Research & Knowledge Management

Strategy & Portfolio Investment

27 June 2016

FOR INTERNAL CIRCULATION ONLY

UK Referendum Vote &

Implications on Global Markets

1

UK Referendum: Final Results

“Leave” votes amounted to 17.41 million or at 51.9% of total votes vs. “Remain” votes were at 16.141 million or

at 48.1%.

Source: Bloomberg

Final results 48.1% / 51.9%

2

While investment community and politicians are still coming to terms with the result of the EU referendum vote, Moody’s

revised downward the outlook of UK’s long-term issuer and debt ratings to negative from stable, premised on

expectations that medium-term economic growth would be weaker.

A negative outlook reflects the danger of the sovereign credit rating being downgraded in the next 6 to 12 months.

Moody’s cut Britain’s AAA rating three years ago.

S&P had earlier warned that it is likely to downgrade Britain’s sovereign credit rating from the current AAA-rating if

the UK voted to exit the EU.

The referendum decision will set in motion a formal withdrawal process that will likely take two years to conclude (under the

Lisbon Treaty provisions). The UK will have to renegotiate its trade relations with the EU, resulting in heightened uncertainty,

diminished confidence and lower spending and investment.

In the event that the country would not be able to secure a favorable alternative trade agreement with the EU and

other countries, growth prospects would be materially weaker than currently anticipated.

Moody’s revised the outlook of UK sovereign to negative from

stable, rating remains at Aa1

UK’s GDP Growth Trend (2000-2017f)

-5

-4

-3

-2

-1

0

1

2

3

4

90 92 94 96 98 00 02 04 06 08 10 12 14 16f

GDP growth is expected at

1.3% in 2016 and 1.1% in

2017, down from earlier

expectations of 1.8% and

2.1% respectively, driven by

lower investment & private

consumption.

Source: Bloomberg, Samruk Kazyna

3

UK’s growth prospects in the medium-term depend crucially on what trade agreement the UK government reaches with the

EU, as well as on the UK government’s trade policies more generally.

The EU is the UK’s biggest trading partner, approximately 48% of exports are destined for EU countries, and similarly

48% of FDI in the UK originating from the EU. It takes time for the UK to redirect trade to other regions in order to

compensate for lower trade with the EU.

In the absence of a trade agreement that preserves core elements of the UK’s current access to the Single Market, UK’s

GDP growth would be materially lower. Barriers to trade will not only result in lower trade but also negatively impact

competition, innovation and productivity.

In addition, the UK authorities will have to renegotiate the UK’s trade relations with a multitude of other countries, as it will

no longer automatically benefit from the more than 30 preferential trade agreements that the EU has concluded,

covering nearly 60 countries.

The EU is UK’s major trading partner and a significant source of

FDI

UK’s Export Destination (2015) FDI in the UK (2014)

EU48%

EU48%

N America18%

Asia Pac16%

Middle East7%

E&W Europe6%

Others5%

Source: Bloomberg

4

While the UK’s institutional framework is considered to be strong (i.e. the rule of law, a strong fiscal framework, highly

credible central bank), policy predictability and effectiveness of economic policy-making might somehow diminished

as a consequence of the vote.

Apart from having to negotiate the UK’s departure from the EU, the government would likely also aim to embark on

significant changes to the country’s immigration policy and possibly regulatory policies, a challenging set of

economic policy decisions under a new government leadership following the resignation of Prime Minister Cameron.

On the fiscal front, Moody’s warned that the UK’s public finances are likely to be weaker than previously projected as

the negative impact from lower economic growth is expected outweigh savings from the UK no longer having to

contribute to the EU budget.

The UK government has one of the largest deficits compared to its developed peers (general government debt ratio of

>89% of GDP in 2015), and lower growth will further complicate the implementation of multi-year fiscal consolidation plan.

Uncertainties in policy predictability & effectiveness of

economic policy-making, public finances expected to be weaker

UK 5Y USD CDS Intraday 24 June 2016 UK 5Y USD CDS (2015-2016YTD)

Source: Bloomberg

UK’s 5Y USD CDS widened by

8.6bps to 44.716bps on 24 June

2016, reflecting heightened

sovereign credit risk

5

UK’s financial markets will remain volatile

GBP-USD Intraday 24 June 2016FTSE 100 Index (2015-2016YTD)

GBP-USD Trend (2015-2016YTD) Gilt 10Y Yield Trend (2015-2016YTD)

Source: Bloomberg

Pound fell 8.1% against USD to

close at 1.3679 on 24 June 2016,

the lowest level since 1985

The 10Y gilt yield narrowed by

28.9bps on the day to close at

1.086% on 24 June 2016

FTSE100 index fell 3.2% to close at

6,138.69 points on 24 June 2016,

volumes surged more than four-folds

6

Bank of England Governor Mark Carney acknowledged that there will inevitably be a period of uncertainty, however

there will be no immediate change to the UK relationship with the EU. Some market and economic volatility are

expected and the central bank is prepared for these, to ensure any effect on jobs and growth is not magnified.

The BOE will make GBP250bln of additional funds available through its normal market operations to stabilize

markets, if needed, and will not hesitate to take additional measures required to address any market volatility.

The central bank highlighted that UK banks are more resilient today than in 2008, with much bigger buffers against

losses (ten times more capital) and more liquid assets. Prior to the referendum vote, banks were instructed to stockpile

cash and ensure ATMs and websites are working in anticipation of large withdrawals.

Reiterating a similar sentiment, G7 issued a statement of its own declaring the UK’s economy and financial system were

resilient, that they still sought to prevent disorderly movements in exchange rates and were ready to pump money into the

financial system to support the functioning of markets.

Key central banks (US Federal Reserve, European Central Bank, People Bank of China) stand ready to deploy

existing swap lines to make liquidity available to other central banks.

Coordinated efforts by key central banks to soothe markets

Source: Bloomberg

UK 1-Month Libor (2015-2016YTD) UK 1-Year Swap Rate (2015-2016YTD)

7

London’s role as a key global financial center and trading of euro-denominated assets is expected to be reduced.

Financial services companies with licenses to operate in Britain can automatically offers it products and services throughout

the EU, reducing compliance and operational costs. Britain could now lose that critical access, making it less attractive to

investing countries.

Asia Pacific companies spent more than USD1.7 billion on greenfield UK wholesale financial services investments

in 2011-2015, with China being the largest average investor.

The referendum vote threatens to redefine Britain’s growing financial services relationship with China, which has agreed to a

number of joint projects as part of the China-UK Economic and Financial Dialogue program to deepen economic ties

between the two countries, based largely on the UK’s membership of the EU and its function as a gateway to the EU single

market.

Last year, the British & Chinese governments have announced plans to launch a London-Shanghai equity trading link, a

mutual recognition scheme for distributing funds products, cooperation on cross-listing exchange products, measures to

cement London as yuan clearing hub, and a commitment on the part of several Chinese financial firms to set up bases in

London – in addition to strategic Chinese infrastructure investments.

Therefore, businesses set up in the UK to serve the entire EU market from within will have to reconsider their

positions. Manufacturers will have to consider how to readjust their structure of production.

Several Asian and European companies with operations in the UK have stated they would reassess their investments in the

wake of the vote results. Some companies might respond by diversifying global production capability, while others might

consider moving their UK offices to continental Europe.

Business that depend on their ability to employ European nationals would have to reshape their operations.

Such business decisions will not have to be made at once, however these decisions will adversely affect investments in

the UK moving forward.

London’s role being a key global financial center with access to

the EU single market is expected to be reduced

8

Brexit impacts the US and its monetary policy

The US manufacturing sector which

relies heavily on trade, it fell into a 5-

month recession last year triggered by

strong USD.

Manufacturing lost a net 39,000 jobs in

the past 12 months.

Concerns have been raised about referedums

from France, Italy and Netherlands. From

within the UK, Scotland is planning to submit

a second referendum to leave the UK.

The EU is a major trade partner with China

and the US. If it breaks, it could lead to global

uncertainty and many trade deals would need

to be restructured.

Volatility in global markets

affect sentiments, which

will adversely impact

consumer spending &

business investments.

The Fed Chair cited Brexit as one

of the key factors in determining its

rate hike decision.

If market volatility continues, US

consumer pare back spending, and

employers slow down hiring even

more, the Fed could be looking at

zero rate hike in 2016.

Concerns that the EU

may be falling apart

Volatile markets

slow down the

engine of US

growth

Brexit triggers a

strong USD, which

hurts US trade

The Fed may have

to rewrite its rate

hike playbook

9

On 24 June 2016, USD-KZT exchange rate closed lower by 1.69% to 340 as the USD strengthened vs. most currencies (except for JPY),

while the KZ stock exchange retreated 2.54% to 997.81 points. Global oil prices fell by 2.5% - Brent dropped to USD48.41pb, WTI closed at

USD47.64pb.

In Europe, the ECB’s accommodative monetary policy, low energy prices, diminishing needs of private sector deleveraging and labor market

improvements have supported domestic demand-led economic recovery this year. Despite these, GDP growth remains moderate and

anticipated at 1.5% in 2016 and 1.6% in 2017. Thus, any significant slowdown to Europe post the UK’s departure would affect the euro, oil

price and imports demand.

The European Union (27) remains Kazakhstan’s largest trading partner, accounting for 52.2% of KZ’s exports in 2015. Trailing behind

was China 11.7% and Russia 9.4%. Muted economic growth, coupled with the depreciation of the effective exchange rate of the euro

would negatively impact the demand for Kazakhstan’s exports.

There has been a strong negative correlation between the USD and oil prices. Prolonged uncertainties post the UK referendum could see the

USD strengthen further on investors flight to safe-havens, putting downward pressure on oil prices. The potential double whammy of slower

exports to Europe, coupled with lower oil prices would in turn affect KZ oil revenue receipts and current account balances further. KZ

experienced current account deficit in the past five quarters, this trend is expected to continue in 2016, with CAD expected at 5.0% of GDP.

London may lose its position as a leading financial center to European markets e.g. Paris, and also its function as a gateway to the EU single

market. Currently, there 17 KZ companies listed in London, this could have implication on future listing considerations for KZ companies.

Potential impact on Kazakhstan

Source: Bloomberg, Ministry of Economy, Samruk Kazyna

Destination of KZ Goods Exports (2015) KZ Current Account Balance, USD mln (1Q14-1Q16)

52.20%

11.74%

9.40%

7.80%

5.69%

4.37%8.80%

European union (27)

China

Russia

CIS except Russia

Switzerland

Turkey

Other-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

10

Global financial markets: equities & fixed income

Global Sovereign Bonds 10Y Yield Intraday

Change, bps, 24 June 2016

Global Equity Markets Intraday Change, %

24 June 2016

Source: Bloomberg, Samruk Kazyna

-14 -12 -10 -8 -6 -4 -2 0

Singapore FTSE

Kazakhstan KASE

Hong Kong HIS

S Korea KOSPI

FTSE 100

Australia ASX 200

S&P 500

Iceland OMX

Netherlands AEX

Belgium 20

Portugal PSI 20

Austrian ATX

Ireland ISEQ

Japan Nikkei

France CAC 40

Euro Stoxx

Italy FTSE

Spain IBEX

Greece ASE

-30 -20 -10 0 10 20 30 40 50 60 70 80

UK

Australia

NZ

US

Germany

Canada

Switzerland

S Korea

Netherlands

France

Japan

Mexico

Brazil

Colombia

Italy

Spain

Portugal

Greece

11

Global financial markets: currencies & commodities

Global Commodities Intraday Change, %

24 June 2016

Global Currencies Intraday Change, %

24 June 2016

Source: Bloomberg, Samruk Kazyna

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4

GBP

ZAR

PLN

SEK

HUF

TRY

Euro

DKK

NOK

RUB

AUD

CAD

NZD

CHF

KZT

SGD

CNY

HKD

JPY

-5 -4 -3 -2 -1 0 1 2 3 4 5

Heating oil

Coffee

Corn

Palladium

Natural gas

Brent

WTI

Nickel LME

Soybeans

Cotton NYBB

Lead LME

Wheat

Aluminium SHF

Sugar

Copper SHF

Iron ore SGX

Platinum

Silver

Gold

12

Global financial markets: credit default swaps

Credit Default Swaps Intraday Change, %

24 June 2016

Source: Bloomberg, Samruk Kazyna

0 5 10 15 20 25 30 35 40

Estonia

Germany

Japan

Switzerland

Norway

Finland

UK

China

Hong Kong

Austria

France

Russia

Kazakhstan

Mexico

Romania

Hungary

Spain

Italy

Markit Itraxx Europe CDS (2015-2016YTD)

Markit Itraxx Japan CDS (2015-2016YTD)

Markit Itraxx EM CDS (2015-2016YTD)

13

THANK YOU