Trump victory going to be more shocking than Brexit: JPMorgan

The market will be dealing with two major events today, a likely Donald Trump victory and the ban on Rs 500 and Rs 1000 notes. India is processing both these events at the moment. So, Adrian Mowat, Managing Director, Chief Asian and Emerging Market Equity Strategist, JPMorgan advises to refrain from buying into the market today as it likely to go lower.There is going to be a lot of volatility in the global markets if Hillary Clinton loses the US elections, he says. This is due to the vacuum of information until more clarity on the policies he employs in US emerges.A Trump victory is going to be a bigger and more impactful shocker than Brexit. A decline in dollar has much broader implications that the sterling.But Mowat adds that despite having a global impact, India is comparatively isolated on the Trump news compared to the other emerging markets, especially China and Mexico.Below is the transcript of Adrian Mowat's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18. Sonia: It is a chaotic morning for us here in India because we have to battle not only the possibility for Donald Trump victory but also the black money crackdown that came through last evening. One-by-one, firstly how do you negotiate the possibility of a Trump victory? A: As we can see by the market reactions that a Trump victory is viewed as a negative. For us in Asia, the biggest fundamental risk is through trade. We have large markets such as Korea and Taiwan that feed product into China, that is finished off in China and some of that ends up in the United States. During his campaign, Trump talked about punitive tariffs against Chinese made products as well as Mexican made products. We are also seeing things like the Mexican peso weakened quiet sharply in the last hour or so also fearing a Trump victory. Latha: So how do you immediately tackle the big question Anuj Sonia and I have been asking each other is this the Brexit moment? So, is today’s low to be bought or do you think this is going to be a protracted slow down? A: It is substantially larger than Brexit. Brexit was a particular hit to the UK outlook and the sterling. This has much broader implications. A trade war which would come about if Trump pursued the policies he talked about with regards to Mexico and China would be a negative for global growth. The Peterson Institute’s reports talks about the impact on global growth and also on the potential for the US economy to go into recession based upon these trade policies. You would also get some moves in the bond market, the Trump policy is to spend more and tax less, so we would expect bond yields to go up. That volatility would impact the flow that we are seeing into emerging market fixed income. So, this to me looks like a bigger event for emerging markets than Brexit was, as you correctly highlight, Brexit was a buying opportunity in Emerging Markets. I am not sure if that is the case here with the Trump victory. Anuj: I remember you were in India two years back and at that point, Donald Trump was not even the presumptive nominee of republicans and you had said that I do not even want to think about a scenario where Donald Trump could become the US president from the markets point of view. Now, if we have to live with that, what could be the downside for the market and in terms of a time period, do you think we are set for a protracted 3-4 month period of a bit of a downside. A: If you think about the way this works, we hear the results of this election probably by the close of business our time. You then have the new president comes into the office on January 20th. That is a long period of time for the markets to speculate about the implications. It is unclear whether you would get a clarification on macroeconomic policy. US president has to appoint more than a 1000 people to his executive. You have got a protracted period where there is a vacuum of information what the exact policies are going to be. That has to be a bad period for markets. I do think there will a relative performance story and India is more isolated to this event than perhaps Korea, Taiwan, China, Mexico are. Latha: But we are bridging that gap aren’t we with our domestic policy that came about 12 hours ago which outlawed Rs 500 and Rs 1,000 notes as they now exist, it won’t be legal tender and it will have to be exchanged; as you well know large sectors like the real estate sector and even legal sectors but informal run on cash. How are you estimating that impact on the near-term growth of the economy and earnings itself? A: It is too early for us to come out with estimates on that. It is quite an amazing policy; this probably makes a lot of sense on a medium to longer term view. It should be good for fiscal revenue. I think ultimately it probably is good in this whole reform that we are seeing in the real estate sector particularly with the real estate reform acts. So, longer term I actually think this is going to add significantly to India’s growth by creating a vibrant open real estate sector which is critical for the growth story in India. Just think about the scale of the real estate industry in China; the Indian one is a fraction of the size despite a very comfortable population. So, near-term disruption, bit like we are going to get with the implementation of goods and services tax (GST) but medium term positive.