Keynote address delivered by Christopher Wood, equity strategist, CLSA, in his first public appearance in India, at the ET Now Market Summit-2010.
Hello everybody and thank you for having me. I will be discussing some charts that pertain to the current situation in the West, and then move on to charts on Asia and India. So let’s start with the bad news first. But it seems that I am going backwards with my presentation.
To begin with, let’s look at the US situation. This chart shows the total debt as a percentage of GDP in the US. The story is simple: the amount of debt in the US has been decreasing since the credit crisis in 2007-2008. This is the first time that total debt has decreased in America since the Great Depression. The Federal Reserve, through its chairman, Mr. Bernanke, has been trying to stimulate re-leveraging, but so far, they have not been successful. My assumption is that the US is now in a long-term de-leveraging cycle, which means lower trend GDP growth. If re-leveraging does occur in the coming months, I will change my view, but until then, I am assuming a de-leveraging cycle until the data proves otherwise.
The next chart shows the rate of growth of borrowing in the US. Despite the increase in borrowing by the Federal Government, the overall rate of growth of borrowing has been decreasing in the system.
Moving on, this chart shows the long-term trend in US nominal GDP growth. In a deflationary environment, it is more relevant to look at nominal GDP rather than real GDP. Nominal GDP growth in America will continue to trend down, which means lower trend earnings and revenue growth.
Next, let’s look at the consumption story in America, which I believe will remain weak. US consumers, along with Western consumers, are increasing their savings rate. Additionally, the baby boomer generation is heading for retirement but cannot afford to retire, which further affects the income trend. This chart shows the US real disposable personal income, and you can see that without government stimulus, the fundamental income trend is weaker. In contrast, emerging markets like India have healthy income growth.
This chart highlights the significant rally in US Treasury Bond prices, resulting in declining yields. This rally contradicted the bearish consensus at the beginning of the year, which stated that Treasury bonds were a sell. The bond market is indicating that nominal GDP growth is slowing and that the recovery is not normal. The bond market is a lead indicator of nominal GDP growth in a deflationary environment.
The next chart shows the US headline CPI inflation, which is expected to fall throughout the world in the West. In Asia, falling inflationary pressures will be bullish, and it is not necessary to worry about inflation in countries like India. However, if the trend of the past 3 months continues, US CPI inflation will turn negative in October, which will not be bullish for equities but rather for government bonds and will signal the need for quantitative easing by Mr. Bernanke.
This chart shows the average duration of unemployment in the US, indicating a large group of structurally unemployed. This situation is similar to that in European countries where a large group relies on the welfare state. However, the controversial nature of the welfare state in America has led to a political divide.
The following charts highlight the overall deleveraging cycle in the US. The velocity of money in circulation is declining, indicating a deflationary environment, and money supply growth is also decreasing. US bank lending and securitization issuance are not showing signs of a meaningful pickup, further illustrating the deleveraging cycle.
In conclusion, the big picture is still deflationary in the US. Macro-economic shocks could cause another steep decline in global equities for the rest of 2010. I anticipate another sharp decline in equities, similar to what we saw in April and May.
Thank you.