Why BREXIT may actually be good news for Indian markets…

For any market participant who had seen the Sensex carnage on the day of the BREXIT vote, it would be hard to believe that BREXIT could actually be beneficial for India. While short term negative repercussions cannot be ruled out as an outcome of BREXIT, India will stand to benefit in the longer term. Here are 5 reasons why India will benefit from BREXIT…

The world is back to accommodative monetary stance… 

One of the big worries for the market was that the US Fed would hike rates and other central banks would gradually reduce their accommodative monetary stance. The BREXIT vote may have substantially changed that equation. With the UK and the EU likely to slow down, the US Fed and other key central banks may prefer to maintain their accommodative stance for some more time. While it may be hard to put a time frame, the US is unlikely to consider rate hikes during this calendar year. It will also ensure that the RBI will have less to worry about on the Fed rates front and will have greater leeway in cutting repo rates further in India, subject to inflation being under control.

Slowdown in EU means weak oil prices… 

The immediate reaction of the BREXIT vote was on oil prices as it crashed below the $50 / bbl mark. Oil prices have been as much a function of demand as it has been of supply. With the UK and the EU likely to slow down, the impact on oil demand will be substantial as EU is a major net importer of oil. That means the benefit of cheap oil dividends on India’s corporates, its fiscal and current account deficit will continue. Cheap oil will also keep inflation low giving more ammunition to the RBI to cut rates. This will be a major benefit that will accrue to India as an outcome of BREXIT.

India can negotiate business treaties independently with UK…

In the past, any of India’s engagement with the UK was stalled by the stringent rules imposed by the EU. While it is not clear as to the nature of the trade deals that the UK will strike with the EU countries, it surely opens up a window of opportunity for India to separately negotiate agreements with the UK. Indian companies like Tata Motors and Tata Steel that have substantial operations in the UK will also benefit from a more progressive and market-friendly approach to business which the UK is likely to adopt.

You cannot ignore the wealth effect of rising gold prices… 

In the immediate impact of the BREXIT vote, gold prices started moving up sharply. That is to be expected. Gold has traditionally been a classic safe haven investment in volatile times and prices of gold are likely o remain elevated. With the Euro and the UK£ coming under attack, there will be increased calls for gold as an alternate currency. As we enter a period of strong gold prices, the big beneficiary will be the Indian economy. Let us understand how this wealth effect is going to play out.

Indian households are estimated to be holding nearly 22,000 tonnes of gold in their vaults either in the form of jewellery or in the form of solid gold. In the last 4 months, the value of this huge gold stash has increased from $840 billion to over $1 trillion. As gold becomes increasingly valuable, the demand for gold bonds and gold ETFs are likely to see an increasing demand for non-physical gold. The wealth effect may not be visible immediately but rising gold prices surely creates a huge wealth effect in India. Over a period of time it will translate into higher consumption and higher investment resulting in a virtuous circle.

Valuations of assets may get moderated and that is good…

The big advantage for India will be that valuations of equities and the INR will get moderated in the short term due to volatility in the market. P/E valuations even on forward terms were at the higher end of the historic band. The correction as a result of the BREXIT volatility will bring back the margin of safety in Indian equities. Also the low interest rate implication of BREXIT will mean that valuations will continue to remain at higher levels. There is another currency angle to this BREXIT debate. As per latest REER estimates, the INR is still overvalued by about 10-12% versus a basket of currencies. A strong dollar will lead to a weak Yuan. As we saw last year, a weak Yuan will have a contagion effect on EM currencies like India and the INR could get closer to the Rs.70/$ mark. That will bring about a much needed rationalization in currency competitiveness of the INR. The short term volatility in equities and currencies will be for the long term good of the attractiveness of Indian markets.

Short term jitters notwithstanding, the Indian economy will be better off as a result of the BREXIT. It could actually provide an opportunity for those who want to bet on India’s growth story. BREXIT could actually be that big opportunity that investors have been waiting for.

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