Opportunities in Brexit:Oversold companies may revert

Event

In today’s referendum, the United Kingdom voted to leave the EuropeanUnion by a narrow margin and the effects of such a decision have alreadybeen felt by markets around the world.

All major European currencies weakened against the US dollar and stockmarkets across Asia dropped as a result.

The Euro zone is an important trading partner for many firms in Asia andtoday many companies’ share price have taken a pounding.

There are significant opportunities here to identify companies that (1) havebeen oversold and (2) have under-reacted (so may drop in the near term).

Impact

It is difficult to estimate the extent of the impact on individual stocks, but froma purely technical perspective we estimate the sensitivity of Asian stocks thatare most exposed to Europe using the share price movement vs. changes tothe Euro.

The exposure to Europe is determined using the reported geographic salesand the currency sensitivity is estimated using the historical correlationbetween weekly share price returns in local currency of each stock and thechanges in the value of the local currency to the Euro.