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'India in good spot but we can't take it for granted'

by June 25, 2016 General

In a chat with ET Now, Ajay Bagga, Market Expert, says big domestic consumption economies like Indonesia, Philippines, India and India will be uneffected by Brexit.

ET Now: Quite a shocker there for the markets, the big question is, is this it, are we seeing the Dow plunge 500 points and the S&P open at lowest levels since 1986? Could we see a reverberation of Friday’s shock come in on Monday as well? Ajay Bagga: The impact is at three levels. One is the immediate impact which we saw on Friday. The second is the short term impact, which is anybody’s guess. Hopefully, a lot of central bank interventions are taking place. The Bank of England came in and said was releasing about 250 billion pounds of liquidity into the system and was ready to release as much foreign currency as needed. Immediately, ECB came in and said that we are ready to release both Euros and foreign currencies. Bank of Japan made a statement that we are watching the markets and then Fed has just released a statement that we will supply as much dollars under the existing swap and any foreign country that needs dollars will be supplied by us. So central banks have converged, G-7 has had a telephonic conversation already.

We are expecting that over the weekend, two or three items come up; one, China remains a very big issue. In the short term, what can happen is that China strengthens the yuan along with dollar or depreciates it. If it depreciates, all other emerging countries have to depreciate and it starts a currency war. Secondly if China does not depreciate, it already has a negative export print, it exacerbates its issues. So what we are expecting is PBOC to come in with a reserve cut and rate cut, already today it put in 140 billion yuan into the domestic market. We are expecting about 600 billion of expiries in the next 8-10 days. They will bring in a big announcement over the weekend.

We are expecting Japan to come in with a big announcement, otherwise this goes right up to 90. Remember, a) yen strengthening cuts of 65 bps on earnings on the Japanese market from the companies balance sheets. So overall, we are expecting coordinate central bank action. b) politicians are already talking, Boris Johnson has said everything is same, Cameron also said the same things will continue. European Union, obviously they are very highly irritated at the British action and so Juncker came up and said get out of here as soon as you can. But that is just petulance right now. We are expecting politicians will try to talk down the volatility. The pound reached a 30-year low…

ET Now: It was carnage, 8% is no joke. Ajay Bagga: So 1985 levels in pound. Now what does that mean? It is very good for England because it has a 6% current account deficit, one of the biggest in the developed world. But US gets about eight sectors out of 19 have more than a 6% earnings from the pound and there if you shave off 10%, you are talking of a 0.6% impact even on the US, leave aside anything else that happens. So it is very interconnected, not easy to analyse. What is easy is that we think there are lot of unknowns coming our way but the good thing is that the central banks will act in concert, US Fed rate hike is gone and that is not happening. If you see the Fed futures, they are showing July 11% chance of a rate cut, September 19% chance of a rate cut, which is not going to happen.

ET Now: At least they will not hike rates. Ajay Bagga: So no hike. Hike is now going to 2018. So no hike. On Tuesday, when the Congress asked Janet Yellen what do you have in your arsenal? You do not have any rate cuts available, she said I can do QE further, I can do a lot of change in maturities of bonds, inject liquidity. So she talked about classical central bank weapons. I am expecting some of that to come in from the Fed. Today they will analyse it. Nobody really loves equity markets. Only when bond markets start hurting they start to take note.

ET Now: But what does it really mean for India because we have had voices join in on the channel from the finance minister to the RBI governor and they are not unduly perturbed as to how it is going to impact really India. The knee-jerk reaction aside, which the RBI has said that if it is an unnatural move, unnatural volatility they are going to try and curb the currency choppiness but they are not unduly perturbed. My question is how long will this knee-jerk reaction really last for us because the world is facing a scenario which none of us in our history have ever faced or seen. Is this just the start of it all? Ajay Bagga: Absolutely. We have seen 1992, we have seen 1997. It never used to be this bad and 2008, I remember one of my childhood friends was in the executive committee of Lehman and I was talking to him on Friday and I said, “Dada what is the scene?”, he said I will be a US government servant on Monday morning and then on Sunday I saw him on CNN carrying out his bag– carton with a big guard standing next to him and he was just walking off. Now after that our generation has really got bitten. We are really afraid of giving a viewpoint because that was unexpected whatever were the reasons it is beyond today’s discussion. Now how bad does this get? There are independence parties in every single of the European 27 other countries already the French and Danish– Dutch parties have said we want a referendum. You cannot have referendum continuously and people opting out, everybody becomes a Crimea then and the whole breaks off.

ET Now: There is no European Union then? Ajay Bagga: Yes, you will balkanise the whole thing but Scotland, Northern Ireland and London voted to remain and they will say the industrial belt people, the farmers, all these people pulled us out. So there is a very big move afoot that Scotland might ask for another referendum because they have an S&P representing them already. They might ask for a referendum and say we will take European Union membership, we want for the Scots this kind of a membership. So extremely difficult to analyse, what is known is that after Lehman central banks have learned their lesson, they are not going to mess up.

ET Now: But this is a new problem? Ajay Bagga: This nobody knows. As you said…

ET Now: They know how to deal with a Lehman kind of problem but this is something completely different. So what really does it mean for India because most experts do believe that barring this knee-jerk reaction it is going to be back to tracking monsoons, who is going to take over the RBI reins post Raghuram Rajan and then back to nitty-gritties like earnings. How long could this knee-jerk reaction last for us? Ajay Bagga: See India is one of the most attractive countries. Today also a lot of brokerages put out reports, across Asia, Vietnam gets hit the most. Vietnam has 2.5% of it GDP linked to the UK. That linkage is very low for the rest of Asia. In case of India, it is extremely low. So we are okay. Then second order hit will be to European Union. Even there we are okay, China still has 3% link to the European Union we are low because we are a low exporting country, that saves us, we are a domestic country. So two or three issues will be critical; how fast can you ramp up domestic consumption as your exports will not grow, for the world there will be trade barriers, there will be currency barriers. Trade in commodities, raw materials will go down. Shipping, which was recovering, will be hit. The Baltic Freight Index, a leading indicator, went down on Friday. So as trade, exports go down, Japan, Korea, Taiwan, Malaysia, Thailand and China will be hit.

Singapore and Hong Kong has trans-shipment hubs and they will be affected,

What is good is that big domestic consumption economies like Indonesia, Philippines, India and India will be uneffected. Latin America, Brazil, will be very badly hit. Argentina was just emerging. Australia will be badly hit as commodities trade will go down.

So India is in a good spot but we cannot take it for granted. So what will the market will look at? GST. Logistics stocks were gaining on a bad day like Friday GST is very critical, good monsoon is critical. I think these two things, then structural reforms that the government has to do.

Dr Rajan spoke on your channel about Make For India, I think it is a pity we are losing somebody like him or if they can get him in an advisory role also it would be good. But overall we need to get structural reforms, only then the foreigners will come in. It is not that that is the only thing.

Fourth thing going for India is that we are in the interest rate cycle, we have scope to cut rates more because commodity prices will go down further. Global deflation will come via China into every country. So WPI which was just limping to positive is going to go negative in another three months from now. So you have a chance to cut rates. I think if China cuts rates now, RBA, the Australian bank will cut very shortly. Bank of England has already said before Brexit that there will be a rate cut. I am expecting over the weekend or at most across next week.

When everybody is trying to depreciate their currencies that is a good time for us to come in and reduce our rates. I do not know if it will happen. I think inter policy, Dr Rajan can really bring in a rate cut. That will enthuse the market. So overall, India domestic consumption, low export dependence, strong exports to non-British companies should help us. Having said that, where we do lose out is 45% of our earnings are now non-Indian because of the big companies which we went and bought out plus our markets. So that is going to impact. We cannot take it for granted and then the political economic situations, structural reforms are very critical, everybody will be on overdrive to try and attract that foreign dollar. So we need to do that. Having said that inherently we have a lot of things going.

ET Now: So keep your buying list ready for when this dust settles down? Ajay Bagga: Absolutely.