While stock markets are pricing in the event, there won't be a major fall in the equity markets as much as will be in the currency market, says Manish Singh, Chief Strategist & Head of Investments, Crossbridge Capital LLP.
On the contrary, a sound growth story in the US and European Union will be the key for deciding markets' trajectory, he told CNBC-TV18.
He believes Britain will most likely opt to remain in the European Union and that the sterling dollar will rise sharply if that happens.
While stock markets are pricing in an exit and will likely not be majorly affected, the Brexit impact will be seen in the currency market, he said.
Below is the verbatim transcript of Manish Singh\\'s interview with Reema Tendulkar and Nigel D’Souza on CNBC-TV18.
Reema: We have already lost about 7-8 percent on the European markets since the start of this month on account of Brexit fears. Do you see more flight to safety, more capital getting pulled out of the global equity markets in the run up to June 23 event?
A: Yes, so I think there will be a bit of risk aversion and of course let see what happens, what is the outcome, but I do not think it will be as big an event as it is being made out to be. To me the big event is still going to be, are we going to see a good growth story in US or in Europe. Those to me are a bigger concern because remember even if UK was to vote to go out of the European Union (EU) on June 23 nothing changes on June 24. This is not a pre-defined agenda on which UK is voting that all the discussions have happened. All the discussions happened after the vote. So, I would say that this will be long drawn out process. My concern is still on the growth and inflation outlook.
Nigel: So you believe then that the global markets have already factored in the worst. We have already seen a sharp correction in the European market for the month itself, they are down between 7-8 percent of the CAC as well as the DAX, so FTSE is well down close to around 4.5-5 percent and also on Twitter you carried a poll a few days ago and most participants believe that yes Brexit is going to take place, so are you factoring in that kind of a scenario. We had an expert this morning who told us that, he doesn’t believe that Brexit actually is going to happen?
A: True, I think that if you go by my Twitter poll you might be misled because I am for Brexit, so a lot of my followers are of that nature, so I would caveat that. My personal belief is that even though I think Brexit is a good thing for UK, it may not happen because what happens in these polls is that the status quo, the people who are looking for status quo when they go and vote eventually they decide to remain or they decide to vote for the status quo. So, my base case scenario still is that it will be a close poll and the UK will remain. I will be surprised if it goes for a Brexit or that happens, but as I mentioned that even if that happen there is a long negotiation process.
Now to your point about have stock market priced in, stock markets are pricing in, so there is a lot of cash waiting outside. So, in either scenario if a Brexit happens then you will see a sharp fall in Sterling. If it doesn’t happen you will see a sharp rise in Sterling. Sterling-dollar could go to 125 if there is a Brexit, it could go back to 150 if there is no Brexit. I think that market will be surprised because if you look at the market and smart money on betting they don’t expect the Brexit to happen. If it was to happen you will have a surprise and some of it is priced in not all.
Reema: You gave us a big wild range on the Sterling in case there is a Brexit and in case there is not. What about on the equity markets if there is a Brexit how would the selloff be, would we see a 10 percent fall, would it be in excess of that and if there is a remain vote, then what could be the recovery that we are likely to see?
A: I don’t see you will see a big fall on the equity market like 10 percent number, I think that will be a major fall and remember just now we had a Fed meeting yesterday and the Fed statements came out and as usual as we have seen in last few meetings Fed went ahead and lower rate rise expectation and is calming the market. For me that is a very positive in terms of risk positive i.e. you are not seeing Fed really running away, so I do not see a major fall. All the risk will be going through the FX market because clearly it is a larger market and much more leverage market. You are going to see a play in the FX market.
On equity market I think there will be some corrections, but there will be lot of buying of as well because ultimately this Brexit vote is not about not trading, it is just about having a better control in doing business. So, it’s completely different to we are not going to trade, no internationalisation, globalisation. It is not that story. If you see what it is being made out to by many people who want to stay. So, I would say that the surprise factor will be more on the FX market, but not as much on the equity market. Of course, you will have some selloff, but not a great deal or big selloff.
Nigel: Suppose if we do see a Brexit, suppose it really does take place, we get a bit of a dip on the Nifty, would you be a buyer into the Nifty as those levels and also could you give us maybe a yearend target of the Nifty. Where do you see us going, we are at 8,100 as we speak?
A: I will say that you should be a buyer and as I pointed out is that I don’t see that as a major catastrophic event. In fact, even if the currency was to weaken in UK, people will use that as a buying opportunity and looking into India you have seen Fed is now likely going to increase only once, so the strong dollar story is not there which is why you saw a huge rally in Japanese yen this morning. So that is very positive for emerging markets and a strong dollar and that should help the Indian market as well. So yes you should be a buyer and you should see an upside and it is difficult to put a number because there are many factors that are coming forward, but you can just build your portfolio and you should use any selloff as an opportunity to buy.