earns 60% of its total revenue from Europe dropped nearly 5%.