KUALA LUMPUR (June 27): With approximately 10% of Malaysia's exports going to the European Union (EU) and of this, 12% going to the United Kingdom (UK), implications of Brexit will be far-reaching and add another layer of risk, said RHB Research Sdn Bhd.

"With 10.1% of Malaysia's exports going to the EU and UK, this will be another negative for exports and exporters," said RHB.

In a strategy note today, the research house said it expects a prolonged period of volatility and uncertainty for markets, depending on how events unfold.

It said sentiment will remain dampened, with investors likely turning "risk off".

Rising aversion to the UK and EU markets could see capital outflows and flight to emerging markets (EM) and US equities and bonds, it added.

The research house said a shift out of the British pound and euro to safe haven currencies like the US dollar and Japanese yen (JPY) will be negative for corporations with significant physical assets and businesses in the UK and Europe.

RHB Research explained that a spike in the JPY will be negative for corporations with JPY-denominated debt, adding that knock-on effect of Brexit could influence the US Federal Open Market Committee (US FOMC) on the timing and pace of future hikes.

However, it said that while there is the propensity for the situation to further unravel, the full implications will take time to unfold due to the unprecedented nature of this development.

Besides that, the advent of Brexit does not alter RHB Research's view that investors need to adopt a trading stance.

The research house said that despite the absence of earnings growth and rising macroeconomic risks, market valuations are being supported by expectations of continued stimulus by global policy makers, if required.

This is helped by the participation of domestic government-linked companies (GLC)-linked funds, it added.

"The FBM KLCI is likely to trade in the 1,590–1,700 points range. We see a preference for quality names and stocks with resilient yield characteristics. Investors should gradually accumulate on any intermittent market selldown," it said.