More referendums likely to dismantle EU: Ambit

In the past 10 days, two major events — Brexit and Rexit — have created panic in the global and Indian markets. Ashok Wadhwa, Group Chief Executive of Ambit Holdings shares his views with CNBC-TV18 on these events that may have negative global and domestic implications.BrexitFive days after the United Kingdom voted to leave the European Union, there is a clear pessimism with respect to global financial situation, Wadhwa said, adding that Brexit will have a negative impact on short and medium-term impact on the UK's growth rate. There are also fears that some European countries like Scotland may call for a similar referendum and thus the EU stands to get dismantled if countries call for such referendum, he said. Wadhwa said that the Lehmann crisis and Brexit are two very different situations. Brexit has political, financial and economic implications and the long-term impacts of which most economists are not willing to hazard a guess right now, he said.India impactEconomists say that emerging markets present a buying opportunity due to Brexit. Wadhwa said India stands out in emerging markets and if Indian markets were to fall to a certain level, it presents a buying opportunity in some specific stocks.RexitReserve Bank Governor Raghuram Rajan's resignation is a smaller event compared to Brexit, said Wadhwa. Historically, India has been able to find a talent of high calibre to replace chiefs of top institutions, he said, adding that the general market participants believe Rajan's move wouldn't impact India's markets.Below is the verbatim transcript of Ashok Wadhwa’s interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal..Anuj: What has been the first reaction or the ground reality that you have gathered as far as Brexit is concerned and the possible impact on global equity markets?A: Almost everything over here in London has been overshadowed by the Brexit outcome. I have to say that as I heard some of the more prominent speakers over here there is a clear pessimism both vis-à-vis UK economic and financial market situation and then moving on to both the global economic and financial situation. The general mood is very clear that what has happened is not good for UK. Clearly it will have both short to medium term impact on growth prospects in the UK and certainly detrimental for the financial markets, some of the larger banks like Morgan Stanley and Goldman Sachs are already talking about shifting huge number of jobs out. And then there is a belief that if UK has done this will Scotland now call for a referendum, something else is coming up in Italy very soon. Something else will come up in another parts of Europe. Therefore the European Union (EU) will again be dismantled and if that matters clearly for some of the smaller and medium economies in the European zone it is extremely bad and detrimental.Sonia: Can we compare this current crisis to the Lehman crisis. I know a lot of people are saying you can't compare it, but what is your own view?A: The Lehman crisis and the Brexit situation are two very different situation. Lehman was caused by significant overleverage in global economy and that along with the burst in the housing bubble effectively lead to re-pricing a serious discount on several financial assets and that caused severe stress on the banking system. Brexit is very different. Brexit has political implications, Brexit has economic implications, Brexit has implications on the financial markets and I dare say it has a much longer term impact because Europe as a zone is getting dismantled. It may just be the beginning of that process. Clearly as I said earlier in the short to medium term both the economic the financial markets impact are negative. What will the long term impact be, most economists over here are not willing to hazard a guess, saying it is relatively pre-mature at this stage.Anuj: A lot of global experts have been saying that if because of Brexit crisis emerging markets (EM) correct specially India, it will be a big buying opportunity. Is that the sense that you are picking up as well talking to investors, they are willing to buy EM if they fall sharply because of Brexit?A: As I have repeatedly said on your channel before India clearly stands out within the EM. I cannot say whether a drop in prices across EM leads to an opportunity to buy other EM. But I would dare say after having studied clearly Brexit is a very new phenomena. We are all trying to understand and learn the implications of Brexit on our respective countries. But I dare to say that if the Indian markets were to fall below a certain level I would think clearly India offers a buying opportunity at least on a select stock basis.Sonia: I am sure while Brexit was the talking point a lot of the investors who came to the conference would have also been disappointed with Raghuram Rajan's exit. How big a risk is that going to be for the Indian markets you think?A: I have to confess and say that Brexit has significantly overshadowed any impact or discussion on Rexit. In hindsight Rexit looks like a very small, less relevant event, of course relevant to India but less relevant in the global context clearly. Having said that there were a few investors who shared their disappointment but also were cognisant of the fact that historically India has been able to find very high quality talent to effectively replace any important individual that we lose. So, whereas there is clearly a short term disappointment particularly amongst the economist community here among the kingdom, the general market participants believe that it is not significant enough to effect India's current market scenario. They are really more concerned about Brexit and what Brexit could impact other Asian economies.Anuj: Coming to your conference now I believe that your are showcasing a lot of domestic lead companies and that has been the theme as well, we have seen so many domestic companies do well. There is so much global correction going on. Do you think that theme is going to stand out in terms of strong domestic companies, strong balance sheet companies doing well?A: As always our list of participating companies are what we term as good and clean corporates. Mid to large corporates, companies that have historically shown that they are not opportunistic but they are very strategic in their approach. Thermax being a good example, TVS Motors being a good example. These are companies that have always focussed on core capability and leveraging their core capability have built significant business. Clearly there is an overweight on companies that are dependent on domestic consumption given how the world is shaping up at this point of time one sees a very serious challenge in demand and one looks at the very likely demand contraction around many economies. Therefore I would think we are better positioned to kind of emphasise on companies that look at Indian demand     as the core of their growth story and that has really been the list over here for us.Sonia: The interesting list of companies within those domestic plays which you are showcasing are some of the private banks and small banks. You have been in the financial markets for too many years and have seen the ups and downs, from hereon what is your broad view on the financial sector?A: Clearly well run private sector banks are seeing a significant surge in demand for their stock. So, our focus again is DCB and City Union Bank. Over here they are participating in our conference. These are banks that we believe have relatively smaller balance sheet but they are focussed very hard on ensuring that they grow commensurate to their capability. They are not overly ambitious. They have not over grown or laid too much emphasis on building retail book or the size of their balance sheets. And we think these banks are very good candidates for substituting some of the demand that will move or is moving from the public sector banks to the private sector banks.We of course also have Bank of Baroda (BoB) which we think is an outstanding story of how a new management from the private sector is working hard to manage this large very successful bank historically and bring back past glory. So, it is a combination of public sector bank into private sector banks. I continue to believe that the Indian story is incomplete. If you believe that India is a good prospect which I believe it is then the private sector banks in India cannot be ignored. They are a proxy to the Indian gross domestic product (GDP) growth story and to the Indian consumption story and I would like to believe that these are wonderful opportunities for all the investors.Anuj: The other big event or big macro opportunity will be the passage of Goods and Services Tax (GST) in the monsoon session. How critical is that going to be for India's image and do you think that is going to be a big trigger for corporate India and for global investors to take note and put more money into India?A: Unfortunately again Brexit has made all these events completely irrelevant. Having said that a group of investors today did tell us that they see the passing of GST as a very important milestone in how this government is able to frame and be able to defend policy making in the parliament. So, from a directional perspective, from a messaging perspective passage of GST will be seen as very positive. Corporates who are present here and who are largely dependent on domestic consumption as I said are very positive, are enthused by the fact that GST could become a reality by April 1, 2017. They continue to emphasise that GST will significantly reduce downtime from their business perspective that a lot of costs will be removed and a whole supply chain will be significantly simplified leading to both improved margins as well as quicker deliveries to the customers. So, that is positive for sure.