The ‘Brexit’ Impact on Businesses & Investments

I will make a confession. I never really understood Brexit in full. I thought I had the right picture in my mind but looks like I was wrong. This post is my honest attempt to add colour and shape to the theory of Brexit. I am not going to delve in the political aspects of Brexit however I am going to set the table for its business and the economic impact.

B

ritish Prime Minister Theresa May might ask for an extension to finalize on Brexit. She hopes that she can bring a turnaround by convincing the MPs that Brexit is altogether a great idea. Nevertheless, this action did portray her to be an unstable leader with a majority which is dangerously at risk. Her constant efforts towards the appeasement of the right wing failed and the nearest alternative she can lay her hands on is soft Brexit. Soft Brexit is the option which makes United Kingdom leave European Union but it has to stay within EU’s custom union and single market norms. Britain will not get a say in formulating the trade norms and policies and has to adhere to the ones created by EU. The soft version of Brexit is still a better alternative than a no-deal Brexit since the latter is expected to devastate jobs, adversely impact tens of thousands of people and cause a serious economic disruption.

The idea for Brexit started three years back when EU failed to address the wider economic problems plaguing Europe; For instance, 20 percent rising unemployment in Southern Europe. The alternatives formulated were sheer disaster. The real problem started when EU started throwing trade barriers which caused United Kingdom a discomfort. This led to UK to consider the decision of leaving the EU and formulating its own trade policy. As I mentioned, I won’t delve into the political happenings of the topic, however the decision did cause some impact on corporate environment in UK.

To understand this better, I took the help of a Decision Maker Panel(DMP), which is a survey initiated by Bank of England in collaboration with University of Nottingham and Stanford University. The respondents of the survey are 7,500 business executives in UK who helm the small, medium & large enterprises. The survey mainly covers operational aspects of a business, possible effect of Brexit on generating revenues, impact on prices, investment philosophies and employment numbers.

Figure 1: Brexit as a source of uncertainty (Source: Bank of England)

As per Figure 1, it is evident that close to 32 percent of respondents view Brexit as one of top sources of uncertainty and 37 percent view it as one of many sources in November 2018. 17 percent respondents feel Brexit as the largest source of uncertainty. These numbers fluctuate through different time periods but latest data reveals an impending risk. This uncertainty can very well set its footprints on investments in UK as you observe greater risk averseness. More statistical scrutiny on DMP data revealed alarming umbers suggesting 6 percent reduction in investment, 1.5 percent lower employment and productivity collapsing to 50 percent.

To look at the future investment environment of UK, it is imperative to consider European Structural Investment. European Structural Investment (ESI) Program was an EU initiative which was swept under the carpet when 2016 referendum was discussed. 2.5 billion euro was infused by ESI fund on average from 2014 to 2016 as per Government numbers. These funds support the SMEs and provide the requisite funding to support operational efficiency and foster innovation in business environment. The infusion of these funds creates a sense of confidence among the budding angel investors for investing in young companies. In wake of referendum, EIS froze this cash and the companies have to look in different direction for funds. Apart from lack of funding, the export industry could potentially be hit due to the departure from the European Union.  Britain has free trade with members of the European Union; however, when exporting in the future, British producers may be subjected to tariffs. These tariffs will unavoidably push prices higher.

UK is a financial epicentre of the world and to help businesses flourish on British soil, political decisions should be influenced by a strong forward-planning taking into view financial and business repercussions of Brexit. I strongly feel UK financial markets should keep building and innovating to support the global economy and be resilient to the outside shocks.

Journey of Electric Vehicles : A Global Perspective

I will start by revisiting the history of the automobile industry and I will dive right in. 20th century saw horse-run carriages as the only means of transport. However with the advent of industrial revolution, people began to experiment with newer forms of transport. Petrol, steam and electric versions of transport began to compete fiercely with each other. Nicholas James Cugnot was the one to invent vehicles run by steam-engines. He invented steam tricycle which sowed the seeds for revolution of the automobile industry. However, his inventions saw a slight turbulence as steam vehicles required a long start up time and had a limited range. It was practically impossible to use them for a long distance travel. This was overcome by the vehicles fuelled by internal combustion engines (ICE) which were invented by Siegfried Marcus in 1870. Incremental developments were made to the model later by many engineers and scientists including Karl Benz, Nikolaus Otto and Rudolph Diesel. However, the first electric vehicle was invented in the year 1884 by an engineer named Thomas Parker. The concept of electric vehicles is not a newfound one. It had its roots way back in 19th century. However, their viability was questionable then. The roads outside the cities were of extremely poor quality which made commuting by an electric vehicle difficult (The rockier the road gets, more power the vehicle consumes). However, Henry Ford brought in huge obstacles to electric vehicle industry. Ford’s Model T costed $650 in 1912 whereas the price of electric vehicle amounted to a $1750. The consumers were more averse in buying electrically powered automobile as they were extremely high priced. Nevertheless, the discovery of abundant crude and faster developments in gasoline engines wiped out the electric vehicles completely from the face of the earth. However, in today’s times, looking at the deteriorating air quality and depleting oil reserves, it has become imperative for us to repaint the picture of electric vehicles with a much broader brush.

Electric vehicles incurred a very high cost primarily because of its increasing battery costs. However, over time battery costs have declined 80% which has given many automobile manufactures the incentive to venture into electric vehicles. Some of leading bigwigs in the business are Beijing Auto Industry Corporation, Zhidou, General Motors, Tesla, Kiah Motors and many more. However, with respect to batteries, there is still an unexplored area; the environmental issue concerning waste management of electric batteries. International Energy Agency estimates there will be 140 million electric cars globally by 2030 if countries adhere to the Paris climate agreement targets. This could leave 11 million tonnes of lithium-ion batteries to be recycled between now and 2030. Lithium ion when burnt can emit toxic gases and can have enormous environmental repercussions. Europe has therefore expressed serious concerns in venturing into the domain of electric vehicles. In fact the growth in terms of registration for electric vehicles is just 7% in Europe whereas United States of America and China have 37% and 70% growth respectively. In terms of climate change, Japan is moving on right course. After 50 nuclear power plants were shut down in the wake of the Fukushima accident, Electric vehicles are expected to significantly contribute to climate change. The situation in China is exactly opposite. With coal comprising approximately 70% of China’s electricity generation, the carbon intensity of the grid is high.

However, China has done exceedingly well in the commercial aspect of electric vehicles. Their primary motive was to reduce dependency on fuel imports and improve air quality (The air quality improvement is far from being realized considering the huge dependency on coal for electricity generation).  59 % of global sales of electric vehicles originate from China. The reason for this massive number is declining costs of batteries. With decreasing battery costs and a revised subsidy scheme, production has scaled up considerably in China. Chinese Government has planned to install 4.5 million units of charging posts by the year 2020 and also convert public transport buses to electric vehicles (at least 30 % by 2020). On the flip side, India needs to reduce air pollution at the earliest. However, simply introducing electric vehicles won’t do the trick. In India, coal is used majorly to produce electricity. More electricity being produced, more coal is burnt to degrade the air quality. Therefore, India should focus on bringing in renewables as a major energy producer and reduce its reliance on coal. Electric vehicles should be the logical next step after this change is implemented on a large scale. 

As per report by J.P.Morgan, electric vehicles contribute 30 % of vehicle sales worldwide. This figure is expected to increase by 7.7 % by 2025. By 2030, 60 percent of the vehicle sales will be attributable to electric vehicles.

USA-China Trade-Wars and Beyond

 This post I decided to have a global perspective. One of brewing topics of international relevance was that of the trade wars. USA and China have locked horns in an inevitable trade war for large period of time and both the economies have felt the immense turbulence emerging from it. This post tries to look at how Trump’s ideologies (good, bad or ugly?) have shaped into a massive trade war which can send ripples across global market.

Post World War II, United States of America established an open rule trade systems and reduced protectionist barriers to trade. The years following the war observed tremendous inflow of investments and a growing American economy. However, in current times, President Donald Trump has a diametrically opposite view. His firm belief in America First has given him the unspoken mandate to impose tariffs on steel and aluminium so as to create more employment opportunities in America. The tariffs did create 33,400 American jobs simultaneously destroying 1, 80,000 jobs across other economies. As on November 2^nd, 2018, steel prices have risen 33.14% YoY.  The corporate numbers have suffered with American companies using steel & aluminium as raw materials reporting weaker profit margins and lesser sales. Trump cited reasons of national security for imposing steel tariffs. However, US defence resorts to just 8.5 percent of total steel consumption and this reason looks far from being genuine. It has taken a toll on automobile companies (who are one of major buyers for steel) wherein there was a sharp 4% rise in automobile costs as predicted by the economists. Trump’s protectionist quagmire has slowly led to an outbreak of a trade war with China. In one of his speeches, Trump clearly reprimanded the leadership in earlier years who allowed US wealth to flow towards Chinese economy through massive reliance on imports. Former President George Bush had imposed 8-30% tariffs on steel to create more jobs; however as trade tensions were sighted, he quickly abandoned the tariffs. With alleged Chinese misuse of intellectual property rights, Trump along with his advisors used an arsenal of tariffs on China to discourage imports. China was closely looking at the Midterm elections wherein a Democrat win could have proven to be a helping hand.  However, even if the outcome was as expected and it challenged Trump on military spending and international business dealing. However, Trump still enjoys executive power on USA’s trade policy and can emphasize on his own terms.

China’s Made in China 2025 policy plans to replace imports with local products as the Government plans to build on existing infrastructure and technology so that Chinese champion companies can take on Western World in terms of domestic production. Trump may have sighted this policy’s adverse repercussions on the American economy as USA exports sizeable amount of goods to China (130.37 billion as on 31^st December 2017). The antagonistic attitude of Trump towards China appears to have stemmed from this foresight. Trade wars have led to a rise in the consumer price index to 2.7% with USA reporting good employment numbers without subsequent rise in productivity as stated by Former Chairman of Federal Reserve Alan Greenspan. This appears to be extremely unsustainable looking at the future growth.

Chinese economy will also suffer implications of growing trade war with China’s fixed asset investment slowing down to a record low in August 2018. China has tremendous debt/GDP ratio of about 250% as China has rising expenditures from debt (12.5% of the GDP) which are used to simulate the economy. These solutions are extremely unsustainable for long term as warned by the International Monetary Fund.

Economic Outlook 2019

As we are 17 days into 2019, I thought it would be advisable to write a post on economic updates on 2018 and how it could snowball into 2019. Being my first post on this facet of financial management, I must tell the readers that my opinions are subject to change with time. After completing my education in financial management, I thought about giving my thoughts and knowledge a digital form. Can I be wrong in putting my thoughts down? Maybe or maybe not. I am just 25 with a huge hunger for knowledge. So as I consume and share on my blog, I ask to be forgiven if I go wrong on some aspects which I might be misinformed.

To begin with, when I look at Indian economy, my attention first turns to the trade. Latest numbers show trade deficit falling to $13.08 billion in December 2018 against $16.67 billion in November 2018. The economists did pray for a declining trade deficit to create favourable trade scenario for India. India happens to be amongst poorest of G20 countries and the only logical way to wriggle out of this label of being poor is to be an export-driven economy. The Indian rupee having its own volatility amidst the growing trade concerns (both locally and globally), rise in exports can bring in immense cash flows in the country. India’s import bill has declined 2.44% to $ 41.01 billion, biggest fall since August 2016. The reason for this is hugely attributable to declining oil prices amidst global tensions (Oil constitutes 27% of India’s import bill). Another strong reason I found for falling imports is lesser reliance on gold. Owing to Nirav Modi scam, there was huge restocking of gold in 2017 as gold imports seem to have fallen 24%. We have few measures to further reduce imports. The Gold Monetization Scheme (GMS) helps mobilize gold held by households and institutions in the country and put it to productive use in return for an interest. Recently, Government also increased its purview to include a smuggled gold too. Prime Minister Modi had repeatedly put emphasis on reducing oil dependency from 82% to 63%.  Stated owned Indian Strategic Petroleum Reserve has built 5.33 million tonnes of capacity at Vishakhapatnam, Mangalore and Padur which can help meet 65 days of country's oil needs in case of contingent situations. 

One of problems which are plaguing the economy is the rising liquidity problem in NBFC sector. NBFCs are yet to come out of the dark phase after the ILFS default which created a risk aversion amongst the investors. The borrowing costs are expected to rise by 50-150 bps as it would be difficult for NBFC to raise capital. However, banks like SBI are ready to take over the loan portfolios through securitization albeit the risk averseness of investors can still be traced to declining NBFC stock prices (The small cap NBFC companies will bare most of the brunt). The Reserve Bank of India needs to monitor funds and direct money based on a proper well-defined assessment mechanism. The RBI also needs to carve out a financial blueprint based on real-time data for NBFC sector spanning a decade to prevent a further asset-liability mismatch. On the equities front, 2018 initially observed lacklustre corporate earnings which showed a revival late in July-September Quarter. The interest rates were hiked twice in the course of year by 25 bps each time which did lead to a low equity performance. The stock markets observed a correction later into the year after making consistent highs (which most analysts suggested it was a bubble). Mid cap and small cap stocks had rich valuations and suffered the most during correction albeit the large caps stock remained resistant. US-China trade tensions crept into global equities which lost $13 trillion, half of which was accounted for by the trade war.

The numbers were not so extravagant in 2018 but we can hope for some promising numbers depending on the results of general elections. With a decrease in consumer price index to 18-month low of 2.19%, the Monetary Policy committee may go in for some rate cuts now to boost borrowing.  Given the fact IIP numbers have been at 17-month low to 0.5%, it is imperative that Government adopts some measures to boost consumption.