June 19, 2016

Brexit and the spectre of Europe's

ugly nationalism
On Thursday, the people of the United Kingdom will cast
a vote that could transform the politics of Europe. If a
majority of voters cast a vote for "Brexit", it could start a
process that could cost the EU one of its largest and
wealthiest members. The stakes are huge for the British
people.
Britain's economy and legal system have become
deeply integrated with the European continent.
Unraveling those relationships could prove highly
disruptive. On the other side, Brexit advocates argue
that Britain will be better off in the long run outside the
EU, with full sovereignty and unfettered control over
immigration and economic regulations. But the numbers
show that since the UK joined the European Economic
Community in 1973, Britain has done relatively well,
outperforming the EUs largest economies, Germany,
France and Italy and the US. There is a campaign
going on by the Brexit advocates regarding the costs
and benefits associated with EU. Claims are made that
the EU membership costs UK 350m a week while in
reality it costs 130m a week.

The Week That FINished

Carbon emissions growth stopped in
2015
Carbon emissions stopped growing in 2015 for the first time
in 10 years as the world turned its back on coal and
embraced energy efficiency and renewable power with
increased vigour, according to BPs Statistical Review of
World Energy. China led the way in driving down emissions
but the latest figures from oil company BP come with a
warning that the progress may not last.
The pledges and deter mination shown by world
governments at the Paris climate change talks in
Parismeant there would likely be further policies aimed at
shifting the fuel-mix towards cleaner, lower-carbon fuels,
with renewable energy, along with natural gas, the main
beneficiary. Coal consumption fell worldwide by 1.8% last
year even as the price slumped by 20%. Much of the
decline was a result of the US switching from its own coal
supplies to shale gas for generating electricity at power
stations.

MDI Gurgaon

What went wrong with Brazil?

During 2010-11, when President Lula left office, Brazil was
regarded as the gold standard for economic
development & social progress in Latin America. But
today, with his handpicked successor, Dilma Rousseff,
facing an impeachment trial, the country is widely viewed
as an economic failure.
Lula was lauded for policies & programs which helped him
keep inflation in check, accelerate economic growth &
reduce poverty. Brazils economic success was praised as
the Lula model, or the Brazilian consensus. Growth was
faster than at any time in the countrys past 50 years, and
inflation remained under control. Unprecedented numbers
of Brazilians climbed out of poverty. The big mistake could
be the temptation felt by the Lulas government during
the boom years where they spent a lot on subsidy policies
& not saved for harder times like now.
Those days of wine and roses are gone. Brazil is suffering
through its worst national trauma in recent memory. Its
economy is in its third consecutive year of negative
growth. The inflation too stayed in double digits most of
the time during the last few years. The similar model
followed by neighbouring countries like Argentina has
helped their economy to remain stable, proves that the
Lula model has failed for improper implementation &
execution.
With the current President being suspended & with some
hope in interim government, there remains a collection of
economic policies that can bring sustained economic
growth and social progress to Latin America and other
developing regions. The problem is that they are not easy
to apply consistently, as Brazilians and their leaders are
now painfully learning.

June 19, 2016

MDI Gurgaon

Brexit More Than Just

Paranoia!

Fed rate unchanged, low growth

projections, diminishing job gains

With the leave camp getting stronger in the recent

weeks investors have rushed to buy the Yen (a safe
haven), appreciating the currency and denting
Japanese exports in an already soft demand climate. It
would have been a good opportunity for Tokyo to offer
additional stimulus with inflation getting weak, but for
Brexit fears and the US Feds status quo on rates.

Worried about slowing job growth, Federal Reserve

provided indications Wednesday that there might be
only one rate hike this year (current rate 0.5%). At the
April meeting, just one member indicated that the year
would end with only one hike. That number jumped to
six at the June session. Fed officials lowered their
expectations for future years, now looking for the funds
rate to rise to 1.6% in 2017, as opposed to the 1.9%
estimate in March, and to 2.4% in 2018, from a 3.0%
estimate previously.

A Labor Department report showed a 38,000 increase in

non farm payrolls for May, well below expectations in
the 160,000 range. The unemployment rate has
declined (to 4.7%) but job gains have diminished.

Hypothetically, if Brexit goes through, the Sterling would

suffer a massive fall in value (as much as 10%). This in
turn would make the Chinese Yuan stronger, putting
downward pressure on Chinese exports to London.

While other indicators such as retail sales and housing

have remained fairly solid, the weak payrolls report
coupled with declining productivity and a general
global slowdown have cast doubts on the future
trajectory of economic growth. The possibility of a British
exit from the European Union also has raised caution
among economists and market participants.

Further, a long list of British brands now have Chinese

Backers London Taxi cabs, Heathrow airport, etc. In
Europe, Britain has become the second most popular
investment avenue for China, next only to Italy. These
economic ties might be damaged if Brexit occurs.
Fundamentally, it is not China and UK, but China and
EU as much of talent pool of several UK companies
(specially tech) is drawn from Europe and this may be
gone.

Back home in Beijing, the referendum carries political

repercussions for the Chinese PM. Mr. Xi has invested
heavily into stronger ties with Britain, which is a
counterbalance to Chinas rocky relationships with
other nations. So if the UK decides to leave, it wont
just undermine economic relations between the two
countries but also call into question Xi Jingpings
image because he might have bet on the wrong
horse.

Current account nears surplus as CAD

narrows
Indias current account came closer to recording a
surplus with the March quarter current account deficit
(CAD) narrowing sharply to 0.1% of gross domestic
product (GDP) on account of a lower trade deficit.
Contracting imports also helped bring down CAD for
2015-16 to 1.1% of GDP from 1.8% in the previous fiscal.
Indias merchandise exports and imports have been
declining continuously since December 2014 because
of sluggish global demand and low commodity prices,
particularly that of oil. In May, exports fell by the
slowest pace in 18 months, at 0.79%.
India macro-economic factors look more robust than
ever be it GDP growth rate, consumer confidence
surveys, robust corporate results or declining deficits.
This has been due to rising economic growth coupled
with low commodity prices and low interest rates.
Along with these factors, expectation of aboveaverage monsoon has been instrumental for stock
market rally in the past 2 months.