Brexit: What the UK credit downgrades mean for Asia

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Dog with British flagImage source, Getty Images
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Hang on - we've been downgraded?

If it feels you wake up every day to more bad news, spare a thought for the Brits.

As the Economist described in its rather scathing report of the current situation in the UK: "Britain is sailing into a storm with no-one at the wheel."

The latest news out of the UK - the two credit downgrades from Standard & Poor's and Fitch respectively - have just further underlined the uncertainty about the British economy, especially when they come accompanied with statements like this one from S&P: "This outcome is a seminal event, and will lead to a less predictable, safe and effective policy framework."

In the immediate term of course, expect more market volatility. Investors are clearly nervous in Asian trade, with Japan, Korea and Australia all opening lower on Tuesday morning.

But after the dust settles, who are the winners and losers in Asia?


Emerging market currencies: As the pound falls, investors are rushing to safe haven assets like the Japanese yen and the US dollar. So riskier assets like the Indonesian rupiah and the Malaysian ringgit have fallen.

The dollar's strength also makes it more expensive for emerging markets to pay their dollar-denominated debt back, and their commodity exports, also priced in US dollars, become more expensive overseas.

This has led to some research houses downgrading emerging market growth rates - Nomura for instance has downgraded Malaysia's full year GDP forecast to 3.9% from 4.3% because of Brexit.

Japanese carmakers: Japan's biggest carmakers are among those most exposed to the UK. Shares of the major auto-makers have been hit, with Nissan in particular seen as being most vulnerable. It has a plant in Sunderland - the district that voted to leave the EU by 61% votes to 39%. It was a far higher vote than most exit polls had suggested and took markets by surprise.

Together, Nissan, Toyota and Honda produce about half of all the cars made in the UK each year. Most of the cars they manufacture in the UK are exported, and more than of half of those go to EU nations, according to the Society of Motor Manufacturers and Traders in the UK.

Depending on what kind of relationship the EU ends up having with the UK, Brexit could mean higher tariffs for British goods - and that would eat into Japanese carmakers' profits. Japanese automakers currently get most of their sales outside of Japan, so coupled with the yen's rise as the pound falls, both sales and profit margins look set to suffer.

Hong Kong shares: It's a no-brainer, shares of HK-listed British financial firms like HSBC, Standard Chartered and Prudential are pressured because of the Brexit fallout. Infrastructure stocks like HK's Hutchison Whampoa and Cheung Kong Infrastructure Holdings have also seen sharp falls. Owned by HK billionaire Li Ka-shing, both companies have big investments in the UK.

Mr Li had warned about the impact of a Brexit on the global economy ahead of the referendum.

China: Chinese Premier Li Keqiang has said that although Brexit won't stop the Chinese economy from achieving its growth targets this year (but then, nothing ever gets in the way of China's official growth targets!) it has increased the uncertainty in the global economy.

And China's lost a powerful ally in the EU - London was a big backer of China's free trade negotiations with the bloc. But now that the UK has voted itself out, Beijing's negotiations with the EU just got a lot tougher.

Image source, AFP
Image caption,
Japanese carmakers could pull out of the UK


For the moment, it is hard to see any immediate winners of the current impasse in the UK - forecasts for economic growth in Asia have been revised downward.

But as a whole, Asia is still likely to post growth rates of around 5% - not too shabby at a time when other parts of the global economy are looking at low, no, or negative growth.

Growth economies: Indonesia, India, and the Philippines have been cited as growth areas to watch - and that's not likely to change even after Brexit. While Nomura has cut the growth expectations of Malaysia, Singapore and HK - it hasn't cut Indonesia and the Philippines by as much.

DBS's David Carbon says this of India: "Much of the heat is likely to be felt by financial markets - rather than the real economy."

The Fed effect: Brexit was already named as a major risk factor in the last US Federal Reserve meeting - and the reason why Janet Yellen held off on raising interest rates.

In the longer term, this indicates a softer global outlook, but in the shorter term, it does give emerging market economies temporary relief from a stronger dollar.

The pound effect - property, tourism: So while a weaker pound will be negative for anyone who earns in sterling, it will make property, holidays and studying in the UK cheaper.

Watch out for Chinese property magnates who may look to snap up assets at weaker prices - and for those of you who have a bit of cash to spend this summer, it may not be a bad time to start looking at holidaying in the UK. Travel agencies have reported a flurry of enquiries from holiday-makers in Asia.

A few research houses have forecast the sterling may settle at around $1.30-1.20 towards the end of the year, so it looks like there may still be some more downside in the pound to come.