KVP's Macro Take: It's time for India, the baby China, to stand up
- The coming week sees a flurry of Fed speakers and heavy economic data from the US and China (Q1 GDP)
- Probably most anticipated central bank meeting will be from the Bank of Canada
- People may have a snapshot of India, but they are missing the big picture
By Kay Van-Petersen (KVP)
Live from the Asia Pacific!
RBA/Fed minutes and baby China
RBA and AUD: 0.7682 - that's 64 basis points up for the week. So unlike my expectations for a cut from the RBA last Tuesday, they kept the rate unchanged at 2.25% leaving May 5 as the next D-day – where to be fair, most of the economists in the market were positioned for the cut to happen.
Here is the link in case you missed the statement. The AUDUSD continues to be one of my more favourite shorts against the USD simply because it has catalysts on both countries: Australia (RBA cuts, slow down, falling commodity prices) and US (Fed hike in 2H, macro still strong).
To be honest I was actually surprised that AUD only closed the week up +64 basis points versus the US, registering on a high of 0.7739. Was very confident and flagged we’d take out 0.77 initially if the RBA did not cut, however was still expecting us to make a run for 0.7750 / 0.7800 given that we still have a few more weeks to go to the next Federal Open Market Committee meeting (April 29) and the RBA meeting (May 5).
Then again the US dollar had a massive week, with the DXY rallying +2.89% to 99.34 for the week – so maybe we will see the AUD tick up over the next one to two weeks before the focus returns on the late April/early May meetings. I would be looking to add to short exposure at 0.7750 / 0.7800 and very aggressively north of 0.7850.
July and September are the key meetings to watch out for, June may be a tad early given that they want to see full Q1 15 GDP data (yes, they know it will be weak) and pick-up starting to come through in Q2 15.
INDIA: If you’ve been through our Q2 Essential trades, you’ll know one of KVP’s two main calls from the APAC macro strategy desk is a mega bullish call on India. If you are in the “India was up +30% and is looking expensive right now" camp or “We’ve had these false starts before…” well you may have a snapshot, but your missing the picture. Its time to bang the desk on this again and remember last time KVP banged the desk on something, DollarSwissy (Never trust a Swiss central banker) went up 17% unlevered in pretty much a straight line to parity.
And just a few weeks later (Jan 26) KVP mentioned Eurozone equities were going to the moon as ECB QE was not fully priced in and later even realised that he was not being aggressive enough. So +40% to +60% in Eurozone equities by the end of the year may have sounded like an extreme view for the sake of publicity. Let’s take a quick MtM of where the main Indices are in Europe from April 10 close, including KVP’s all-time favourite, Ms. Portugal.
INDEX LAST PRICE %YTD
Euro Stoxx 3,817 +21%
CAC 40 5,241 +23%
DAX 12,375 +26%
FTSE MIB 23,877 +26%
PSI-20 6,308 +32%
So with Q1 just barely over, we are already halfway to the bottom end of the +40% to +60% range and for those of you waiting for that “market correction” to get in – there are still people in the US waiting for that S&P market correction since QE started there years ago. This party is going on with or without you – whilst you can play this view (and risk manage) through options on Euro Stoxx (most liquid) and most of the main indices have futures & CFDs on them, some USD denominated (no euro FX risk) Exchange Traded Funds include FEZ (Euro Stoxx), EWG, EWP, EWI & PGAL (Not as liquid).
Soooo… going back to India let me put it in perspective when I say over the next 3-5-10 years India is going to be one of the hottest markets around. Below is a layer cake summary of the structural themes that leave me super bullish on this “Baby China” – no other country I can think of has this myriad of factors powering it.
1. India = baby China, where China was 10 years ago
2. India will grow more than China this year at over 7% and within 10 years, it will overtake China as the most populated country in the world.
3. China GDP per capita is around $7000, India is $1,500… the inflection point from $1,500 to $3,000 is a lot lower and easier… i.e. lots of low hanging fruit
4. China and the likes of Japan have huge demographic problems, 50% of India is under the age of 25, if you move that to 35, then its 65% of the population
5. They are very well educated and speak English, making them that more versatile for future growth and development (i.e. can leap frog traditional manufacturing development pathways)
6. They have probably one of the top five best central bankers in the world with Raghuram Rajan – i.e. monetary policy is in great hands
7. They are a huge beneficiary of lower oil prices – which I believe we will be in an environment of lower oil for longer than most people expect
8. They have the reform agenda theme – first time in over 30 years that one party controls parliament and is elected on a reform agenda across ethnic and religious backgrounds
9. Modi has a great track record from Gujarat, of very robust growth, cut of red tape, more efficiency, etc. (ie, he’s not an academic or bureaucrat with no track record)
10. They have CAPEX needs that will extend for decades
11. India is very well insulated from the rest of the world, hence there are diversification benefits of being exposed to India as it can keep doing its thing when the rest of the world is falling off a cliff
Easiest ways of getting exposure to this multi-year bullish call on India is through ETFs such as the INDA (MSCI India) and INDY (India 50), for the smaller cap exposure (also less liquid) there is SCIF. As its hard to get exposure to most onshore specific names or sectors, institutions looking to place much bigger long-term bets could explore equity return swaps on a +3-5 year horizons.
Key macro data points to watch over next week
Speakers/Other: April 13-19
Fed Speak - Kocherlakota (Apr 14), Bullard (15), Lacker (16), Lockhart/Mester/Rosengren/Fischer (17)
Other Speakers – Kuroda (Apr 15), Ingves-Riksbank (17)
MEETINGS/MINUTES THIS WEEK: April 13-19
Bank of Japan Minutes (Mon April 13), BI 7.50%e 7.50%p (Apr 14), ECB (Apr 15), BoC 0.75%e 0.75%p (Apr 15), Fed’s Beige book (Apr 16), RBA FX Transaction (Apr 16), G-20 central bankers and finance ministers in Washington, HK 0.36%p (Apr 16)
Next Week: April 20-26
Reserve Bankof Australia minutes and Stevens speaking in NY (Apr 21), BoE Minutes (Apr 22), Turkey 7.50%p (Apr 22), Wheeler speaks (Apr 23)
ECONOMIC DATA FLASH: US & China heavy…
Most key data points should be China Q1 GDP, US/CA/UK inflation and Bank of Canada decision.
China: Q1 GDP 7.0%e, 7.3%p (Wed Apr 15); Trade data, Retail Sales, IP and FAI, New Yuan Loans CNY 1040.0bn e, 1020.02bn p, Property prices
Japan: PPI, Machine Orders, IP
Australia: Retail Sales +0.4%e, +1.04%p, Home loans MoM 3.0%e, -3.5%p, Foreign reserves
New Zealand: REINZ House Sales 12.6%, Food prices -0.7%p, BusinessNZ Manf. PMI 0.7%p
UK: CPI Year on year 0.0%e, 0.0%p, Core Yoy 1.2%e, 1.2%p, PPI, Jobs data
EZ: IP, CPI YoY -0.1%e, -0.1%p, Core YoY 0.6%e, 0.6%p
US: Retail Sales Advance 1.0%e, -0.6%p; PPI 0.2%e -0.5%p, Empire manf. 7.17e 6.9p, IP MoM -0.3%e, 0.1% p, Housing starts 1040K e, 897K p, CPI MoM 0.3%e, 0.2%p, Core MoM 0.2%e 0.2%p, CPI YoY 0.0%e 0.0%p, Core YoY 1.7%e 1.7%p (Fri Apr 17), Mich. Conf. 94e 93p
Canada: CPI YoY 1.0%e 1.0%p, Core YoY 2.1%e 2.1%p (Fri Apr 17), Retail Sales 0.5%e -1.7%p
Source: Bloomberg & Saxo Capital Markets as of Sun, 5 Apr 2015.
Lastly, life is very similar to investing/trading, you end up with what you put up with – so set your standards high, focus on the process and a profitable trading/investing to you all – be successful and don’t forget to enjoy the journey.
The effective use of our time is the most valuable commodity we have.
-- Edited by Adam Courtenay
Kay Van-Petersen (KVP) is Asia macro strategist at Saxo Capital Markets, the home of social trading.