| India, Gold-The Two Best Asset Class
It should be evident to all, that it is not as easy to inflate out of a debt bust as many mechanical monetarists still seem to believe. In this respect it is worth repeating again GREED & fear's longstanding view that the 2007/2008 credit risks marked the "super-cycle".
Very soon investors will loose all faith in US Treasuries. This is when the time for Gold would have come. There have been the odd days when all risk assets have been down save for the US dollar, government bonds and gold bullion. It is the resilience of gold on such days, when the commodity complex is down, that shows that mainstream investors are beginning to understand that gold is a financial asset and not a In this respect it is also interesting how little bullion was withdrawn from the SPDR Gold Shares ETF (GLD) when gold corrected sharply a few weeks ago. Thus, the gold bullion price fell from US$1239/oz on 12 May to US$1177/oz on 21 May, while GLD's gold holdings rose from 38.9m oz to 39.2m oz over the same period. Indeed, since then gold bullion held by GLD has risen by a further 2.5m oz to 41.7m oz (see Figure 12). All this highlights the reality that gold remains in a powerful bull market. India-The Best Asset Class Meanwhile in three years, compared with the present minimum level of 10%. Still in the short term there are clearly negative supply implications. CLSA's head of India research N. Krishnan estimates that 61 of the BSE500 companies will have to raise US$13-17bn this year. This is on top of the projected US$13bn of other issues in the IPO pipeline. GREED & fear India will grow faster than China The other point to remember about India is that it is likely to grow faster than China for the next five years, say by 9% plus per annum, if an infrastructure cycle kicks in as expected here. Whereas in China, the core growth trend is 8-9% at best, and that assumes bravely a gradual albeit successful transition to a more consumption driven economy as the export sector fails to return to its former glory days. Meanwhile, it is currently fashionable to disparage the Asian asset-reflation story because of perceived policy risk. While understandable, the policy risk is likely to recede as already discussed here once Asian policymakers, from China down, wake up fully to the renewed deflationary pressures hitting deleveraging Western economies. For then they will likely realise that it is too dangerous to continue tightening. But brace for sell-offs on negative news from the Euroland World financial markets remain jittery and GREED & fear remains risk averse with newsflow from Euroland remaining the most obvious area to trigger renewed corrections. This is also the view of CLSA's technical analyst Laurence Balanco.
He notes in his latest research (Price Action Derivatives, 7 June 2010) that since 16 April there have been eight 90 percent volume down days and four 90 percent volume up days recorded on the New York Stock Exchange.
This intensifying volatility is not a sign of a healthy market but rather indicates a situation of extreme divergence which is not normally associated with happy endings. In terms of future negative newsflow from Euroland in coming weeks and months, Spain remains the most likely source of bad news with the trigger likely to be growing revelations of the scale of bad debts in the Spanish banking system. Meanwhile, €40bn of Spanish government debt is due for refinancing in June and July (see Figure 1). Euroland has been busy this week finalising the details of its own €440bn special purpose vehicle (SPV) which was announced in May as the entity to ease the refinancing of Euroland government paper. Still in Europe since it is such an obvious fudge. This is why there remains more market focus on whether the ECB will engage in full scale quantitative easing. On that point the ECB again scaled down its purchases of government bonds last week through its so called Securities Markets Programme (SMP) introduced on 10 May. Thus, the ECB bought only €4.9bn of Eurozone bonds last week, down from €8.8bn in the previous week and €16.3bn during the first week of the programme. So far the price action would appear to suggest that the ECB has only been buying Greek, Portuguese and perhaps Irish government paper. Thus, since the introduction of the ECB bond-buying plan on 10 May, the Greek, Portuguese and Irish 10-year government bond yields have declined by 430bp, 105bp and 75bp respectively to 8.15%, 5.23% and 5.10%. By contrast, Spanish 10-year government bond yields are now 13bp above their 7 May high (see Figure 2). Still it may only be a matter of time before the ECB is forced to buy Spanish government paper also. Clearly for now, it is not disclosing what paper it is buying. So with the ECB still reluctant to give the risk assets what they want, in terms of a commitment to full scale quantitative easing, the likelihood is that the markets will, sooner or later, have to sell off more to test the resolve of the ECB. China will not tighten further Why is the PRC willing to take this risk? The answer continues to be the growing social tensions emanating from China's headlong pursuit of growth. The symptoms of these social tensions can be seen in the recent publicity surrounding labour protests and, more bizarrely, in the copy cat killings of children in Chinese kindergartens when single men have gone on the rampage picking on the most vulnerable target. Because the PRC has a well-honed instinct for survival it is not ignoring such pressures. The wage hikes forced on Foxconn are just a signal that wages will be rising throughout coastal China, as will minimum wage levels. Thus, after announcing a 30% pay rise last week from Rmb900 per month, Foxconn announced again this week that it would raise monthly basic salaries for qualified workers in its Shenzhen factory by a further 66% from Rmb1,200 to Rmb2,000 if they pass a three-month evaluation period. While the Shenzhen Municipal Government announced this week that the minimum wage in the city will be raised by 10-22% from July to Rmb1,100 per month, up from the present Rmb1,000 inside the Special Economic Zone (SEZ) and Rmb900 outside the SEZ (see Figure 8). But if the PRC is serious about all this it remains the case, as previously discussed here, that the best way to ease the undeniable social pressures triggered by China's property boom is to develop a social housing policy that will provide shelter to the 713m rural population and the 150m of migrant workers in the cities who are priced out of the private housing market. In this respect Beijing home prices are now 16 times household disposable income based on CRR estimates. The reality is that many "ordinary people" in Beijing could not afford homes even if they halved in value. This is why expansion of social housing is inevitable if it still remains unclear exactly how this programme will evolve. What is evident is that the national government will have to take the initiative since at the moment, as previously discussed here, neither local governments nor private developers are incentivised to build such low cost housing. This is also why presumably the government is increasing the supply of land for residential housing. In 2009 the figure was 76,461 hectares. In 2010 the figure is 180,000 hectares. An expansion of social housing on a five to ten year view should also allow the government to step back from its micro management of the residential property market. For, clearly, the problem with such cycles of intervention is that they create the impression that prices are a one-way bet up whenever the central government releases its grip on the market.
Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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