A serious risk to global markets has emerged in the form of the British referendum slated for next week, says Arvind Sanger of New York-based Geosphere Capital.In an interview with CNBC-TV18, Sanger said should Britian choose to exit the Eurozone, it would create a flight of capital into safe havens.But should the stay camp prevail, risk assets will make a comeback and India will be a beneficiary, according to Sanger."Once we get past Brexit vote, India is a no-brainer," Sanger said, àdding that he was positive on cement, commercial vehicles and road companies in the country.Below is the verbatim transcript of Arvind Sanger's interview with Latha Venkatesh, Sonia Shenoy & Anuj Singhal on CNBC-TV18. Latha: What did you make of Fed statement? As an emerging market investor are you getting a sense that the Fed is warning of an even slower growing US economy?
A: The Fed is recognising that both US and global economic conditions are quite fragile and their assumption that this would be an easier path to normalisation is becoming more and more suspect and they are beginning to accept the fact that every time they get ready to raise rates, something or the other globally blows up and delays it.
I think this event path being pullback to much slower rate of rate hikes through 2018 and what the long-term equilibrium rate is, both coming down, reflects a greater recognition that this cycle is different and the flexibility of the Fed to go as quickly as you would have liked is much less likely. However, the market probably been there, the Fed is just playing catch-up, the market being sceptical that the Fed could go as fast as they have been assuming. So the Fed is coming somewhat more in line with the market. It was not a huge surprise but it was a surprise to see the Fed capitulate to the market viewpoint almost as completely as the market has been making.Sonia: The bigger overarching worry is the Brexit referendum. Do you think it is really much ado about nothing or is it an apocalypse situation if Britain exits the euro?
A: Britain exiting the euro is a real serious situation now. The markets may selloff and then rebound on that news, but what Britain, if it were to leave the Euro zone, it shows that political risk which has been quiescent for the last several years, even though the Greece risk came and went it was really an economic issue, not a political issue, but here it would be politics overwhelming the economics and the repercussions of that would be do other European countries, the Dutch or others follow suite, does the Euro zone unravel and what does that mean for economic stability and can central bankers just paper over that by keeping on cutting rates because we have already seen from Japan that cutting rates seems to have limited usefulness once you go into negative interest rate.
So, Britain exiting in my opinion would be a huge deal because that would suggest that global political equation has gone quite haywire and we are already seeing it in the US election in terms of having a complete outsider as a candidate. And if Britain were to do something like this, this would also follow on the heels of some pretty surprising election and poll numbers coming out of other European countries and would suggest that political risk in many developed markets is rising dramatically.
Latha: What does that mean for us? At the moment, all that we are seeing is the pound getting cheaper and cheaper. Will it mean that the euro will get cheaper? How does it exactly get transmitted to an emerging market investor or to an India investor? Will it be a risk off in the sense that already German bunds are negative yield? Will it be that US bonds also will go into 1 percent? How does it translate into risk for us?
A: First of all, we are talking about uncharted territory. So, we are all trying to feel in the dark and try to figure out what happens if something this unforeseen happens because we look at Scotland, the independence vote fail, if you look in Prague, Quebec independence vote fail. So, we do not have a roadmap to go on, on what happens in a Brexit scenario, whether the euro would go up or down, if it becomes a smaller Euro zone and risk of further unravelling of Euro countries, does it become more German like which means stronger, or does it go to the weakest? So there is a lot of uncertainty there.
However, my sense is you have hit the nail on the head. What it does, it creates risk off. And if it creates risk off, no matter what happens to individual currencies, it causes money to go into ‘safe haven’ assets and we are seeing that with German bunds, we are seeing that with US treasuries and I think you could see more dramatic flight to quality and if that were to happen, then all emerging markets including India would be at some risk of capital outflows. So that is the biggest risk to India and to emerging markets would be short-term capital flows no matter what central bankers are doing, turning tail and trying to hide in ‘safe assets’ and that would be a negative. Anuj: What about India in particular, the Indian valuations because for the first two months we underperformed emerging markets by a big margin but over the last two months we have caught up, year-to-date now maybe at par with emerging markets. At current levels, at index, do you think the risk reward favours getting long at this time?
A: Once we get Brexit, India is a no-brainer in my opinion. A referendum of this sort, which is that the late deciders all vote in favour of status quo and if that happens then the Indian market, it is relatively expensive compared to other emerging markets. It has always been more expensive but the India growth story is relatively better shaped and not withstanding some remaining major irritants which remain the banking sector issues as well as inflation starting to perk its head up, but despite all that there is enough momentum in enough parts of the economy then Indian market looks attractive to us in any turmoil caused by non fundamental factors like fears about -- Brexit is a fundamental factor but fears about Brexit, if that doesn't pass great buying opportunities and fundamentals of India look good then I think this is a good time to be adding but certainly I am not rushing out to buy but I am little more nervous that Brexit is too close to call and the consequences of Brexit are unforeseeable.
Latha: What will you buy that apocalypse doesn't happen?
A: If that doesn't happen as I said in the past, I think some sectors which are seeing strength include cement, include road infrastructure orders for that there are few small midcap companies that play into that. We like the commercial vehicle sector. We are also getting more interested in some of the power related stocks because the Ujwal DISCOM Assurance Yojana (UDAY) scheme seems to be moving forward and some companies that have decent assets and do not have leverage issue, could be interesting. So those are some areas and even in the banking sector to the extent that monsoon turns out to be reasonable and that is the bet we are making that we won't have third monsoon failure and we have a decent monsoon then the inflation fear should abate and therefore some of the banking stocks and the non banking financial companies (NBFCs) could be quite interesting.
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