Inflation reflects growth dynamics in India: Christopher Wood

Key enactment code delivered by Christopher Wood, equity strategist, CLSA, successful his archetypal nationalist quality successful India, astatine the ET Now Market Summit-2010. Excerpts:

Hello everybody and convey you for asking me. I volition beryllium moving done immoderate charts which were inactive archetypal with the concern successful the West. Then I volition determination connected to charts connected Asia and India. So I get the atrocious quality retired of mode first. But this seems to beryllium the incorrect mode around. So I americium getting from backmost to beforehand here. (Watch)

To commencement with the US situation, this is simply a large representation illustration everybody needs to beryllium alert of successful the planetary economy. This is US full indebtedness arsenic a percent of GDP. The communicative is precise elemental and the full magnitude of indebtedness successful the strategy successful the US has been going down ever since the recognition situation erupted successful 2007-2008. This the archetypal clip full indebtedness has been falling successful America since the Great Depression.

Mr Bernanke of the Federal Reserve has been trying to get the re-leveraging crippled going truthful far, they person not succeeded. My operating presumption is to presume that the leveraging volition proceed that we peaked retired successful the US ace recognition rhythm successful 2007, which has been moving since the Second World War and present successful a semipermanent de-leveraging cycle, which means little inclination GDP growth.

May beryllium re-leveraging volition footwear successful coming months successful which lawsuit I volition alteration my view, but for present I americium assuming it's a de-leveraging rhythm until the information proves otherwise. Next illustration you spot US full nett recognition marketplace borrowings and you tin spot the complaint of maturation of borrowing has been going down successful the strategy contempt the large footwear up successful Federal Government borrowing.

Next illustration is simply a semipermanent inclination successful US nominal GDP 10-year compound yearly growth. As the Japanese illustration has shown successful the past 20 years, erstwhile you get into a deflationary environment, it nary longer makes consciousness to look astatine existent GDP measures due to the fact that erstwhile ostentation zero level what gives a much realistic representation of what is going is nominal GDP. And successful my view, nominal GDP maturation successful America volition proceed to inclination down. We person seen a large rally successful US authorities enslaved prices this year, arsenic telling you the inclination nominal GDP maturation is little and that means the inclination net growth, inclination gross maturation successful America is besides going to beryllium lower.

Then adjacent illustration relates to the depletion communicative successful America which successful my presumption is going to stay anaemic. In my presumption the US consumers, occidental consumers successful general, are going to beryllium expanding savings rate. There is besides a demographic kicking in... the babe roar arsenic heading for retirement, but they cannot spend to retire.

So topline is US existent disposable idiosyncratic income, the bottommost enactment is existent idiosyncratic income excluding existent transportation receipts. Transfer receipts fundamentally mean payment payments. So you tin spot without each the stimulus from the authorities the cardinal income inclination is overmuch weaker. What separates the emerging markets from the developed satellite is an emerging markets similar India with steadfast income maturation and the developed countries, beryllium it the US, Japan, Europe, we bash not person steadfast income growth.

Next illustration highlights a important rally successful US Treasury Bond prices reflected successful declining treasury enslaved yields which has happened this year. At the commencement of this twelvemonth the biggest bearish statement amongst planetary equity investors was that US Treasury bonds were screaming sells.

Everybody said that the treasury enslaved marketplace is going to collapse, the Fed printing wealth ostentation is coming back. Clearly that statement was wholly wrong. US Treasury Bond marketplace has been rallying adjacent with the caller prime successful the S&P and caller weeks up to 1150 level which I deliberation was a highest of this antagonistic inclination rally. Even with the banal marketplace rally the enslaved marketplace did not merchantability off. What this enslaved marketplace is telling you is that nominal GDP maturation is slowing successful America, it is telling you it is not a mean recovery. The recognition multiplier is not working.

Once the inventory cycles hap & the US capex rhythm has ran through, determination volition beryllium thing near to prolong the economical momentum. So successful a deflationary environment, authorities enslaved prices are pb indicator of nominal GDP growth. Right present this is simply a precise important constituent due to the fact that the US enslaved marketplace is sending 1 connection and the US banal marketplace is sending different connection and fundamentally investors person a determination to marque - bash they judge the enslaved marketplace is giving the close awesome oregon the banal market? My presumption is that it’s the enslaved marketplace and my acquisition is that the enslaved marketplace is nary mode smarter than the banal marketplace 90% of the time. Meanwhile, this is US header CPI ostentation for the remainder of this twelvemonth we are going to spot inflationary pressures falling passim the satellite successful the West. That’s going to pb to caller deflation concerns.

In Asia and countries similar China and India, falling inflationary pressures are going to beryllium bullish and everybody is going to realise it does not marque consciousness to interest astir ostentation successful countries similar India. The bully quality is that you person ostentation due to the fact that that reflects the cardinal maturation dynamic. But the cardinal constituent astir the US is if the inclination implicit the past 3 months has extrapolated forward, US CPI ostentation volition crook antagonistic successful October. If that happens, it’s not going to beryllium bullish for equities, it’s going to beryllium bullish for authorities bonds and it’s going to beryllium a awesome for Mr. Bernanke, if we person not done that already, to presume quantitative easing.

Next chart, US mean duration of unemployment. So fundamentally determination are ample groups of the structurally unemployed successful America. So successful this sense, the US is heading for the European systems concern were you person a ample radical of structurally unemployed surviving disconnected the payment state. The occupation successful America is that the payment authorities is overmuch much arguable than successful Europe, hence the governmental disagreement successful America, hence the increasing inclination nether the alleged Tea Party movement.

Meanwhile the classical monetary measures are highlighting the information that we are not successful a re-leveraging cycle, we are inactive successful a deleveraging cycle. This is the US wealth multiplier representing the velocity of wealth successful circulation. Velocity of wealth successful circulation is declining. So agelong arsenic that enactment is declining, it’s deflationary. We don’t person to interest astir ostentation picking up, and this illustration highlights the increasing deflationary threat.

Next illustration is US wide wealth proviso growth. Again, wealth proviso maturation is going down. That’s wherefore the enslaved market’s rallying, that’s wherefore ostentation is not an issue, that’s wherefore Mr. Bernanke is present looking for an excuse to resume quantitative easing.

Next illustration is US slope lending. Again, nary existent motion of immoderate benignant of meaningful prime up successful slope lending annualise lending indebtedness maturation proceed to dilatory different denotation of a deleveraging cycle. This is not conscionable astir banks restricting credit, it is besides astir a alteration successful psychology, economical agents beryllium it the companies oregon consumers person go much hazard averse astir borrowing.

Next illustration is US full securitisation issuance. In the caller recognition roar earlier the bust a ample portion of the recognition rhythm was driven by securitization, truthful we are going to get re-leveraging successful America. We request to spot a steadfast prime up successful securitisation arsenic good arsenic banking lending, but the lone country that has picked up since the situation is the acheronian bluish enactment here.

This is bureau owe slope securities, that’s Fannie Mae and Freddie Mac. These entities are guaranteed by the Federal Government and truthful they bash not truly count. Any backstage assemblage securitisation has hardly recovered. Meanwhile the immense relation played by Fannie and Freddie should not beryllium ignored successful presumption of supporting the lodging market.

Basically astir 96% of the America owe marketplace present is authorities guaranteed. So that's the US situation. The large representation is inactive deflationary. However, successful presumption of macroeconomic shocks that could origin different steep autumn successful planetary equities this twelvemonth for the remainder of 2010, I inactive judge determination is going to beryllium different crisp diminution successful equities similar we saw successful April and May. It’s much apt to beryllium triggered by the Eurozone wherever you person systemic hazard relating to authorities debt.

So this illustration relates to the ECBs nett buying of Euroland authorities bonds. The cardinal constituent present is this ECB was forced reluctantly to halt buying junk authorities bonds successful Europe similar Greek authorities bonds successful May erstwhile the Greek situation blew up. The absorbing constituent is the ECB is lone doing this reluctantly and arsenic equity markets person rallied and the recognition spreads person travel in, the ECB has progressively bought little and little junk authorities paper.

Basically past week they hardly bought thing – they’re astir apt going to spell down to zero conscionable arsenic this antagonistic inclination rally peaks.

How aboriginal we spell down depends connected whether determination is different bout of hazard aversion oregon markets are conscionable focusing connected waning growth. This is Greek and PIG authorities enslaved output spreads. I was recommending for respective years the capitalist should stake connected omniscient widening PIG spread. PIG spread, for radical who don’t cognize this, is the mean enslaved output of Portugal, Ireland, Greece, Spain implicit the German enslaved yields-I closed retired that conscionable astir erstwhile the Greek situation peaked. And I deliberation a amended commercialized is going guardant is what I called a Spanish flu trade, betting connected rising Spanish CDS.

For present the assemblage doubts connected whether these European countries tin marque the fiscal adjustments being demanded by the Germans, but radical should recognize that the Germans person a wholly diametrically other presumption to the Americans - they simply bash not judge that fiscally stimulating is the mode to get yourself retired of the economical problem. So close present the weaker portion of Euroland has embarked connected a fiscal adjustments which is intrinsically deflationary, fixed the downturn they are facing.

The accent trial is being led by Ireland. Last twelvemonth the Irish system contracted successful nominal presumption by much than 10 percent points. So acold the Irish are taking the symptom astir apt due to the fact that the lone roar they person had successful the past 1000 years was erstwhile they articulation Euroland community. So successful that consciousness consenting to instrumentality rather a batch of pain, but successful the large accent trial it is going to beryllium Spain.

Spain is simply a large important country. They had a monolithic backstage assemblage indebtedness binge, they got the biggest lodging bust successful the west, adjacent bigger than the US. So it is going to beryllium absorbing to spot whether the Spanish governmental strategy tin marque this fiscal adjustment, fixed the information they already person astir 20% unemployed. I person an unfastened caput connected this. We conscionable person to spot what happens and whitethorn beryllium the Europeans tin marque this fiscal adjustment, successful which lawsuit it’s going to beryllium a batch of pain, but the Euro arsenic a currency is going to merge with immense credibility.

On the different hand, it whitethorn good beryllium that this level of fiscal austerity is simply incompatible with the governmental systems of these Mediterranean countries. Right now, it is intolerable to archer the European who is watching the shot and present astatine the formation we tin person a overmuch amended ideas they tin instrumentality this symptom by astir January-February adjacent year.

But successful the meantime if the markets volition trial oregon are bound to trial the European’s willingness to instrumentality this fiscal accommodation successful the adjacent fewer months. Tactically I would beryllium selling the Euro against the dollar present arsenic we had a important bounce backmost successful the Euro. So those are my thoughts connected fundamentally the West. It’s a deflationary environment. But successful the US we are going to proceed to stimulate successful the Europeans due to the fact that the Europe’s lawsuit is going to travel the German President.

Turning to Asia, Asia is simply a fundamentally steadfast communicative dissimilar the West. In my view, the highest of the Asia ex-Japan scale you saw anterior to the recognition situation volition beryllium exceeded sooner oregon aboriginal due to the fact that the Asian economies are increasing healthily and person efficaciously decoupled from the West adjacent though the markets haven’t. This is MSCI Asia ex-Japan comparative to MSCI satellite index. They’ve been successful & outperforming inclination since the bottommost of the Asian situation successful 1998 and that outperforming inclination is resuming erstwhile the Chinese banal tightening and past formally commencement easing again which volition hap successful the adjacent fewer months. That volition reaccelerate Asian outperformance.

Valuation wise, Asia is trading successful enactment with the US connected the 12-month guardant PE basis. In my view, sooner oregon aboriginal Asia is going to commercialized astatine a sustainable premium implicit the West due to the fact that the cardinal maturation communicative is truthful superior. In presumption of my comparative instrumentality plus allocation, I’m going to instrumentality a detour here. I americium structurally overweight connected India and Indonesia arsenic these are the 2 champion semipermanent stories successful Asia. But tactically I person reduced India a spot and raised China due to the fact that we are going to get a argumentation inflection points successful China successful the adjacent fewer months which volition beryllium bullish for Chinese stocks.

But my large underweight successful Asia Pac portfolio is Australia which is wherefore I’m weaving much wealth into China due to the fact that it has go cheap. What I americium underweight connected is those stock, sectors, countries which are perceived arsenic beneficiaries of Chinese maturation similar the commodities sector, due to the fact that successful my view, Chinese maturation is going to beryllium slowing for the remainder of this twelvemonth and that’s a antagonistic headwind for the commodities complex.

From an Indian standpoint that was evidently positive. I deliberation lipid is going this week to beryllium arsenic precocious arsenic it’s going to get connected its antagonistic inclination move. Clearly if you are much bullish connected oil, you volition beryllium much bearish connected India and this is my agelong lone portfolio connected Asia oregon ex-Japan.

I started this portfolio opening of 4th fourth 2002, sent astir 25 to 30 stocks successful it, mostly ample cap. I cannot person immoderate currency and it’s agelong lone and is fundamentally playing the home communicative successful Asia arsenic always. Mostly has the biggest value being successful India due to the fact that India since ever has been my favourite equity communicative successful Asia. It’s inactive got a large weighting successful India. We tin reason astir the details of what stocks to ain etc, but fundamentally this has India. Secondly, China if I did not person a large superior orientation, past I would person little successful China, much successful smaller Asian markets similar Indonesia and Philippines.

That’s the show of my long-only portfolio compared with the benchmarks. Since I cannot truly person cash, arsenic I said, truthful I cannot truly hedge it, but for those who privation to hedge I person been recommending since the mediate of implicit 2007 that investors hedge this agelong Asian vulnerability by shorting occidental fiscal stocks. I person present narrowed that down successful caller months into not shorting occidental fiscal stocks, but shorting European fiscal stocks due to the fact that European fiscal stocks are overmuch much geared to the systemic hazard from junk European authorities indebtedness and they are besides successful a overmuch much leverage than American fiscal stocks.

This is my planetary portfolio I person besides been moving since 2002. This has tally connected a theoretical US dollar denominated pension money connected a 5-year presumption and this portfolio I person simplified successful caller months person got 15% weighting successful US 30 twelvemonth treasury bonds.

That mightiness look brainsick to radical fixed the information that the US authorities indebtedness is getting bigger & bigger, but 1 of my views is that the astir apt extremity crippled is simply a sovereign indebtedness situation successful the US and the illness of the US dollar insubstantial standard. I don't deliberation that extremity crippled happens this twelvemonth and successful my presumption earlier this oust successful the crippled is played retired the deflationary pressures successful the US volition instrumentality enslaved yields overmuch lower. So I deliberation it’s rather imaginable the 10-year Treasury goes 2%, 30 twelvemonth treasury goes to 3%. For radical who deliberation that’s insane, I should constituent retired that the 10-year GDP went beneath 1% this week and successful 2003 got to 0.45 ground points.

So the connection is that successful deflationary situation enslaved happening gets precise debased so due to the fact that the hazard aversion causes radical similar banks, security companies, individuals to bargain bonds to fastener successful income due to the fact that successful deflationary situation determination is not overmuch income around. So that’s the deflationary hedge, but 45% of my portfolio is geared to the champion communicative successful the world, which is Asia.

So I got 15% successful Asia oregon ex-Japan carnal property, 30% successful my long-only Asia oregon ex-Japan portfolio. Then I got a longstanding presumption successful golden and golden mining stocks which I person since inception of this portfolio and this presumption successful golden is fundamentally hedging for US dollar denominated pension funds. The large representation hazard is that 1 time simply the satellite revolt against the ongoing US stimulus and determination is simply a sovereign indebtedness situation successful the US dollar, US authorities debt, which means the extremity of the US insubstantial modular and the extremity of the station 1945 Western insubstantial currency system. And successful that situation golden tin spell parabolic. My longstanding people for golden that tin highest successful this bull marketplace is $35000 per ounce.

So this is simply a golden bullion illustration successful US dollar terms. The cardinal constituent astir this illustration is that it’s rather evident golden is successful a bull marketplace and remains successful a bull marketplace and this bull market, erstwhile it ends, volition extremity successful a parabolic spike which we person not seen yet. The adjacent evident trigger for the adjacent large determination successful golden volition beryllium the adjacent clip Mr. Bernanke adopts quantitative easing and the adjacent clip helium does it helium who is going to person to grow the equilibrium expanse much than the past clip (because different radical are going to interest if it’s going to work), but cannot bash it close present due to the fact that the quality travel is not atrocious enough.

Gold stocks comparative to golden bullion price. In my presumption golden stocks made that comparative debased to golden bullion terms successful 2008 erstwhile commodities collapsed. So for equity managers who cannot bargain axenic bullion I would accidental look astatine golden mining stocks due to the fact that if golden goes $35000 per ounce, it is going to beryllium monolithic operating leverage for those mine. Gold stocks that really nutrient golden haven’t hedge the golden and connected jurisdictions wherever governments don’t cease the golden often.

I americium turning to immoderate Asian Pacific charts. I volition conscionable tally done fewer charts connected China that’s a large communicative for everyplace arsenic I accidental Chinese marketplace has underperformed this year. The cardinal constituent to recognize astir Chinese stocks is that they are policy-driven. Indian stocks are earnings-driven portion Chinese stocks are policy-driven. The Chinese authorities is tightening, that is wherefore the marketplace has been going down. When the Chinese authorities starts easing, the Chinese stocks volition spell up and past whitethorn beryllium outperforming Indian stocks for a period.

Real GDP maturation successful China. China maturation peaked successful my presumption archetypal quarter. It’s going to beryllium slowing for the remainder of this twelvemonth astir apt an annualised maturation 12% archetypal quarter, whitethorn beryllium down to 1% by the 4th quarter. That is going to make a batch of marketplace noise. It volition beryllium antagonistic for commodities. It’s not a large deal, but it volition make a batch of noise. Chinese slope landing has slowed dramatically this twelvemonth from the surge past year. China is simply a bid system banking system. So that looks dramatic, but that has seen the indebtedness maturation slowing to 18% which is inactive respectable, it’s not acold turkey.

China has been tightening connected the spot market. So what the banal marketplace successful China wants to spot is much and much developers consenting to chopped spot prices due to the fact that it’s much than evident that developers are stopping raising prices and starting to chopped prices. The greater the anticipation that the Chinese authorities stops tightening that process should play retired successful the adjacent fewer months. As you tin spot present mean regular residential income of Chinese properties person fallen beauteous dramatically since April erstwhile the authorities got much assertive connected tightening. You’d person work a batch astir Chinese spot bubbles, particularly successful America.

The Chinese spot markets person a batch of excess supply, but it’s not a bubble due to the fact that you person precise blimpish owe financing. What you bash person determination is simply a batch of precocious extremity developments sitting 80% empty. So Chinese radical similar to person batch of level worth and don’t similar to person flats erstwhile utilized due to the fact that they deliberation a utilized level is devalued conscionable similar a utilized car.

What astir the currency? When the renminbi starts to emergence against the US dollar incrementally, maximum incremental appreciation volition beryllium of 5%. So the Chinese are going to fto their currency spell up slightly, but you are not going to get immoderate assertive moves.

I got a illustration connected Hong Kong conscionable to item that we person got a large semipermanent plus ostentation communicative successful Asia. The quintessential plus ostentation communicative successful Asia is Hong Kong due to the fact that of the proviso constraints. In my view, Hong Kong spot would sooner oregon aboriginal transcend 1997 peaks. You tin get a mortagage successful Hong Kong contiguous for little than 1%. There you see, isolated from Mumbai, this is simply a 1 spot marketplace successful Asia with the monolithic proviso constraint. This is simply a caller supplier residential properties. So Hong Kong I deliberation is simply a classical plus ostentation communicative to monitor.

Turning to India, I would not spell excessively overmuch linked to India due to the fact that everybody implicit present would cognize much astir it than me, but we astir apt had a large ostentation scare astatine the commencement of this year. In my view, it’s fundamentally silly to interest excessively overmuch astir inflationary pressures successful Asia.

We should beryllium celebrating the information that determination is ostentation due to the fact that if determination wasn’t inflationary pressures successful Asia, it would mean the satellite is facing a planetary slump due to the fact that determination is nary maturation dynamics successful the developed world. So I americium gladsome determination is inflationary pressure. Having said that ostentation is going to beryllium coming disconnected successful India for the remainder of this twelvemonth which means that interest should recede. The cardinal slope volition proceed to tighten incrementally. I deliberation that’s sensible fixed the outer environment, but I deliberation incremental tightening that the RBI is doing is capable to upset stocks present unduly.

Bank recognition growth. This I deliberation is simply a precise important chart. The Indian banking assemblage is simply a capitalist banking strategy dissimilar the Chinese system. So erstwhile the economies slow, the banks dilatory their lending whereas successful China they were ordered to lend more. Now the recognition rhythm is picking up again, that’s a precise steadfast development. We are looking astatine astir 20% indebtedness maturation successful India this year. But I deliberation the astir important affirmative points of each is that the recognition rhythm is being led by infrastructure loans, not idiosyncratic loans, arsenic you tin spot from this chart. This raises the cardinal constituent which successful my presumption is the captious bearable for the Indian macroeconomic communicative this twelvemonth and for the adjacent 5 to 10 years is whether we tin get an infrastructure rhythm playing out.

The information that infrastructure loans are starring the recognition rhythm is anecdotal grounds that is happening. If we get infrastructure happening successful India, it’s rather imaginable that India tin turn astatine 9% positive a twelvemonth for the adjacent 5 years astatine least, if not 10 years, which means that India successful my presumption is going to beryllium increasing much rapidly than China. In my presumption a much basal inclination maturation successful China is going to beryllium 8% and that’s a maturation complaint that Chinese Communist enactment is going to beryllium comfy with. So the higher maturation complaint successful India than successful China, if the infrastructure communicative happens, is going to rise the illustration of the Indian communicative globally.

Clearly if I americium incorrect and infrastructure does not hap successful India, the full Indian communicative becomes overmuch little interesting. It’s not a disaster, but the state lone grows conscionable 5%-6%. So this is fixed concern comparative to GDP successful India. I americium expecting this enactment to prime up again. Car sales, two-wheelers income are going up. So the user communicative is inactive perfectly bully communicative successful India. It has picked up with the monetary easing, but arsenic I accidental the cardinal adaptable for maine is infrastructure.

In presumption of risks to the Indian markets, astir apt the biggest hazard to the Indian marketplace is simply the immense magnitude of overseas money. My ain conjecture is that the adjacent clip determination is simply a planetary hiccup, foreigners volition merchantability India little aggressively than successful 2008 for the elemental crushed that India has shown it tin decouple from the US economical cycle.

The different constituent is the information that overseas investors enactment overmuch successful India is fundamentally confirmation that India is simply a bully communicative and those overseas investors who person not yet invested successful India are each desperately waiting for a correction. So they tin invest, that’s the mindset of them.

One twelvemonth guardant terms to book. India is not cheap, but it’s not costly successful the discourse of Indian banal marketplace past and successful my presumption the Indian banal marketplace volition proceed to commercialized astatine a premium to Asian and parent of emerging markets due to the fact that the Indian marketplace is similar 1 large maturation banal and maturation stocks commercialized astatine a premium. Clearly, if you privation to participate successful an equity portfolio for dividends & you don’t bargain India, past you should spell and look astatine Singapore.

This illustration perceives a utile illustration for anybody who is trying to rise Indian funds successful the country due to the fact that it shows a immense outperformance of India - MSCI India comparative to MSCI China successful caller history. I volition conscionable extremity with the 3 charts connected Japan & the crushed I americium doing this is due to the fact that of my acquisition erstwhile I lived successful Japan successful the aboriginal 90s and the acquisition of Japan successful the past 20 years is simply a imaginable pb indicator of what is going to hap successful the West.