Italian referendum not a Brexit, impact will be limited: Experts

Italian Prime Minister Matteo Renzi resigned after suffering a heavy defeat in a referendum over his plan to reform the constitution. The defeat has raised questions about market stability, but analysts at UBS and JP Morgan feel that the markets will take the jitters in their stride.

Italian referendum is unlikely to have as big an impact as that from Brexit or Donald Trump’s victory in the recently-concluded US Presidential elections, Geoffrey Dennis of UBS Investment Bank told CNBC-TV18.

The Indian market specifically may not react as it has no immediate connection to the Italian Referendum, says Hartmut Issel, Head Equity & Credit for Asia Pacific and Chief Investment Officer for Weal of UBS.Strong US jobs data only adds to the view that the US Federal Reserve will raise rates now, he said, adding that global markets have already priced in a rate hike by the US Fed mid-December. He further said that UBS expects two rate hikes by the US Fed next year.

James Glassman of JPMorgan told CNBC-TV18 that Italian vote count and Renzi’s resignation was on expected lines and hence market reaction to the outcome of the referendum will be limited.Issel says the demonetisation in India will lead to some pain in the economy for the next 1-2 quarters, but the impact may not be very big. He expects India's FY17 GDP at 6 percent due to the cash crunch.Below is the verbatim transcript of Geoffrey Dennis, Hartmut Issel and James Glassman’s interview to Latha Venkatesh, Prashant Nair, Anuj Singhal and Sonia Shenoy on CNBC-TV18.Latha: What is your sense about how the financial markets are going to take it? The euro is at a 20 month low but will equities also take it on the chin?Glassman: The market certainly is going to be more uncertain about what lies ahead for Italy but the trick is Prime Minister resigned and that was frightening. The term was about as expected. My suspicion is that the president and the public will reject it resignation and he will survive and he will remain in place. So, this is really more about reform as political system and not whether the Italy will leave the union or not. So, Italy is a lot of questions about where this goes politically but it is not like the Brexit decision. So, my suspicion is that the market reaction will be very limited.Anuj: The trade in the market in the last one month has been to go long on developed markets and short emerging markets (EM), that trade started on Trump victory day. Do you see that trade having more legs now?Dennis: No, we don't really. We suspect that the EM into the developed market is pretty much on its course. The very big move occurred within the week after the results of the US elections falls into obvious reasons and at this point EM have really made some sort of bounce off the bottom. It is hardly particularly encouraging here but they have them off the bottom. And what is interesting about the Italian referendum results is the early evidence of the markets is that equity is obviously under pressure, bonds have rallied tiny bit more in the US and bonds globally rallied tiny bit more and dollar is a little firmer. What we have reacted badly to EMs recently is the sharp rise in bond yields. So, the knee jerk reaction here is that you buy bonds, you sell European equities on the back of this, that may actually help the EMs somewhat at the margin. So, I kind of agree with James overall that I don't think this is going to be as big an impact on the markets result. Nothing like as big an impact as Brexit or across the Trump election victory.Sonia: So, now the Italian referendum is behind us the next event to watch out for is the Federal Open Market Committee (FOMC) meeting and given the strong jobs data that we saw on Friday of 178,000 it seems that in all likelihood there will be a rate hike this time around. Do you expect more volatility in EMs through the course of at least the next fortnight?Dennis: No, not really, not particularly on the back of the Fed because it is widely expected now the Fed will raise rates and there is no doubt in our minds that what the markets will focus on is what the Fed may provide a sense with 2017, it is well priced in. We have very different situation from where we were a year ago when the markets were looking at December rate hike and possibly four rate hike in 2016. This time we have got a rate hike coming in and we think maybe two rate hikes next year. So, it is much of a cycle than people had feared was the case a year ago and as I said what EMs are actually much more to unusually perhaps but they are reacting much more to the long end of the curve and the bond market tantrum is rather on the short end of the curve.Latha: When you were in India in November your approach to demonetisation in the country was not very negative. It certainly looked like reform. Now with the wisdom of three weeks and the impact of the cash crunch, put India in context for us there is a demonetisation issue inside, there is a Fed rate hike generally and there is this overall Italian risk off that may play out?Dennis: After the conference when I met I was actually having an 8-9 day vacation in India and my personal thoughts from that was that this was indeed much more disruptive in the short term than we had initially expected. Indeed our economists have cut their forecasts for current fiscal year to six percent, raised their forecast for next year to eight percent. So, what that tells you on short term impact is quite significant, long term impact is probably we got a way. It is a positive thing in the long term. These are headwinds for sure, the Fed and the Italian referendum results but at the end of the day we had a pretty significant sell off in the EMs over the last month and we would rather start to take a look at them for some potential upside in 2017 rather than getting too bearish and as I implied at the beginning the key about India here is this is a very good long term reform even if the short term impact on the economy and the market was more disruptive than we initially believed.Anuj: Your thoughts on the Fed rate hike because EMs may fear it but anecdotal evidence tells us that some of the markets like India have had the best periods in a rising US rates scenario and the market has corrected already. Your thoughts on how it will happen now?Glassman: This is really well anticipated. I don't think I have seen move that is this well priced into the market. Secondly why this is all happening is that the US economy is doing better. That is the real issue for EMs is the developed economies are doing better and it is allowing central banks to move rates back to something more normal. That is not a bad thing and the Fed is going to do this very cautiously. From the markets point of view what we really sensed in the last month or so is post the elections we sense there are more tailwinds building here because we are expecting more response on the fiscal side, a little more balance with fiscal policy versus monetary policy and the market has been reacting on the assumption that we are going to see more pro-growth kind of initiatives which is making economists revise up their growth forecasts slightly for next year. So, the Fed reserves expected action is really a side show in what is generally turning out to be a more positive economic data. Prashant: Markets have not opened in Europe yet but do you expect heightened volatility, yields spiking, that kind of thing when they do in about an hour’s time? Issel: I would say we have finally, a refreshing reminder that sometimes the polls can be quite useful that in this case, polls had already indicated that we are probably going to see a no. And yes, you are right, it is probably a bit more resounding than we thought, but a no is a no. It is important, especially for investors outside Europe to really understand that this is different from a Brexit. Yes, the population voted against the government proposal, but what it really means is no means no change. So, we are preserving the status quo. So, unfortunately, what we did not get perhaps is an initiative to make it easier to make decisions on the government level, but we are not actually having downside from this. And it was expected, so therefore, we have seen all. So typical safety proxies in Asia, the yen, or gold in particular, except for the first few minutes, none of it has really moved. So, markets do also agree with our view that it does not really mean too much and therefore, slightly up and down. But I do not think anything significant in terms of pull downs on the markets is something we will see today. Ekta: Where is India in your pecking order of things? Issel: I do not think there is an immediate connection to the referendum, otherwise we have looked at the numbers and it was all a bit difficult of course, for everybody to figure out the demonetisation impact. So yes, we have naturally chaffed the fiscal year 2017 gross domestic product (GDP) where we are expecting about 6 percent which is still not bad, but then with some payback. More importantly, on the earnings front, when we look at the Nifty, clearly, we are still looking for a reasonably high number but certainly below 10 percent now and then some pay back in the double digits for 2018. So, all told, we have an overweight on India. We have an overweight now and based on the assumption that after about two quarters, most of the drag should have happened. And pretty much by definition that the worst strike has already happened when no notes were available, granted that they are not all available now, but the situation is improving. So, in this scenario, it is unlikely that the market pulls down from here because the situation, still not quite soft, but getting better by the day essentially in our view.