What is Brexit? Is it Time for Britain to Exit the European Union?

Posted On Wednesday, Jun 08, 2016


Brexit or ExiIndia – What should concern us More?

Brexit - a word that's been doing the rounds of the news for some time now. Many so called economists and your friendly investment advisor at the cocktail party seem to be concerned about Brexit. So what is Brexit and does it really affect our lives in the erstwhile jewel of the British empire, or should we be more concerned with ExiIndia? (details on this word later)

The Noise around Brexit
Brexit, as Wikipedia describes it is a "portmanteau combining the words "Britain" and "exit". A portmanteau, in our layman's terms, is a khichdi of two words joined together in a Frankenstein-esque experiment in the English grammar laboratory to create one word (like Quantruth - a combination of Quantum and truth could be one word that describes your fund house and the cornerstone of its philosophy, in one word ).

Coming back from the grammar lesson, Wikipedia continues "Brexit is a political aim of some advocacy groups, individuals and political parties in the United Kingdom (UK) that the UK should exit European Union" - given the economic conditions of the same. The reason that Brexit is in the news is that the British electorate will address the question again on 23 June 2016 in a referendum (the first was held in the 70's where more than 67% voted in favour of joining the European Economic Community or EEC) on the country's membership, following the passage of the European Union Referendum Act 2015.

The Verdict
Should Britain continue to be a part of the EU or should Brexit occur? Should the land of King Arthur continue the good fight (or flight?) or like little furry creatures should they desert the proverbial sinking ship that seems to be the EU? What is best for Britain and the Europe?

Well the jury is out on that one with various agencies coming up with different scenarios to suit their perspectives (we guess). Therefore various studies show negative impacts of Brexit to varying degrees. The Centre for Economic Performance at the London School of Economics estimates that the United Kingdom leaving the European Union and joining the European Free Trade Association will reduce British gross domestic product (GDP) by at least 2.2% in its optimistic scenario, and between 6.3% and 9.5% in its pessimistic one.

Whereas the Confederation of British Industry estimates that the net benefit to the United Kingdom stemming from European Union membership is somewhere in the region of 4 to 5% of Britain's GDP, or between £62bn and £78bn per year.

And the National Institute of Economic and Social Research muddies waters further by estimating that withdrawal from the European Union would permanently lower the British economy's level of output by 2.25% below what it would otherwise have been.

So, ladies and gentlemen, the British themselves don't know whether Brexit is beneficial or harmful, whether they will go ahead with the divorce from the EU or will the EU, on bended knee offer an even larger diamond ring (the UK already has the largest diamond in the world – the Kohinoor gracing the crown, doubt a larger diamond will sway them, but...) and save the marriage, or propel the divorce proceedings which may or may not be accepted by the British people, remains to be seen. Muddy waters these indeed, Watson.

Even if the people vote in favour of the exit it is not as simple as the British PM inviting the EU to a cuppa tea, shaking hands and wishing them well. There will be a Scafell Pike (highest mountain in England) of paperwork and formalities to complete, economic analyses to be done before the first concrete steps for the exit are undertaken. Hence the noise around Brexit is just that, but if the British do decide to exit then there is no denying that it will be a big - maybe the knock out - blow to the already reeling and bleeding EU.

So what's this ExiIndia now?
ExiIndia, a word we created at Quantum for the 4 horsemen of the investcalypse (see another portmanteau) in India. 4 myths that if they exit the minds of the Indian investors – can leave us more equipped to make our money work for us better and be there when we need it the most.

These 4 points that are holding us, the average Indian, back from building wealth for meeting our life’s goals; need to exit the consciousness of the Indian investor. If these points Exit India or ExiIndia then we can aim to be financially aware, if not savvy citizens; not reliant on the government or anyone else for finances to meet our goals.

1.Equities are Risky so I will not invest in them
2.I have very little saving, so I cannot invest
3.Mutual Fund investments are subject to lack of understanding risk. I will not read any scheme information document but will blindly trust the friendly neighborhood distributor.
4.I'll invest later, now the markets are too high, too low, too frothy, too anything!

Equities – The Monster that is the Market
“You know, my friend invested in XYZ company and lost lakhs in the stock market.”

“ABC is a sure shot stock that I thought will do well, but malpractices in the accounts were revealed, now I’ve lost all my money.”

“These stock markets I tell you, all rigged like sports seem to be”.

“Equities? Don’t understand all this market-schmarket nonsense at all. I buy property and gold”

How many times have we heard the above statements, or variations of the same? This continuous information hitting us will have us thinking – that maybe equities aren’t the best place to invest.

That is the worst thing you could do to your portfolio - that is not having an allocation into equities.

Equities tend to give returns that beat inflation, are tax friendly and moreover, if you choose the right stock/fund, you need to follow the motorcycle ad of fill it, shut it forget it. In this case buy it, bury it forget it - for 10 years or so.

Why 10 years? The answer lies in the table below:

Investment tenure for 36 years No of periods observedNo. of times S&P BSE Sensex gave negative returns in 36 years
1 year3610
3 years344
5 years323
7 years301
10 years270
12 years250
15 years220
20 years170
25 years120

Past performance may or may not be sustained in the future.
Data Source: S&P BSE Sensex values from 31st December, 1979 - 31st December, 2015.
Source: Bloomberg; data compilation by Quantum AMC.

What this table tells us is that there are zero - or no instances of negative returns after a period of 10 years, which in layman's terms means that any investment in equties, if done for more than a period of 10 years will yield positive results.

From a long term investment perspective there is no other asset class that gives such returns. However, as our Compliance team would love to tell you - past performance is no guarantee for future results!

I have very little savings so I cannot invest
Another myth that needs to go out of the window. Don't have enough savings? - Start an SIP or a Systematic Investment Plan. An SIP allows you to invest a fixed amount every month/quarter/year (there are daily and other options available too). This inculcates the savings habit and allows you to build wealth over the long term. Here's how:

Reduces the average cost of Investing
In SIP one starts investing a fixed amount regularly. Therefore, one end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, those who are not well versed with the swings of the market would stay away from buying when the markets are down. They mostly tend to invest when the markets are rising. Starting an SIP tends to bring discipline to our portfolio as SIP investors buy even when the markets are low, which actually is the best time to buy! As an investor you don’t need to time the market. Always remember markets will fluctuate but your financial goals won't!

Invest regularly and experience the power of compounding
Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In simpler words, the interest you will earn from your invested amount will be re-invested, and thus increase your principle amount. Starting a Systematic Investment Plan (SIP) will help you harness the power of compounding as you invest a set amount every day/week/month etc irrespective of the wild swings of the market.

Below is an illustrative example that shows how power of compounding helps to be a discipline investor from an early age and invest with SIPs.

 Amount of SIP (Rs.)FrequencyTotal No. of Years of Investment/ Age of InvestingRate of ReturnTotal Amount Invested (In lakhs)Corpus Build (In lakhs)
Person A1,000Monthly3012%3.630.81
Person B1,000Monthly2512%3.017.02

*Table is for illustrative purpose assuming SIP starts at the beginning of the month.

Person A builds a corpus of Rs 30.81 lakhs while person B's corpus is only Rs 17.02 lakhs. So the difference of Rs 60,000 in amount invested made a difference of approx. Rs 13.79 lakhs to their end-corpus. That difference is due to the power of compounding. Hence, with disciplined approach and longer compounding period, investors can enjoy potential higher returns.

Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest? Apart from the other big question WHERE to invest? While, investing in a mutual fund solves the issue of where to invest, SIP helps us to overcome the problem of when to invest. As per the earlier example, even if you were to pull the plug on equity investments, where would you then park your money? locker at home? bank account? None of which might help you build that corpus for your financial goal.

SIP involves disciplined investing irrespective of the state of the market as SIP investors buy even when the markets are low. When the markets are high, it may not be prudent to commit large sums at one go, thus balancing your portfolio. This makes timing the market less relevant, therefore reducing your worries about the state of your investments in volatile markets.

Does not strain our day-to-day finances
Mutual Funds allow us to invest very small amounts (starting from Rs. 500/-) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our finances. SIP, therefore, becomes one of the ideal investment options for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market. Large investors who wish to accumulate their savings prudently might opt for a larger SIP amount.

Opportunity for building wealth
At Quantum, we are firm believers in the India growth story; we believe that there is enough potential in the country and the youth and enough entrepreneurial spirit, which if channelized correctly can propel the country to consistently being one of the fastest growing nations in the world. Of course, this growth depends upon infrastructure and opens government policies which will encourage rather than discourage this entrepreneurial spirit.

Therefore it makes perfect sense for you to invest in equity mutual funds for the long term, to help you achieve your financial goals. The fund that you chose to invest has to have values that reflect your own, if you are the slightly conservative investor, and then it may not make sense for you to invest in sector funds (which tend to carry more risk than diversified equity schemes). So if you do your homework and chose a fund whose investment philosophy resonates with you, then we recommend that you continue the SIP.

Mutual Fund investments are subject to lack of understanding risk. I will not read any scheme information document but will blindly trust the friendly neighborhood distributor.

India is the outsourcing capital of the world, most major companies across the globe would have outsourced some part of their operations to India.

While this is great for the economy - the problem with this is we Indians too have become experts at outsourcing - from outsourcing housework to driving to cooking we are the undisputed masters of the outsourcing universe. So much so that we even outsource the homework that we mandatorily should be doing when it comes to investing the hard earned savings that we accumulate.

A mutual fund, or any investment for that matter, has a performance level which first catches our eye... and that's it! Instead of that being the first point of reference checks, performance, process, people, pedigree, consistency and most importantly investment philosophy - all need to add up and give us that comfort feel before we invest. But no. We conveniently forget the rest or outsource it to the friendly neighborhood distributor, who may not have the best interest of your portfolio in mind when he/she recommends a switch to that "zabardast fund sar!"

Please do not get us wrong, we have nothing against distributors and know for sure that there are many distributors out there who will give you great sound advice for your portfolio, but history tells us that many funds especially in the 2006 era were mis-sold and when the tsunami of the Lehman crisis hit, entire portfolios were decimated.

So while we may rely on him/her to give you additional information (keyword here being additional) we need to have answers to a few basic questions ourselves like:

1.How old is the fund?
2.Does it have a track record of good performance across market cycles or is it a "me-too" that does well only when the markets do?
3.Who is the fund manager? What is his pedigree? How long has he been with the fund?

Questions on risk and other points can be asked to the financial advisor before investing.

I'll invest later, now the markets are too high, too low, too frothy, too anything!
Timing, a wonderful thing to see a batsman gifted with it perform on the cricket pitch, not a great thing when it comes to investments. There are very few of the so called market gurus who get it right, which is more a game of chance or coincidence than an actual science.

Having said that we have a very clear cut answer for the question When do we invest? We say, if you are an investor who will stay invested for more than 10 years then don't wait - invest now. Now is the time to put in money in the market and stay there. But if you are a speculator wanting to exit in a few weeks, you best never invest in equities.

One can always rely on the Oracle of Omaha who rightly said that as an investor it is wise to be "Fearful when others are greedy and greedy when others are fearful." The biggest mistake investors make is to halt investments in equities when stock markets are falling and withdraw whatever corpus has been created as soon as stock markets seem to have recovered. To tackle this tendency one needs to link investments to goals and not to stock market levels. While it is very important to balance out your portfolio and spread your investments across asset classes, one can look at Debt and gold as an asset class to park their investments.

Therefore, if you have future financial goals like planning for retirement, child's education, their marriage etc., you can have some exposure to equities and have a long term horizon while investing and not exiting from your investments abruptly to book quick profits in the stock market. Moreover you should consult your financial advisor to guide with your investment needs. There will be times when your fund doesn't do well, persist with your equity investment, keep the long term goal in mind and do not be swayed by short term views and opinions which keep changing with the hour.

So while Brexit may or may not actually happen, we sure hope that these myths exit the minds of the Indian investor and encourage all of us to invest right. If you wish to banish these myths of investing then do write to us at [email protected] we will be happy to answer your investment related queries.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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