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Last Updated : Jun 24, 2016 08:07 PM IST | Source: CNBC-TV18

Brexit, China woes could tip markets into a recession: Udayan

While 2008‘s Lehman was a financial problem, Brexit will be an economical and political issue and is likely to be more dangerous. It can have serious ramifications over the next 2-3 years, says CNBC-TV18‘s Consulting Editor Udayan Mukherjee.

Volatility in commodities and markets all over has increased with UK votes tipping towards a 'leave' for the UK. The pound has lost 10 percent already.

“It is bad news,” says CNBC-TV18’s Consulting Editor Udayan Mukherjee. Brexit, he says, will not be a one-time issue, but will impact markets over the medium-term.

If the UK leaves, other countries in the EU too might follow the lead. “When the big boy goes, a lot of small boys will go tagging along,” he says. Continuing issues in China and the Brexit could drive the markets towards a recession.

While 2008’s Lehman was a financial problem, Brexit will be an economical and political issue and is likely to be more dangerous. It can have serious ramifications over the next 2-3 years.

However, Mukherjee advises traders to remain calm in India. “Not a good day to sell-off in panic,” he says, adding that once European markets open today in teh afternoon, a sense of how bad things could be will come through.

While the magnitude of will not be much in near-term, but a gradual drift down to 7700-7800 is possible on Nifty, Mukherjee says.

Below is the verbatim transcript of Udayan Mukherjee's interview with Latha Venkatesh, Anuj Singhal and Reema Tendulkar on CNBC-TV18.

Latha: The betting guys had given the markets to understand that it will be a Remain vote, we are seeing the first gashes, pound has lost 10 percent, you must have seen all those rates, where do we go from here, is this going to be a protracted downside even for India?

A: It is bad news. The idea is not to panic this morning but try and analyse what the near-term and the medium-term impact could be. There will be a gash near-term whether it is today's 3 percent or if it loses another 3-4 percent over the next three-four days that we will see.

But I think this is not just going to be one-of event where the market impact will be just for two-three days and then we can put it behind us and move on.

This is a medium-term event that the market has to deal with because these impacts are not going to go away in the next two-three days. While we can all analyse over the next few minutes and hours and days, what the stock specific impact will be on specific sectors etc where India fits in I think the bigger takeaways are certainly global in nature because the European economy was very fragile.

The last few US numbers which have come in were also not looking table thumping bullish. Is this an event which can tip over a very fragile global economy into something more pernicious, that should be worry number one instead of getting down to the micro immediately of course the near-term impact will be determined by what happens to sentiment, which is obviously terrible and what kind of a risk-off it might propagate in most global markets.

That we will manifest itself in next two-three days but whether this event is big enough to tip global markets over into almost a recessionary kind of phase, I think it is a much bigger worry for me.

Latha: What would be the odds that we will again start talking like we spoke in January of imminent global recessions?

A: Today you don’t want to be doomsday around a day which is already bad but my sense is you cannot take an event like Brexit lightly because it has a series of potential ramifications which might unravel over the next year or two. May be we will look back in two years and think of today as the date when the whole European experiment began to unravel.

Now I remember many years back and this is one of the worst plays of trading that I remember the day Lehman Brothers collapsed and I was on air that day and we spoke to a lot of experts and almost everybody said yes it is bad news but Lehman Brothers does not even have a presence in India, so we should not worry beyond a point. 2-3 percent is fine but markets will recover and we will stabilise. Medium-term this does not affect us and you know what the impact turned out to be.

Now this is not Lehman Brothers this is United Kingdom leaving the European Union (EU) potentially sounding the end of the EU experiment. Now you tell me what could have bigger ramifications.

A financial firm going burst or a country leaving European Union and one of the big blocks of global engines of economic performance potentially going burst so I think there are serious ramifications of this. I don’t know how it will turn out; may be one year later we will think that it didn’t turn out to badly. However, today is not the day when you come out like a hero and say this has no medium-term implications we are fine it is a 3-5 percent market event which will get priced in and then we can start focusing on the Fed meeting next because Brexit is out of the way.

I don’t think Brexit is out of the way in the next one week. So, this is a medium-term problem that we have to got to deal with right now and I think the odds to answer your questions are not insignificant that this coupled with the continuing problems in China could have recessionary implications for the global economy. I hope it doesn’t come to that but is it an outcome with a zero probability I don’t have the courage to say that.

Reema: Is it possible that the contagion impact of this development on the financial markets could be as bad as what we saw in 2008 on account of Lehman Brothers and then what does it do to the medium-term upside for the equity markets? Are equity markets going to start underperforming the other asset classes and therefore if you have one year time horizon it makes sense to exit and lighten up positions in the equities?

A: It is never a good day to sell or usually not a good time to sell in panic. Today is almost like a panic kind of dip and we will see how the afternoon opens up because the news is out but I think as the European markets open up in the second half of the day you will probably sense the kind of reaction or panic that the world is waking up to today.

You have had the currencies react, you can get a sense of how bad it could be but I think the fact that last few days the most global markets were almost beginning to price in that Brexit won’t happen means that a lot will have to shaved off today.

So, the next couple of days will belong to us tagging along with the most other global markets to the fall in magnitude will certainly not be as much. We won’t fall 10 percent in one day or anything like that.

A gradual drift down to that 7,700 -7,800 kind of level which was the last big support level for the Nifty cannot be ruled out. That is 500-600 points after a 1,400 point rally in the Index that can still be digested.

As I keep saying what happens three months down, the line six months down the line because of this Brexit problem can it land us in much bigger soup than we thought we could land into? My worries are not about the next two or three days or the next 300 points on the Nifty that is a blip that can happen at any point in global market.

However, whether this mean something more dangerous and suddenly when all of us were thinking that we have put a bottom in place and now 7,500-7,600 is secured and under no circumstances will India go down below that. Will we need to really look at that hypothesis in the light of this global event?

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First Published on Jun 24, 2016 09:57 am
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