The after-shocks from Britain’s decision to leave the European Union should result in only a short-term impact on emerging market equities and within the pack, said Ian Hui,global market strategist, JP Morgan Asset Management. In an interview to Sanam Mirchandani , Hong Kong-based Hui said India will see a very low impact of Brexit — in growth terms — and its equity market will be one of the better performers among Asian peers this year — thanks to its strong growth prospects. Edited excerpts:
What would be the immediate global repercussions of Brexit in the near term? Can it to be compared to the Lehman bankruptcy situation? It can be compared in the sense that the global financial markets have entered into a risk-off mode. The pound has fallen significantly and most Asian markets also reacted negatively to the result. In the short term, at the very least, the markets will take this negatively.
If other Euro nations also move towards exiting the zone, how will global financial markets react? That will also be taken quite negatively. Britain’s exit negotiations with the EU might still take a while to come to the final result. It might give courage to other countries that are seeing a rise in euro scepticism to have their own referendum and look at the possibility of leaving.
How long do you expect the risk-off sentiment in emerging markets to last? It is just a short-term uncertainty or risk-off sentiment at the moment. Hopefully, the market should come down and return its focus back to economic fundamentals. A lot of it is negative sentiment, so I do think it will last a couple of days at least.
What does this mean for Indian markets given that foreign investors are already overweight on India? The sell-off should result in only a shortterm impact on emerging markets, including India. India should be less affected from the fallout post Brexit issue as it doesn’t have huge ties to Britain or the European Union in the way of exports or other sectors. If we look at the actual numbers, exports from India to Europe as a percentage of GDP is around 2.1%. It is quite low compared to other Asian markets. India will be among the less-affected in growth terms. India’s growth prospects look strong. There have been some disappointments from the government in pushing forward some reforms in the past, but recent activities like bankruptcy reforms show there are still some positives on the Indian reforms side.
What is your view on the rupee against the dollar given the global currency volatility and the upcoming redemption of $20 billion worth of FCNR deposits in the coming months? The rupee may weaken slightly, especially with the weakness in assets across Europe, the US dollar might strengthen against other currencies. But I don’t see a steep fall in the rupee given the fiscal discipline of the government.
Do you expect another round of quantitative easing from the US Federal Reserve or similar monetary stimulus programmes from other major central banks ? I don’t think that the US Fed would change its tightening bias. Brexit made them hold off from raising rates earlier but it will not lead to a 180 degree turnaround in their policy to start easing again or moving away from tightening. Brexit may cause the Bank of England to move into a more easy monetary policy position. For the rest of Asia, most of the action we have seen from central banks recently was either easing or staying neutral, and it will probably remain the same. The weak or sluggish growth that we have seen probably means that most of the Asian banks are still on an easing policy bias.
Do you see India outperforming its Asian peers in 2016? India will be one of the better performers in Asia. In the near term though it will not be significantly impacted by what happened in Europe, the general risk-off sentiment from this unexpected shock will cause it to fall along with Asian markets.
What is your investment strategy for India? What is your outlook on stocks with high exposure to the UK or EU? In India, I would go with sectors that will benefit from government reforms. Companies with exposure to UK or Europe may see some more volatility. Nobody is still quite sure how the UK-EU negotiations will pan out. There is no clarity on how easy it will be for Indian companies who have set up operations in UK to get access to European markets and how their operations will go on going forward.