Huge mandate for UK's Johnson clears political fog, India Inc smiles

Highlights - Historic win for Conservative party reduces political uncertainty - Victory an implied affirmation for Brexit - Next step: Deal follow-through in Parliament; Transition in focus - Positive for pound, UK equities (smallcaps) and Indian exporters to UK

UK’s Conservative party led by Prime Minister Boris Johnson has secured a resounding election mandate which will put much of Britain's political uncertainties to rest. The unusual election, which was fought primarily on Brexit, has led to a massive win for Conservatives last seen when Margaret Thatcher had come to power. This is also seen as the second UK referendum in favour of Brexit.

With the mandate, Johnson can easily pass the first hurdle of UK Parliament’s approval for his Brexit plan. The Street is expecting a quick follow-through in Parliament and an anticipated ratification from the European Union (EU). While sketchy details of a free trade agreement will keep politics and markets on the edge, the market is sensing clarity on the broader question of UK’s departure from the EU -- commonly known as Brexit.

Market reaction

Less political uncertainties do feed into the stock market – locally and globally. And that’s what we are witnessing. Global stocks along with the European ones (Index futures) are trending positive. Implied volatility indicators -- S&P 500 VIX & VDAX -- across the Atlantic have come off. Much of the stock rally also owes it to positive developments in the US-China first phase of trade agreement.

The British pound-dollar currency pair is way past the levels seen in early 2019 when the UK Parliament had failed to approve Theresa May’s Brexit proposal with the hope of a better deal with the EU.

While FTSE 100 with a heavy export sales exposure is moderately up, more domestically focused FTSE 250 is expected to outperform.

What next?

Since Johnson had made an election promise that he would get past Brexit deal before the end of January 2020, the market is expecting a quick follow through. Though this would by itself mean a delay of 10 months from the original deadline, there is relief that deal is set to move in one direction.

Most likely, the Johnson proposal will feature modifications for the Irish backstop.

Pls read: Brexit deal – Not done yet

However, there lies the real challenge. The Conservative party has committed to a transition period that gets over by end of 2020. During this period, current regulations remain allowing the UK and the EU to negotiate their future relationship. Both sides will work towards a Free Trade Agreement (FTA) during this phase.

Takeaways

From India’s point of view, companies from IT, automobiles, textiles, gems and jewellery, metal and mining sectors having business interest in the UK will be a close watch. The election for sure is going to make it easy for those dealing with Brexit issues and help pave the way for long-term investments.

Stocks such as Tata Motors, Eicher Motors, Motherson Sumi, Bharat Forge, Solara Active, Mastek and Majesco exposed to the UK are on investors' radar. Sectorally, IT is among the most sensitive to the economic recovery and the currency movement in Europe. A good 17 percent of India's IT services are exported to the UK and 11 percent to continental Europe. An appreciation in the pound sterling can help them put the house in order.

Infosys has lower revenue exposure denominated in the pound and the euro compared to peers TCS and Wipro. Tech Mahindra has higher exposure to the British currency.

A few auto component players -- Mahindra CIE, Bharat Forge and Motherson Sumi -- are likely to benefit from the rupee depreciation against the pound and the euro. They all have a revenue share of 40-65 percent from Europe.

Tata Motors, with 16 percent revenue from the UK, has much at stake. The impact on the JLR business in medium term depends on Brexit negotiations and trade restrictions between the UK and Europe. Nearly 40 percent of JLR exports is in dollars.

Indian gems and jewellery is another sector that could feel the impact. The sector imports rough diamonds from the UK and exports precious gems and jewels. The UK accounts for about 10 percent of India’s gems and jewellery exports ($40 billion). However, much of the import billing is done in dollar terms. Which is why the impact here could be relatively less.

Coming to metal and mining, Tata Steel BSL and Hindalco are among those having a substantial exposure to Europe.

Indian pharma has about 16 percent export exposure to the European Union. Aurobindo Pharma and Wockhardt stand to gain on this front.

Overall, amid all the pessimism related to the domestic economic recovery, the UK election may come as a blessing in disguise for India Inc.

Follow @anubhavsays

For more research articles, visit our Moneycontrol Research page