Even if Britain remains, Rajan effect to impact India: Mecklai

The Brits will vote today to decide whether they will remain within the European Union or not. It's definitely the biggest question of the year and the verdict could go either ways.The poll of polls gives the 'remain camp' a razor thin lead of just one percent over the 'leave' camp. So, who holds the trump card? Ironically, it's the undecided faction which is a sizeable 11 percent. It is the 48 million eligible voters, who will decide not just what happens to Britain but also whether the European Union will survive, and what happens to the euro; will the euro survive and what will all this mean to India as well.Though chances of a Brexit are really thin, currency would be the most hit at 5-20 percent and investors globally will move to safe haven currencies — yen and US Dollar— or gold if at all Britain leaves the European Union, said Jeff Chowdhry, Portfolio Manager at LGM Investments. Not just this, Britain leaving the European Union will trigger a chain-effect making other EU members to reconsider their Democratic right, he told CNBC-TV18.However, he believes the Indian equity markets may suffer a downside risk only for a couple of days because of the surprise Brexit gets and the risk-off environment emerging markets would be in.On the contrary there could be a 2-5 percent relief rally in a scenario where Britain chooses to remain in the European Union (EU), Chowdhry added.  In an event of Brexit, gold will be key and may cross USD 1300 an ounce, said Jamal Mecklai, CEO, Mecklai Financial Services. Even if it is a remain vote, the Rajan effect will still post a downward pressure, he said.Political uncertainity will trigger market volatility. Sterling will be hammered really hard, said Jane Foley, Rabobank International. "There will be a movement into risky assets immediately; stock markets will move higher, particularly emerging markets in an immediate aftermath of a remain vote."Below is the transcript of Jeff Chowdhry, Jane Foley and Jamal Mecklai\\'s interview with CNBC-TV18\\'s Latha Venkatesh.Q: What is the sense you are getting despite the poll of polls indicating a razor thin majority for the remain camp, is there still that small chance that it might end up with the victory for the leave guys?Foley: There is probably more than a small chance. In fact if you look at some of the opinion polls, they are suggesting this could be really quite close. In fact if you also look at the bookies, the bookies also are suggesting that it should be quite clear win for the remain camp but of course bookies have also disclosed that what we are seeing is the weight of the money is coming from London on the remain camp. In fact if you look at the split and breakdown of the number of bets that have been placed outside of London, the greatest volume albeit for smaller amounts is actually for the leave campaign. Meaning that there is a skew in these odds in favour of remain. So, it really could go in both directions.What we are seeing this week is some of the relief rally coming through in asset prices, in sterling for instance we have certainly seen a massive move higher over the last couple of sessions on the anticipation that it will be remain vote. However still there is as huge amount of uncertainty out there. I think Friday could bring some serious volatility through the night on Thursday as those results come out area by area within the UK.Q: What is your sense, tomorrow do you think people will pare down positions as Jane says it is still not 100 percent that the remain guys will win. So, how do you prepare for it tomorrow? Do you think all markets already go towards risk averse assets, towards safe havens?Mecklai: Everyone will be nervous because nobody really knows what will be impact irrespective of the vote. What is more interesting is even if it is a leave clearly sterling will come down. While I think it makes sense for the UK to stay, personally I would be delighted if it were to leave because I am going on a holiday to London next month.My point is even if it is remain, the fact is it is going to be close or lets us say if it is remain and it is close, the reality is there is huge number of people in the UK who are uncomfortable with the European Union (EU). What that means politically is, it is going to be very difficult for whoever is in-charge. This is actually the story of the beast all over the place. There is a real polarisation, you are seeing it across the world. So, fundamentally what we are going to see is a rise in volatility.I think gold gives you the key. If gold crosses USD 1300 look out.Q: If the base case appears to be a wafer thin win for the remain guys, it still indicates that there is a lot of dissatisfaction out there in Britain and now the Danes and the Dutch are also asking, do you think that there would be a big flight to risk assets, could we see a huge relief rally or not quite?Foley: I would agree with the position that there is going to be still a lot of volatility. In fact if you look at just the UK to start off with, it is quite likely even if it is a narrow win in favour of the remain, that Prime Minster Cameroon\\'s job is looking very questionable. So, we have political uncertainty, we have got uncertainty about who can be the leadership of the UK government. So, that is one degree of uncertainty. However if we shift the focus to Europe, I think what the Brexit campaign in UK has done is really focused a lot of attention on the cracks that are quite apparent in many different countries. For instance one survey done last week suggests dissatisfaction with the EU. It is greater in France than it is in the UK. We have dissatisfaction, some questions about the position of Danish people within the referendum particularly if there is a Brexit. Sweden there is some scepticism, even in Italy there is some scepticism too. We have some voter dissatisfaction, years of austerity for instance, low wage rises, all of this leading to this position where people are already moving away from centrist politicians towards the left wing, towards the right wing and I do think that amongst all these protest votes, it is a lot of anti-EU sentiment which is really manifesting.So, we have a lot of volatility in politics in Europe and that is before you try and work out what the impact of that will be on the economies.Q: What are the goalposts for the Indian Rupee itself, in case of smooth remain vote what happens to the rupee and if it is indeed a leave vote?Mecklai: If it is remain vote what we will see is still the Rajan’s effect, so there will be little bit a downward pressure. There may be a little relieves that from people unwinding nervous positions. Goalpost is very hard to say. If there is a leave yes the pressure will be more, but I think really the point is we got our special event, which is that Dr Rajan left, so probably RBI will really pullout all the stops to prevent any major decline right now.Q: The Pound, what's the goalpost, if its leave or if its remain?Foley: We have seen already some of the reliefs early already this week, so scope for upside certainly on relief if there is one immediately, but that is relatively limited I am looking at 150 area for cable, but if there is a leave vote, we are in for Sterling being hammered really quite hard, I am looking for drop maybe as low as something like 126 on cable as the uncertainty pans out and as people really don’t know what will happen either in UK politically and then maybe in Europe to.Q: Where will smart money go if it is remain vote? Do you see it coming to Europe or do you see it now going elsewhere?Foley: I think if there is remain vote there will be a certain activity in the UK. If you look at business surveys over the last few months they have been down. If you look at areas such as commercial property even more residential property we have seen this market impacted, so there will be money coming back into the UK immediately. It will be very difficult to work out beyond underlying trend.Q: I meant globally where will smart money go?Foley: There will be a movement into risky assets immediately, so we will look at stock markets moving higher, emerging markets will perform quite well too, if that would be on immediate aftermath of remain vote, but as the dust settle as people do see that there has been a legacy of this Brexit campaign on politics in Europe, we will have volatility, so don’t think there is going to be strong sustained movements into risky assets necessarily.Q: What is your gut as you get into this event? Does it look like after all the even-steven poll of polls it is going to be 'remain'? Chowdhry: Yes, it looks like it is a 'remain'. You are right that the polls seem to be indicating a very tight race but I think what is more important is the betting markets where people are actually putting real money rather than actually telling people what they are going to vote. The betting markets have moved very firmly in favour of remain and by almost over 70 percent. So, it looks as though the wave of money is moving towards 'remain' with less than 24 hours to go. Q: For the moment let me just assume that the odds also once in a blue moon could go wrong. If that indeed happens, what immediately do you think the world is staring at, at probably 8:00 AM London time or GMT, would it be a deep gash on the pound, would even the euro face reverses, just assume it is a ‘leave’ vote at 8:00 AM GMT on Friday.Chowdhry: In simple terms what would take a hit would be the currency, the pound, that would go down 5-10 percent easily. The stock market, similar sort of magnitude, the UK stock market. Europe, yes, because I think it will cause not only problems as far as UK’s membership but also cause a chain reaction in terms of what other countries may do.I was reading something last week which said that if they had a vote in Germany today, the majority would want to leave as well. So, I think it would cause a sort of a ripple effect across both European stock markets and the European currency and people would naturally move into the yen or gold or US dollar. Q: You would expect even in emerging markets (EMs) in far away India to get impacted by this risk aversion? Chowdhry: I think in the short-term and short-term means just a couple of days, I think yes because it would definitely be a surprise, one. Secondly, it would mean risk-off and in a risk-off environment, EMs including India would be affected on sort of a short-term basis. Q: Now let me come to the possibility that it remains a ‘remain’ vote. If that is the case, do you think you will see a very big jump in risk assets; would you see both euro and pound but risk assets all over the world having a huge knee-jerk relief rally? Chowdhry: Huge is probably a bit too much to say. I think there would be a relief rally. Again, not of the same magnitude as if it was a ‘leave’ vote, so, I think again sterling, UK stock market, European stock market and euro would probably rally a bit, maybe of the order of sort of 2-5 percent but I don’t think of the same order. I think also the markets which have really haven’t focused on what the magnitude of the ‘remain’ vote is, if it is very tight, let us say it is 52 and 48, there may be some question marks about David Cameron and his leadership of the government. Obviously if there is a big ‘remain’ vote, let us say 60 and 40, then that would be less of an issue. So, we also not just have to look at the level of ‘remain’ vote if it is ‘remain’ but also what the magnitude of the win is as well.Q: Will you even if it is remain vote witnessed even the Danes and the Dutch asking for referendum. So do you think the EU is kind of going to remain shaken for the next several weeks and months?Chowdhry: The simple answer to that is yes and I think Britain in this sense let the way, but what it also has done is in France and in Netherlands and Italy as well and not yet in Germany, but it could happen in Germany. People are saying look British being given a democratic right to vote, why can’t we and so even remain vote for the UK doesn’t put the issue as it will off the agenda for the rest of Europe.Q: If I look at it from an Indian standpoint, we have actually seen a decent amount of foreign flows coming in ever since the Indian budget day. Just a day of jitter when Raghuram Rajan decided to leave the Reserve Bank on September 4. Do you think that foreign monies continue to come to emerging markets more particularly to India starting say Friday or Monday?Chowdhry: Well, maybe not in Friday and Monday that's probably too short term to say that, but as things settled down post Friday, post Monday and let assume for the purposes of the discussion it is a remain, what will then happen is to say right okay, let’s go back to the real world. We had Brexit for last 2-3 months the real world is though the US economy is not particularly robust, which is why interest rates are likely to stay low as is the case in Europe, as in the case of UK and emerging markets and in parts are in good shape India is definitely in good shape as you know it is our biggest holding weighting in our emerging markets portfolio. China is still recovering, so I think overall net-net emerging market incrementally will get some money coming into it. If for no other reason that the rest of the world doesn’t look in really good shape as economically is concerned. Q: Tell us is India attractive now, would you worry a bit that there is a change of guard at the central bank. What are you picking up in India and are you picking right now?Chowdhry: We have been long India as you know for quite a long time. Our focus is tend to be on financials and the first moving consumer goods, so the same old names which we have liked for a while HDFC Bank, Yes Bank amongst the financials ICICI Bank, ITC these types of companies, Hindustan Unilever these are companies we believe whether it is Brexit, no Brexit, whether short term or not these are companies that we like to own for the long term and I think one thing I should emphasise here these are not just great Indian companies, they are just great world class companies. We compare these types of companies with all of the companies we look at emerging markets and even developed market companies and their strategy and their management is right up there with the best in the world.