How will the markets look at Labour victory in the UK? India has been a different story altogether with the markets bracing for continuity, But the UK is different. What is your view on the near-term performance of the markets is concerned?
Arnab Das: This is largely priced in. Not an enormous amount is going to change in the short run. The UK’s economic problems, and policy challenges, are deeply structural and I do not think Labour is going to be able to fix them in a big way. A big part of the story here that Labour is selling to the electorate, is about stability. We have had an enormous amount of turmoil here in the United Kingdom. Any number of prime ministers and an even larger number of chancellors, and finance ministers, have been coming and going. Lots of budgets, interim budgets, and main annual budgets have made important changes. We already have the highest tax burden as a share of GDP in the UK in three generations. So, there has been a lot of change, a lot of turmoil, and a lot of disruption from Brexit, partly due to the pandemic, and partly due to bad policy choices.
So stability is going to be a big part of the story in the short term. Now, stability is going to help. It is not going to solve the productivity puzzle that this country faces and the stagnation that has resulted from that. So, there is going to have to be some change over a longer period. But how we get to that change and what changes specifically are made will take time to see. It will take time to see how they play out in the performance of the economy. I would guess that they do not make that much difference and so I do not think the markets are going to react in a big way.
I do not think we are going to get the kind of big surprise that we had in India. We had a surprise in Mexico. We had a surprise in South Africa. We had a surprise just earlier in the week in the French elections and in the European parliamentary elections a few weeks before that for France. So, we have had a lot of electoral surprises. Possibly we are going to have some important unexpected change in the US election. But I think the UK election was relatively predictable as to the big picture here, which is that power switching from the right to the centre and left. Not much is going to change in the short term. Some symbolic changes in taxes here and there, this idea of stability I do not think it is going to make a huge amount of difference in the short term. I think we are going to need to see this play out over years, if not a period of at least a couple of parliaments before the UK can rediscover its mojo.
What is your view on the rate change trajectory that the central bank is going to take? Rates have been at a 16-year high. Do you see any kind of change happening at least this year or early next year? What is the sense that you are getting?
Arnab Das: I think the Bank of England would like to cut rates as soon as it can, as soon as the door is open through significantly better services inflation. Inflation hit the target already last month and so that would seem to open the door. But the problem is that the domestically generated forces for inflation, particularly services inflation, remain too high for comfort. The market is expecting something like two cuts this year, starting somewhere between the August and the September meeting. I think to me that seems fairly reasonable. But I would not bet the farm on it.
I would have some expectations in my portfolio of somewhat lower rates in the UK. I think we are in a different kind of interest rate environment in general, more structurally. We are in a world in which trade barriers have gone up, and investment barriers have gone up. The fiscal footprint of the state is larger in the UK. As we were discussing, the tax burden is high and the question is how to fix the fiscal accounts at a time when countries feel they need to be doing industrial policies, subsidies, tariffs, and populations, particularly in Europe are aging, in the UK that is no different especially if immigration is effectively addressed. They would not be able to do much. We can talk about that more if you want. But the point is that there are going to be lots of fiscal pressures that are going to support inflation probably in the years to come. So, yes, I think we will get one or two rate cuts this year.
I do not think we are going down pretty sharply in rates after that, although the market is pricing in a rate-cutting cycle. I think we are in a structurally higher interest rate environment, a structurally higher yield environment in the UK, in Europe, and especially in the US and the UK is going to participate in a lot of these phenomena of trying to onshore, nearshore, and so forth.
Where do you see the trajectory of India-UK ties move on from here on? Of course, we are talking about an FTA. Many experts say that they are slated to continue. How do you see the India factor playing out in the United Kingdom? India has been able to increase itself geopolitically. We have a great relationship going on as far as the US and Russia and the rest of Europe are concerned.
Arnab Das: I think the direction of travel is very clear. India is inexorably getting closer to the West, especially the United States, and I think the improving relationships with Europe, Japan, the EU, and the UK in particular are part of that bigger picture. The big challenge for India regionally geopolitically, geo economically is China. There have been tensions. There have been flare-ups at the border. There have been efforts to reduce foreign direct investment from China. And yet the trade surplus of China with India continues to grow and that is true of many countries, not just India.
So, there is a disconnect where the geopolitical tensions are high, and the geoeconomic tensions are high. Still, the reality of the macro on the ground is that the integration continues. So, there is not going to be any big rupture in Asia, but there is going to be a continuing integration or continuing alignment of India and other countries in Asia with the west and including the UK.
