'Grossly exaggerating to say Rajan exit will spark outflows'

Even as global markets have been fairly unperturbed by the upcoming referendum in Britain, which will decide the country's future in the Eurozone, Udayan Mukherjee believes it is a risk the market may be underpricing.The CNBC-TV18 Consulting Editor is in London, where he is talking to a number of investors and fund managers, regarding the market outlook, global events and 'Brexit'."If you read the press here and you talk to people, they are very concerned about the kind of growing momentum over the last few days particularly that this whole Brexit campaign has assumed," he said, but added that equities were drawing comfort from betting markets, which point to a no vote.Mukherjee also spoke about other risks that the global economy faces and what an exit for incumbent Reserve Bank Governor Raghuram Rajan would mean for flows into Indian markets.Below is the transcript of Udayan Mukherjee’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Sonia: What is the investment mood like in London amongst the foreign institutional investors (FII) that you have chatted with so far? Is it much better than the last time you were there?A: The mood is a little divided at this point in time in London, because if you are in this part of the world, Brexit is dominating so much of the story out here, but the markets seem very complacent about it. I do not think any part of the market is ruffled by what might happen in just a couple of week’s time. But if you read the press and you talk to people, they are very concerned about the kind of growing momentum over the last few days particularly that this whole Brexit campaign has assumed. So, people are cognisant of the risks because this is something which the market has not priced in yet. So, in a sense, it is not in the price, it is being spoken about, the betting market in London is saying that Brexit will not happen and therefore, the financial markets are taking a lot of comfort from it yet. But, as we get closer to June 23, you will find that a little bit of edginess will begin to creep in which has not crept in already. So, there is an event ahead of us and it is an event which the market had thought that would be of little significance, at least from a emerging market point of view because it will not happen, but now the risks of that happening have certainly gone up. And to that extent, it might induce a little bit of nervousness into the market over the next 10 days or so. That is my feeling from speaking to a lot of the fund managers over the last couple of days that they are beginning to get slightly antsy about the prospect of a surprise being thrown up on June 23.Latha: Now that you are closer to the event, first let us get one thing out of the way. As emerging market investors, do you think what we may expect is a shallow correction in our markets and that should be interpreted as a buy opportunity?A: The latter I suppose, but I do not think it will be as easy as that, because as I said, it depends also on where markets are before June 23. If some amount of pricing in happens between now and then which is conceivable, then markets might not correct very significantly. But there is one view that you can take that Brexit is not very fundamental to India or the Asian space and therefore, why are we fretting about it? The bigger risk is that the world has seen a big rally in the months of February, March and April and therefore, there is an event out there which can temporarily induce a fair degree of risk off onto the table. And that might prick the bubble that we are in at this point in time. Also, whether Brexit is an isolated incident out there or it might be the start of the unravelling of the whole European Union experiment because there are countries like Italy, Sweden which are waiting on the sidelines to see what happens in Britain and maybe there will be more along those lines if Brexit were to really happen. So, I do not think it is as insignificant an event in the global context, in terms of its potential on a risk off as we think. So, it may not be a one day correction, but your question on whether that will lead to a complete unravelling of the Indian market, one would have to say no. So, it would be a buying opportunity, but whether it will be a shallow buying opportunity, that one cannot say at this point in time. That would be too complacent to determine sitting here.Latha: Let us shift to slightly longer term issues. We have seen a lot of FII money flowing in lately. In your conversations with investors in London, have you heard of dedicated India funds pumping in a lot of money or is this just tactical exchange traded fund (ETF) money, hedge fund money entering our markets?A: I spoke to a lot of dedicated India fund managers and I do not think they are getting major inflows at this point in time. Some of the bigger houses which run big India dedicated products, they are saying that they have not seen any significant change. So, one would have to suspect that it is a mix of primarily what we like to call the ETF, or the sovereign wealth fund kind of money which might have walked in – sovereign wealth funds, particularly because of the bounce back in crude oil over the last few weeks. There is an element of a tactical allocation into global emerging market (GEM) funds which the traditional GEM funds which we speak about, they would have got some money from what I hear from people or some of the fund managers. And that might have found its way into India and other neighbouring markets as well. In the case of India, fund managers here are also beginning to recognise and it has not gone unnoticed that we have had a good earnings season after a lot of time. And that has also changed the mood in India or around India quite a bit because fundamentally people are beginning to recognise that there might be some kind of an uptick finally in the earnings expectations and that is so fundamental an aspect that that might have accounted for some of the allocations that we have seen over the last few sessions.Sonia: The other big topic of conversation is whether or not Governor Rajan’s tenure gets extended. What are the Londoners saying? If it does not, would that dent investor sentiment a lot or will life just move on?A: Life will move on, but there will be disappointment. I read a white paper piece just a few days back suggesting that tens of billions of dollars will leave India if Raghuram Rajan does not get an extension. I think that is a grossly exaggerated kind of a take on that matter. There will be disappointment because all of us know that he has been an excellent RBI governor. Central banks are very important in negotiating and steering countries through the kinds of global phases that we are going through and most global investors, certainly, the ones that I have spoken to over the last few days out here are rooting for an extension for Raghuram Rajan. But I think it would be overstating the case to say that FII money would walk out by the billions. There might be small kneejerk reactions, because this is something that you do not want to see – a man who has done so well to be replaced for political reasons. That takes away a little bit of the sheen of what global investors think of the idea of India or the Indian market, but I do not think that it is something which will break the markets back. It will cause a wrinkle. It might see a bit of a kneejerk reaction for a couple of days, but I do not think it is a trend changer, as much that everybody hopes that he will be sticking around.Latha: What is your view on markets now? Are you convinced about the green shoots in earnings that we have been speaking about? We spoke about that with you last time. Would you, if you were a fund manager increase allocation?A: From the last time we spoke, my take has been that India has been improving and therefore, if you are watching India in isolation, what we were referring to as green shoots earlier and I was not convinced about those green shoots even a few months back, this earnings season is the first in many quarters which makes me much more hopeful than one has been in the past. At the end of the day, that is at the absolute fundamental. The rest is noise which dents us from time to time or lifts us from time to time, but eventually, the medium-term trend usually follows earnings and at the end of this quarter, while it is scanty evidence -- we need more evidence over the next few days, next few quarters and I know we are working on a fairly low base, but you cannot deny the fact that this quarter has been optimistic from an earnings point of view. So, that makes me very optimistic after a long time that maybe we are turning corner out here. But you will also note that the last few time we have spoken, I have been extremely cautious and sceptical about the global backdrop and that tops my list of worries as well today because there are many things which might go wrong over the next few months. We spoke about Brexit, we do not know what the US Fed will do, what kind of numbers come out of the US. China has had a very calm three months in terms of news flow and I fully expect at some point, over the next few months, that to come back to the table and then we are running into a US presidential battle. So, the next 3-4 months are pitted with one hurdle after another. Some of them may work for the market and might trigger off rallies as well, but the chances of volatility or even a correction after the kind of very spectacular rally that we have had from where we are is certainly something that cannot be ruled out. So, the India piece is looking better, I am feeling more optimistic and confident about it, the global piece is still looking shaky and pitted with a few land mines out there, and that might be the source for the correction sometime this summer and even a meaningful correction. We will talk again depending on what triggers off this correction, because that is very important. But the phrase that you used earlier, would that global selloff be a buying opportunity in India, with the evidence of what we have seen in this earnings season, one would veer towards saying more a yes than no.