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2010 - a bumpy road ahead?

2010 - a bumpy road ahead?. Investment Presentation Jersey – February 2010. Speakers Tristan Hanson Jonathan Schiessl Craig Farley. Craig Farley. Ashburton Investment Models. Chindia: Navigating choppy waters February 2010. What’s it all about…?. Commonly heard phrases today;

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2010 - a bumpy road ahead?

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  1. 2010 - a bumpy road ahead? Investment Presentation Jersey – February 2010 Speakers Tristan Hanson Jonathan Schiessl Craig Farley

  2. Craig Farley Ashburton Investment Models Chindia: Navigating choppy waters February 2010

  3. What’s it all about…? Commonly heard phrases today; 1) ‘ The inflation genie is out of the bottle – tightening is imminent’ 2) ‘China is cutting off domestic bank lending’ 3) ‘China’s property market is a bubble waiting to burst’ 4) ‘India’s fiscal deficit is unmanageable’ 5) ‘Renminbi revaluation is a certainty’ 7

  4. 10 CPI (YoY%) 8 6 4 2 0 -2 -4 01 02 03 04 05 06 07 08 09 10 Inflation in China and India… WPI (YoY %) 14 12 10 8 6 4 2 0 -2 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Source: Bloomberg, Office of the Economic Adviser

  5. India vs. China food inflation % change YOY • Food inflation the major driver • Causes broadly similar • But policy response will differ Source: Office of the Economic Adviser, CEIC, Trusted Sources

  6. Same sickness, different medicine… China - % change last 2 yrs India - % change last 12 months Source: Office of the Economic Adviser, CEIC • China - led by fresh vegetables. • Much lower than levels seen in India • Government likely to increase food imports • India - must be seen to take immediate action • Food accounts for c.43% household consumption • RBI will be forced to raise interest rates

  7. Putting China’s loan ‘crunch’ in perspective… (%YoY) China bank lending 40 • Interpreted as prelude to squeeze in monetary policy • Communicated to banks late last year • Lending explosion 1st 3 weeks of 2010 35 30 25 20 15 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (%YoY) China FAI 36 • Early 2009 opened floodgates to new lending • Situation today radically different • Worst of crisis has passed. New priories identified 34 32 30 28 26 24 22 2005 2006 2007 2008 2009 2010 Source: Bloomberg, CLSA

  8. Managing China’s property bubble China residential property prices (%YoY) 14 • Driven by supportive policies, unprecedented liquidity • BUT sector remains best option for maintaining strong GDP growth • Selective policy changes • Prices to stabilize • Result: government to succeed 12 10 8 6 4 2 0 -2 -4 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: CEIC, Trusted Sources

  9. Fiscal deficit looks ugly but… Fiscal Deficit as % GDP IIP (YoY %) 9 18 8 16 7 14 12 6 10 5 8 4 6 4 3 2 2 0 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 May-05 May-06 May-07 May-08 May-09 -2 Source: Bloomberg

  10. RBI can step onto the front foot… • Spending programmes tapering off • Significant reduction in fiscal deficit going forward now looks feasible • Huge improvement in central revenue growth collection • Disinvestment proceeds Source: BNP Paribas, Reuters EcoWin Pro

  11. Renminbi revaluation…? • PBOC – foreign exchange policy misinterpreted • Nobody knows China’s real intentions but enough reasons to doubt MAJOR change in policy • Conclusion - China increasingly confident policies are the right ones • Currency revaluation would run counter iiito current policy objectives RMB 8.5 8 7.5 7 6.5 2007 2004 2005 2006 2008 2009 2003 1997 1998 1999 2000 2002 2001 Source: Bloomberg

  12. In summary… Both underlying economies are experiencing a nascent recovery, although India is in a more fragile state given the precarious inflation situation; 1) Likely inflation policy - rate hikes in India, food imports in China. 2) China is NOT cutting off lending 3) Property prices will stabilize from here 4) A significant reduction in India’s fiscal deficit now looks feasible 5) Enough reasons to doubt a major policy change on the currency front Volatility to re-emerge as a Force Majeure in 2010. Nevertheless equities in both markets should return reasonable performance. Patience & resolve will be rewarded. 7

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