The United Kingdom’s referendum to leave the European Union has triggered intense volatility in the global markets. While developed markets have been roiled, emerging markets are also feeling the heat.
Speaking to Bloomberg TV India , Geosphere Capital Management Managing Partner Arvind Sanger says the vast mass of disappointed voters — the middle and the lower class — in numerous western nations are essentially disenchanted by the current framework, which they believe is not working for them. The real danger is, whenever there is a political issue, the central banks are forced to pump in liquidity. But the question is, can central bankers fix free trade?
A month and a half ago, I attended a conference in the UK that focused on the political risk and the political upheaval in many western countries. And I came back with a slight fear.
I think the biggest risk is what Brexit signifies. Brexit by itself has its own dislocational effect on the EU. But what it signifies is there is a large mass of frustrated voters — middle and lower-middle class — in many western countries that feel significantly disenchanted by the existing system, which they think is not working for them post financial crises. And they are willing to completely ignore what experts and politicians say. So the risk I see is really a risk that we have been used to since the financial crisis of 2008 — that central bankers have to fix everything.
Anytime there is a political problem, the central banks rush in and pump in liquidity and it is fine. Now the question is, can central bankers fix free trade? If Britain is leaving the EU, it can affect trade significantly because it has to negotiate in terms of trade. US presidential candidate Donald Trump is talking of a completely anti-free trade message. But that would not imply significant risk to free trade whether it is Mexico or China.
That is what we have been going through in globalisation for the past 25-30 years. We do not know where this is going. But we have to be respectful that this is not just one-off. If it’s just one-off, we will be fine. But if it is a start of a trend, then risk for global investors in companies that depend on global trade has gone up dramatically.
And I think we have to give lower multiples to companies that rely on global trade because of the risk that things could get derailed. I do not think that you can go back to the pre-Brexit assumption of growth that you did for companies that depend on global trade.
Which is why, when I look at markets such as India, I want to play in domestic companies. And that has been our focus in cement and autos. The IT, sector on the other hand, I think there is going to be a lower multiple to some of these businesses till we understand where it’s going.
Indian IT companies have been facing huge problems in getting visas in the US. One of the main causes of Brexit is also the migrant labour problem. How serious will the anti-immigrant effect be on India’s services exports?
I think that (the anti-immigrant wave) is partly due to terrorism incidents in many parts of Europe. Part of that has to do with economic dislocations. People are going through the frustrations of ‘What happened to my deal and why others are doing well and I am not’.
That other people are in countries where there is free trade and of course immigrants. All of these suggest that global growth, which was dependent on free movement of trade and skilled labour, will be affected.