Opportunity for India to emerge as major global financial market after Brexit: Mark Mobius

Britain’s exit from the European Union will impact emerging markets as some of the companies which have significant exposure to the United Kingdom may get affected said Mark Mobius, executive chairman, emerging markets group, Franklin Templeton Investments. In an interview to Biswajit Baruah he said there is an opportunity for India to emerge as a major global financial market as London’s influence could wane after Brexit. Excerpts:

What is your reading of the likely repercussions of Britian’s exit from the European Union?
The decision for Britain to leave the European Union is an unfortunate one, because it will not only affect the UK or Eurozone but also the entire world. Countries with a successful model of global trade and expansion are moving towards nationalism and isolation. I expect there will be repercussion which will spread globally.

Extreme nationalist sentiment and populism will be dangerous for everyone in the world. Brexit remains complicated because of Scotland and Ireland, as three is a possibility of them separating from the United Kingdom and joining the European Union. This will makes things further complicated and there will be more uncertainty in the world.

Emerging markets, including India, have shown some resilience to Brexit so far...
There will be an impact on emerging markets and some of the Indian companies that have significant exposure to the United Kingdom may get affected. London as a financial market is very important as it can impact global financial markets. One should also remember that London helped emerging market companies to raise finances and this may get impacted.

If you take India, there is no reason why it cannot become an important global financial market, if the government allows free exchange of currency and general liberalisation of the market. Hence, you can see there is both opportunity and danger in these tough times.

How will global central banks react to the fresh uncertainties in the global financial markets?
The central banks across the globe will now ensure that their own banks remain solid and have sufficient capital in these times. This means finances to a lot of companies will get tightened which will not be good. Central banks around the world will prepare themselves for any kind of eventuality. The reaction from the Bank of England (BoE) was that they made sure that the banks have a strong balance sheet. This means there will be a cut in lending activities.

What will the US Federal Reserve do next?
There is a good chance of the US Federal Reserve delaying interest rate decision if the uncertainty in the Eurozone prolongs, because they will also remain concerned what could happen next. Meanwhile, the US Fed will also remain watchful about the inflationary situation.

How are Indian markets positioned in the emerging market universe after Brexit?
Indian markets look pretty good in the emerging market universe. However, there are traditional ties between the UK and India which might become critical, and related companies might get impacted. It’s time for the Indian government to announce policies that will give confidence to the people especially after the RBI Governor Rajan has decided to leave his post.

How have foreign investors including you taken Rajan’s decision to leave the RBI?
A lot of foreign investors are disappointed with Rajan’s departure. Certainly, rating agencies will look at this space very carefully. However, a lot depends on who is going to replace Rajan and if the person is perceived to be independent and his decisions are not driven by political compulsions. The government’s recent move in announcing FDI policies should be applauded as this shows continuity in the reform approach amidst Rajan’s departure.

Do you expect foreign fund flows to slow?
If the government continues to liberalise various sectors then it will attract investors. Unfortunately we are dealing with events in Europe which is impacting investments in the rest of the world. Investors are definitely holding back their investments but this uncertainty is not just restricted to India but is there across the world.

There are expectations that the new RBI governor may opt for a lower interest rate regime. What is your take?
I think there is some merit in the government’s desire to see lower interest rate which is understandable due to an event such as the Brexit. If the government asks the new governor to lower interest rates, it not should be seen as negative, because I think it’s important that the companies and businesses receive finances in these difficult times. The banks should be allowed to lend aggressively and at the same time the collections must be also done aggressively. Rajan’s policy on addressing bad loan issues in the banking system should also be continued.

How comfortable you are about Indian market valuations?
If you look at the Indian market valuation historically, they have always relatively traded higher to emerging market peers. And, if you look at the performance, India has delivered consistent returns over the years. I would say despite high valuations, India has done very well. There are many investors who focus on price to earnings (P/E) ratio, but I would say it’s equally important to focus on other parameters which are crucial for business. What are you buying these days? I like companies that have good domestic market shares and are not so dependent on exports. I have turned cautious on technology companies as many of them have exposure to the United Kingdom.

Following Brexit, will the US presidential elections impact the global financial markets?
Donald Trump’s dialogue really emphasises on isolation and nationalism which is not healthy for global financial markets. My feeling is that Trump will definitely soften his tone as we move forward because in the current situation there is so much of national interest for having an open market.