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Today we are also publishing a Special Report titled Chinese Auto Demand: Time For A Recovery? Highlights India is the third-largest world consumer of crude oil. Hence, fluctuations in its oil consumption is a non-negligible factor behind global oil prices. India’s petroleum demand growth is slowing cyclically due to the domestic demand slump and a dramatic drop in vehicle sales. This, combined with China’s ongoing slowdown in petroleum product demand, will have a non-trivial impact on oil prices in the next six months. From a structural perspective, India’s long-term demand growth for petroleum is decelerating as well. Feature India’s petroleum products consumption growth is slowing. Chart 1India Is The World's Third Largest Crude Oil Consumer India is the world’s third-largest consumer of crude oil, guzzling 5% of global consumption (Chart 1). Hence, fluctuations in India’s crude oil/petroleum consumption is a non-negligible factor affecting global oil prices. India’s petroleum products consumption growth is slowing. This comes on top of China’s ongoing petroleum demand deceleration. Together, the two countries account for 19% of the world’s oil intake. Therefore, deceleration in their oil consumption growth will have a considerable impact on the outlook for global oil demand growth. A Pronounced Cyclical Oil Demand Slump Indian petroleum consumption growth has decelerated significantly on the back of slumps in Indian domestic spending and economic activity (Chart 2). Please click on this link for an in-depth analysis on the domestic demand slump in India. Chart 2Indian Petroleum Consumption Growth Has Been Dwindling Specifically, vehicle purchases and industrial sectors have been hit hard. These sectors are critical for Indian petroleum consumption, since transportation demand accounts for 50% and industrial activity for around 25% of total petroleum consumption (Chart 3). Indian vehicle sales have been in freefall. Chart 3Transportation & Industry Guzzle The Most Fuel In India Chart 4Indian Vehicle Sales Are In Deep Contraction Indian vehicle sales have been in freefall. Chart 4 shows passenger car sales are shrinking at 30% and sales of two and three-wheeler units are contracting at 20% from a year ago. Moreover, commercial vehicles and tractor unit sales are falling at annual rates of 35% and 10%, respectively. Chart 5 illustrates that the number of registered vehicles is expanding at a lower rate than before – i.e., its second derivative has turned negative. This signals a further growth slowdown in gasoline and diesel consumption. We use the second derivative in this analysis because registered vehicles are a stock variable. However, we are trying to explain changes in petroleum consumption which is a flow variable. Therefore, the second derivative of a stock variable (the number of registered cars on the road) explains the first derivative of a flow variable (the growth rate of oil consumption). Looking ahead, vehicle sales will remain in the doldrums because of a lack of financing. In particular, the impulse on auto loans issued by commercial banks is negative (Chart 6). Chart 5Slowing Growth Of Vehicles On The Road = Weaker Pace Of Fuel Consumption Chart 6Indian Banks: Negative Vehicle Loan Impulse More worrisome is the ongoing turmoil in India’s non-bank finance sector (NBFCs), which has also significantly hit auto sales. In the past, the NBFC sector played a major role in funding Indian auto purchases. For instance, according to the ICRA, an independent rating agency in India, NBFCs have helped fund the purchases of 65% of two-wheelers, 30% of passenger cars and around 55% of commercial vehicles – both new and used. Given these non-bank finance companies are currently facing formidable funding and liquidity pressures amid rising NPLs (Chart 7), they are being forced to shrink their balance sheets. This is damaging to auto sales. Please click here for an in-depth analysis on the Indian banking and non-bank finance sectors. Chart 7Major Asset-Liability Mismatches Among Indian Non-Bank Finance Sector Chart 8India's Capex Has Been Weak Turning to the industrial sector, overall Indian capital spending has been weak. India’s real gross fixed capital formation has rolled over, the number of capex projects underway is nosediving and both capital goods imports and production are contracting by 7% and 12% on an annual basis (Chart 8). Falling industrial activity has taken a toll on the consumption growth of petroleum products with industrial applications, such as bitumen, naphtha and petroleum coke, etc. The growth rate in demand for these products is dropping — a significant development since they account for 25% of overall petroleum consumption in India.1  Bottom Line: India’s petroleum consumption growth has been slowing drastically from a cyclical perspective. And Moderating Structural Oil Demand Growth It appears there are structural factors at play that will also reduce India’s long-term demand for petroleum. On top of the cyclical demand slowdown, it appears there are structural factors at play that will also reduce India’s long-term demand for petroleum: Chart 9Impressive Efficiency Gains In India's Vehicle Fleet The fuel efficiency of India’s vehicle fleet is markedly improving (Chart 9). Additionally, since 2015-16 the Indian government has been proactively pursuing new emission/fuel efficiency standards. For instance, emissions standards for new passenger vehicles will fall to 4.2 L/100 KM by 2023 down from its current level of 4.6 L/100 KM. This will lead to a 7% reduction in auto fuel consumption. While this is not a large reduction, the government has the scope to implement even stricter standards since Indian car makers are easily meeting these targets. Finally, the Indian government has been aggressively promoting electric vehicles (EVs) as an alternative to traditional autos. It has made the advancement of this sector a priority. Ownership of EVs is currently negligible in India. However, the government is pushing for EVs to make up 30% of vehicle sales by 2030. In addition, it has been providing incentives such as sales tax cuts and subsidies to the sector. Finally, Mahindra and Tata Motors are already establishing a lead in the EV industry and are developing new EV models in collaboration with foreign automakers.  Bottom Line: The pace of India’s structural demand for petroleum will also be downshifting. Oil Inventory Not A Critical Factor Chart 10China: Oil Inventory Drives Oil Imports Inventory accumulation and destocking can play an important role in oil price fluctuations. For example, inventory accumulation plays a key role in driving Chinese crude oil imports (Chart 10). There is a dearth of data on Indian oil inventories to make a strong inference about its de- and re-stocking cycles. However, we have the following observations: India has the capacity to store 5.33 million tons worth of strategic oil reserves - equivalent to around 10 days of its crude oil consumption. It is not clear whether or not these reserves are at full capacity. However, even if we assume they are only 50% full and the government decides to fill its reserves all at once, this would require the importation of an additional 2.67 million tons of oil, equivalent to only 1.2% of Indian crude oil imports and 0.05% of global crude oil demand. This is a negligible amount, and is unlikely to have any impact on global oil prices. Furthermore, while the Indian government is planning to expand its storage capacity by an extra 6.5 million tons, this will only take place in the next six to eight years. Thus, it will not meaningfully affect oil imports in the medium term. Chart 11India: Oil Consumption Drives Oil Imports Finally, India’s crude oil imports are strongly correlated with its petroleum final consumption (Chart 11). Therefore, it is reasonable to assume that Indian consumption – not the oil inventory cycle – is relevant for crude imports, and by extension for oil prices. Bottom Line: India’s petroleum product and crude oil inventory fluctuations are too small to influence the nation’s crude imports and hence global oil prices. Investment Conclusions From a cyclical perspective, Indian final demand for crude oil has been weakening. A major re-acceleration in economic growth and hence oil demand is not imminent. We discuss the outlook for China’s auto sales in a separate report published today. Together India and China consume 19% of world oil, and therefore a deceleration in their oil consumption growth will have a non-trivial impact on the pace of global oil demand growth. Chart 12Expansion Pace Of Vehicles On The Road Has Downshifted In India & China Our estimations for annual growth in cars on the road (excluding 2-wheelers) has dropped to 5.8% in India and 10.5% in China (Chart 12). This entails a slower pace of oil demand growth than in the past. Besides, if one rightly assumes petroleum consumption per car is declining for structural reasons due to technological advancements by car manufacturers and enforcement of stricter efficiency standards by governments, oil consumption growth will be considerably slower going forward relative to the past 20 years. Together India and China consume 19% of world oil, and therefore a deceleration in their oil consumption growth will have a non-trivial impact on the pace of global oil demand growth. This presents a major risk for crude prices in the next 6 months or so. Beyond the cyclical horizon, the long-term demand outlook for oil is also downbeat. Please note that this is the view of BCA’s Emerging Markets Strategy team, and differs from that of BCA’s house view, which is bullish on oil. Chart 13India’s Relative Equities Performance Benefits From Lower Oil Prices In turn, low oil prices are positive for the relative performance of Indian stocks versus the EM equity benchmark (Chart 13). This was among the primary reasons why we upgraded the allocation to this bourse within an EM equity portfolio to neutral from underweight on September 26, 2019. In absolute terms, the outlook for Indian share prices remains downbeat, as discussed in the same report. Finally, to express our negative view on oil prices, we are reiterating our short oil and copper / long gold position recommended on July 11, 2019. Industrial commodities such as copper and oil will continue to underperform gold prices in the medium term (the next six months). Ayman Kawtharani, Editor/Strategist ayman@bcaresearch.com   Footnotes 1      Diesel consumption will also be impacted. While the latter is mostly consumed by the transportation sector in India, diesel does have some industrial applications as well. Equities Recommendations Currencies, Credit And Fixed-Income Recommendations

ハイライト 我々はインド株を新興市場（EM）株式ポートフォリオ内でアンダーウェイトからニュートラルへ格上げしています。 それでも、インドの株価の絶対的なパフォーマンス見通しは依然として弱気です。 財政赤字の拡大により現地債利回りが上昇する可能性が高い。 高い債券利回りと依然として低迷する成長は、法人税引き下げという一時的な株価押し上げ効果を打ち消すでしょう。 特集 この予想外の異例措置は、インド経済の成長が急速に落ち込んだために採用されました。 インド政府は先週、予想外の大幅な法人所得税減税に踏み切りました。政府は実効法人税率を35%から約25%へ引き下げました。この劇的な政策変更は投資にどのような影響を与えるのでしょうか。 なぜ異例措置なのか？ この予想外の異例措置は、インド経済の成長が急速に落ち込んだために採用されました： 家計の裁量的支出が縮小している（チャート I-1）。 企業の設備投資の指標は極めて弱く、多くの場合縮小している（チャート I-2）。 チャート I-1 インド：家計の裁量的支出が縮小している インド: 家計の裁量的支出が縮小している インド: 家計の裁量的支出が縮小している チャート I-2 インド：設備投資が低迷している インド：設備投資は低迷している インド：設備投資は低迷している 上場インド企業上位500社の1株当たり利益は、現地通貨ベースで前年同期比8%減少している（チャート I-3）。 コア的なインフレ指標は低水準である（チャート I-4）。 チャート I-3 インド企業の業績は縮小している インドの企業利益は減少している インドの企業利益は減少している チャート I-4 インフレは極めて抑制されている インフレは極めて抑制されている インフレは極めて抑制されている 中央銀行は金利を引き下げてきたが、実質ベースでの借入コストは依然として高い。理由はインフレが低下し、実質（インフレ調整後）で貸出金利が高まっているためである（チャート I-5）。 また、企業の借入コスト（現地通貨建てBBB社債利回り）は名目GDP成長率を上回っている（チャート I-6）。これは企業の設備投資を促す水準にはないことを示唆している。 政府が法人税を思い切って引き下げた決定は、現状の環境では正しい政策判断だ。政策当局は企業が投資を行い、好循環が生まれることを期待している。 チャート I-5 実質金利は高く上昇している 実質金利は高く、上昇している 実質金利は高く、上昇している チャート I-6 借入金利は名目成長に対して高い 借入金利は名目成長率に比べて高い 借入金利は名目成長率に比べて高い チャート I-7 商業銀行の貸出：公的部門 vs. 民間部門 商業銀行の貸出：パブリック対プライベート 商業銀行の貸出：パブリック対プライベート 最後に、貸し手は依然として不良債権の傷を負っている。公的銀行は縮小を余儀なくされ、ノンバンク金融会社は現在バランスシートを縮小しており、民間銀行が次に与信創出のペースを落とす可能性がある（チャート I-7）。 中央銀行の政策金利を段階的に引き下げても短期的に成長を押し上げる可能性は低いと認識した当局は、財政政策に頼って景気刺激を図った。インドは投資不足の国であり、設備投資が長期的な成長潜在力の鍵を握る。したがって、政府が法人税を思い切って引き下げた決定は現状の環境では正しい政策判断である。政策当局は企業が投資を行い、好循環が生まれることを期待している。　 しかし、投資家にとって重要なのは、これらの政策が株価の下支えになるのか、それともより良い買いの機会が将来にあるのか、という点である。 現地債利回りが株価の鍵を握る もしこの財政刺激に反応して政府および企業の現地債利回りが大幅に上昇すれば、株価は苦戦する。 チャート I-8 高い借入コストは株価にとってマイナスである 高い借入コストは株価にとってマイナスである 高い借入コストは株価にとってマイナスである もし国内債利回りがこの財政刺激に反応して大幅に上昇すれば、株価は苦戦するだろう。対照的に、現地債利回りが現在の水準近辺にとどまるなら、株価は特に新興市場ベンチマークに対して良好に推移する（チャート I-8）。 重要なのは、株価は来年の利益や配当よりも、金利や長期成長期待に遥かに敏感である。1　法人税減税は一時的なイベントであり、来年の利益や場合によっては配当を押し上げるだろうが、それはあくまで来年のみである。 もし金利が上昇するか長期の名目成長期待が減速すれば、法人利益の一時的な押し上げだけではより高い株式バリュエーションを正当化できない。むしろ、金利上昇や名目成長期待の低下は、来年の一時的な利益増の正の効果を打ち消すだろう。その結果、株式の適正価値は上昇するのではなく低下することになる。 結論：現地通貨建て債利回りと長期の成長期待は、企業業績の一時的増加よりも株式バリュエーションにとってはるかに重要である。 国内債の見通し 成長鈍化と極めて低いインフレが続く中で、なぜ現地債利回りが急騰するのか？ 主な理由は財政赤字の急拡大であり、それが政府債の発行増加を招く点にある。 中央政府の全体の財政赤字は、最新の法人税減税前でGDP比3.7%だった。州政府を含めると、総合の財政赤字はGDP比でおよそ6%に達している。 今後、中央の予算赤字は本会計年度における政府の3.3%という予想を大きく上回ることになるだろう。法人税減税に加え、政府の歳入の伸びは急速に低下しており、名目成長が極めて低迷しているため少なくとも現会計年度末（2020年3月）まではさらに落ち込む見込みである。 チャート I-9 インド：マネー創造と財政赤字の比較 インド：マネー創造と財政赤字 インド：マネー創造と財政赤字 商業銀行による広義マネーの創出が総合財政赤字（すなわち純政府債発行）に追いつかない場合、債利回りは上昇圧力を受けるだろう。チャート I-9は、総合財政赤字が急増する際に、広義マネー供給の増分が拡大する赤字を十分に吸収できない可能性があることを示している。　 銀行による大規模な国債買入れがない限り、これは公的部門と民間部門の双方に対する資金供給が減少することを意味する。これが債利回りを押し上げるだろう。 追加的な国債発行が市場で容易に吸収されない可能性が高まっている。銀行の預金に対する国債保有比率は28%に達しており、法定最低の18.75%を既に大きく上回っている。 外国人の政府債保有も2014年以降急増している。今後数カ月、外国投資家のインド国債に対する需要が鈍る可能性が高い理由は次のとおりである： 現在の高水準である債務対GDP比が急速に上昇すること。 新興市場（EM）通貨の下落は新興国フィクスト・インカム市場からの外国資本流出を誘発し、インドの現地通貨建て国債に対する国際的な需要を侵食する可能性がある。 銀行は政府債保有の42%、保険会社が23%、ミューチュアルファンドと外国人がそれぞれ3%を占めている。合計で彼らは現在発行済み政府債の71%を占めている。従って、銀行が公的・民間の双方の資金調達の鍵を握っている。 チャート I-10 RBIの政府債保有 RBIの国債保有 RBIの国債保有 債利回り上昇のシナリオに対するリスクとして、インドの中央銀行が政府債買入れをさらに加速させる可能性がある。もしそうなれば、債利回りは抑えられるだろう。しかしそれは量的緩和や公的債務のモネタイズを伴う。後者は通貨安を招き、資本逃避を引き起こす。 結論：インドの国内債利回りは上昇する公算が高い。これは現地通貨建て企業債利回りを押し上げ、結果として株式バリュエーションを圧迫するだろう。 投資判断 インドの株価の絶対的なパフォーマンス見通しは依然として弱気である（チャート I-11、上段）。 それでも、過去数カ月のアンダーパフォーマンスを利用して当該市場を新興市場（EM）株式ポートフォリオ内でアンダーウェイトからニュートラルへ格上げしている（チャート I-11、下段）。法人税引き下げにより新興市場ベンチマークに対するアウトパフォーマンスの確率は上昇したが、オーバーウェイトを正当化するほど高くはない。 チャート I-11 インド株価：絶対および相対パフォーマンスのプロファイル インドの株価：絶対および相対パフォーマンスのプロファイル インドの株価：絶対および相対パフォーマンスのプロファイル チャート I-12 我々のロング・インドソフトウェア／ショート・新興市場株ポジション 当社のインド・ソフトウェア・ロング／EM株式ショート・ポジション 当社のインド・ソフトウェア・ロング／EM株式ショート・ポジション 他の新興市場通貨と同様に、ルピーは今後数カ月で反落しやすい。歴史的に、外国投資家はインドの株式および投資ファンドに累計1,480億米ドルを投入してきた。したがって、インドの成長軌道や財政赤字に対する失望が積み上がれば、資本流出の期間が生じる可能性がある。 通貨安と、我々の「先進国（DM）成長銘柄優先」というテーマは、インドのソフトウェア株ロング／総合新興市場（EM）株指数ショートのポジションを支持し続ける。私たちは2016年12月21日にこのポジションを開始しており、かなりの利益を上げている（チャート I-12）。 フィクスト・インカム投資家は、1年受け／10年支払いのスワップを利用してイールドカーブのスティープニングに賭け続けるべきである。   Arthur Budaghyan チーフ・新興市場ストラテジスト arthurb@bcaresearch.com Ayman Kawtharani, 編集者／ストラテジスト ayman@bcaresearch.com   脚注 1      理由は、割引キャッシュフローモデルの分母には金利と利益の長期成長率（率）が含まれているためである（株価 = 期待配当 /（金利 – 利益の長期成長率））。したがって、これらは株価に指数的な影響を与える可能性がある一方で、配当や利益は分子にあるため株価への影響は線形的である。

ハイライト 新興国株式ポートフォリオ内で、インド株をアンダーウェイトからニュートラルへ格上げします。 それでも、インドの株価の絶対パフォーマンス見通しは依然として弱気のままです。 財政赤字拡大により、現地の国債利回りが上昇する可能性が高い。 利回りの上昇と依然低迷する成長が、法人税減税の一時的な株価押し上げ効果を圧倒するでしょう。 特集 予想外の抜本的措置が採られたのは、インド経済の成長が劇的に減速したためです。 先週、インド政府は予期せぬ大規模な法人税率引き下げに踏み切りました。政府は実効法人税率を35%から約25%に引き下げました。この劇的な政策変更は投資にどのような影響を及ぼすのでしょうか。 なぜ抜本的措置を講じたのか？ 予想外の抜本的措置が採られたのは、インド経済の成長が劇的に減速したためです： 家計の裁量支出が縮小している（Chart I-1）。 企業の設備投資指標は極めて弱く、多くの場合縮小している（Chart I-2）。 Chart I-1 インド：家計の裁量支出は縮小している インド: 家計の裁量的支出が縮小している インド: 家計の裁量的支出が縮小している Chart I-2 インド：設備投資は低迷している インド：設備投資は低迷している インド：設備投資は低迷している 上場上位500社の1株当たり利益は現地通貨建てで前年同期比8%減少している（Chart I-3）。 コア指標のインフレは低水準である（Chart I-4）。 Chart I-3 インドの企業利益は縮小している インドの企業利益は減少している インドの企業利益は減少している Chart I-4 インフレは極めて抑制されている インフレは極めて抑制されている インフレは極めて抑制されている 中央銀行は利下げを行ってきたが、実質の借入コストは依然として高い。理由はインフレが低下し、実質（インフレ調整後）で見た貸出金利が上昇しているためである（Chart I-5）。 さらに、企業の借入コスト（現地通貨建てBBB社債利回り）は名目GDP成長率を上回っている（Chart I-6）。これは、企業の資本支出に適した水準に借入コストがないことを意味する。 政府が法人税を抜本的に引き下げた決定は現状の環境において正しい政策判断である。政策担当者は企業が投資を行い、好循環が生まれることを期待している。 Chart I-5 実質金利は高く、上昇している 実質金利は高く、上昇している 実質金利は高く、上昇している Chart I-6 借入金利は名目成長に対して高い 借入金利は名目成長率に比べて高い 借入金利は名目成長率に比べて高い Chart I-7 商業銀行の貸出：公的銀行対民間銀行 商業銀行の貸出：パブリック対プライベート 商業銀行の貸出：パブリック対プライベート 最後に、貸し手は依然として不良債権の傷を負っている。国有銀行は縮小を余儀なくされ、非銀行系金融会社は現在バランスシートを縮小しており、民間銀行も次いで与信の増加ペースを抑える可能性がある（Chart I-7）。 中央銀行の政策金利を段階的に引き下げても短期的に成長を押し上げる可能性は低いと認識した当局は、財政政策に訴えて景気刺激を図った。インドは不足投資の国であり、設備投資が長期的な成長ポテンシャルの鍵を握る。したがって、政府が法人税を抜本的に引き下げた決定は現状の環境において正しい政策判断である。政策担当者は企業が投資を行い、好循環が生まれることを期待している。  しかし、投資家にとって重要な疑問は、これらの政策が株価の下値を支えるのか、それともより良い買い場は先にあるのか、という点である。 国内債利回りが株価の鍵を握る この財政刺激に反応して国債や企業の現地通貨債利回りが大幅に上昇すれば、株価は苦戦するだろう。 Chart I-8 高い借入コストは株価にとってマイナス 高い借入コストは株価にとってマイナスである 高い借入コストは株価にとってマイナスである この財政刺激に反応して国内債利回りが大幅に上昇すれば、株価は苦戦するだろう。対照的に、現地債利回りが現在の水準付近にとどまれば、特に新興国ベンチマークと比較して株価は好調に推移するだろう（Chart I-8）。 重要なのは、株価は来年の利益や配当よりも、金利や長期の成長期待に遥かに敏感である。1　法人税の引き下げは一時的な出来事であり、来年の利益や場合によっては配当を押し上げるが、それは来年だけの効果である。 金利が上昇するか長期の名目成長期待が和らげば、一時的な企業利益の増加だけでは株式の高いバリュエーションを正当化するには不十分である。むしろ、金利上昇や名目成長期待の低下は来年の一時的な企業利益上昇のプラス効果を圧倒するだろう。その結果、株式の公正価値は上昇せずに低下する。 結論： 現地通貨建て債利回りと長期成長期待は、一時的な企業利益の増加よりも株式評価に遥かに重要である。 国内債の見通し なぜ低迷が続きインフレが非常に低い中で現地債利回りが急騰するのか？ 主因は財政赤字の急拡大であり、国債の発行増が必要となることだ。 中央政府の全体の財政赤字はGDP比3.7%であり（最新の法人税引き下げ前）。州政府を合わせると、総合的な財政赤字はGDP比で約6%に達している。 今後、中央予算の赤字は政府が今会計年度のために見積もったGDP比3.3%の予想を大幅に上回るだろう。法人税削減に加えて、政府の歳入成長は急落しており、名目成長が非常に低迷しているため、少なくとも現行会計年度末である2020年3月まで減少し続ける見込みである。 Chart I-9 インド：マネー創出と財政赤字の対比 インド：マネー創造と財政赤字 インド：マネー創造と財政赤字 商業銀行による広義マネー創出が合計財政赤字（純国債発行に相当）に劣る場合、債利回りは上方圧力を受けるだろう。Chart I-9は、総合財政赤字が急増する中で、広義マネー供給の増加分が拡大する赤字を吸収するのに十分でない可能性を示している。  銀行の大規模な国債購入がない限り、公的・民間の双方にとって利用可能な資金は減少することになり、債利回りは上昇するだろう。 新規国債発行が市場に容易に吸収される可能性は低くなっている。預金に対する比率で見た場合、銀行の国債保有は既に28%に達しており、法定最低の18.75%を大きく上回っている。 外国人の国債保有も2014年以降急増している。外国人投資家のインド国債に対する需要は、今後数か月間は以下の理由から鈍る可能性が高い： 現在高い水準にある公的債務対GDP比率が急速に上昇していること。 新興国通貨の下落が新興国フィクスト・インカム市場からの外国資本の流出を誘発し、インドの現地通貨建て債券に対する国際的な需要を損なう可能性があること。 銀行は国債保有の42%、保険会社が23%、投資信託と外国人がそれぞれ3%を占めている。合計で現在発行残高の71%を占める。したがって銀行が公的・民間の双方の資金供給の鍵を握っている。 Chart I-10 RBIの国債保有 RBIの国債保有 RBIの国債保有 債利回り上昇シナリオに対するリスクは、インド中央銀行が国債購入をさらに加速させる場合である（Chart I-10）。その場合、債利回りは抑制されるだろう。しかし、それは量的緩和や公的債務のマネタイズを意味する。後者は通貨安を招き、資本逃避を誘発するだろう。 結論： インドの国債利回りは上昇傾向をたどる可能性が高い。これが現地通貨建ての企業債利回りを押し上げ、結果として株式評価を圧迫するだろう。 投資結論 インド株の絶対的パフォーマンス見通しは依然として弱気である（Chart I-11、上段）。 それにもかかわらず、過去数か月のアンダーパフォームを利用して我々はこの市場を新興国株式ポートフォリオ内でアンダーウェイトからニュートラルへ格上げする。法人税減税により新興国ベンチマークに対する株式のアウトパフォーマンスの可能性は高まったが、オーバーウェイトを正当化するほど高くはない（Chart I-11、下段）。 Chart I-11 インド株価：絶対および相対パフォーマンスのプロファイル インドの株価：絶対および相対パフォーマンスのプロファイル インドの株価：絶対および相対パフォーマンスのプロファイル Chart I-12 我々のインド・ソフトウェアのロング／新興国株のショートポジション 当社のインド・ソフトウェア・ロング／EM株式ショート・ポジション 当社のインド・ソフトウェア・ロング／EM株式ショート・ポジション 他の新興国通貨と同様に、ルピーは今後数か月で反落する脆弱性を抱えている。歴史的に見て、外国人投資家はインドの株式や投資信託に累計1480億ドルを流入させてきた。したがって、インドの成長軌道や財政赤字に関する外国人投資家の失望が蓄積すると、資本流出の期間を引き起こす可能性がある。 通貨安のリスクと我々の「先進国（DM）成長志向を新興国に対して優先する」というテーマは、引き続きインド・ソフトウェア銘柄のロング／新興国全体の株価指数のショートというポジションを支持する。私たちは2016年12月21日にこのポジションを開始しており、かなりの利益を生んでいる（Chart I-12）。 フィクスト・インカム投資家は、1年受け／10年支払のスワップでイールドカーブの急勾配化に引き続き賭けるべきである。   Arthur Budaghyan チーフ・エマージング・マーケッツ・ストラテジスト arthurb@bcaresearch.com Ayman Kawtharani, 編集者／ストラテジスト ayman@bcaresearch.com   脚注 1      理由は、キャッシュフロー割引モデルの分母には金利と利益の長期的成長率（レート）の両方が存在するためである（株価＝期待配当／（金利－利益の長期的成長率））。したがって、これらは株価に対して指数的に影響を与える可能性がある一方で、配当／利益は分子にあるため株価への影響は線形である。 株式の推奨 通貨、クレジットおよびフィクスト・インカムの推奨

Chart II-1Indian Stocks Failed To Break Major Resistance Levels Indian stocks have failed to break out above their highs, in both local currency and U.S. dollar terms, and have rolled over decisively (Chart II-1, top panel). Relative to the EM equity benchmark, Indian share prices have recently been underperforming despite collapsing oil prices and plunging U.S. interest rates. Furthermore, this bourse’s relative performance against the global equity index in common currency terms has bounced lower from a major structural technical resistance (Chart II-1, bottom panel). India’s recent underwhelming equity dynamics have transpired despite ongoing monetary policy easing by the country's central bank. In a nutshell, the roots of this poor equity performance trace back to lackluster profitability, rich equity valuations and overcrowded positioning. We recommend investors continue avoiding Indian equities for now as more downside is likely. Domestic Growth/Corporate Earnings Slump Indian domestic demand growth has been nosediving with no clear end in sight: Sales of passenger cars, two-wheelers, three-wheelers, tractors as well as medium & heavy commercial trucks are all contracting at double-digit rates (Chart II-2). Similarly, real gross fixed capital formation growth has decelerated, the number of capex projects underway are falling, capital goods imports and production are contracting and cement production growth has plummeted (Chart II-3). Some cracks are also appearing in India’s real estate sector. Chart II-4 shows nationwide housing price growth is decelerating in nominal terms and deflating in real (inflation-adjusted) terms. Chart II-2Domestic Demand Is Very Weak Chart II-3Capex And Infrastructure Are Heading South Chart II-4House Prices Are Contracting In Real Terms Typically, share prices become extremely sensitive to business cycles slowdowns when valuations are elevated. This is currently the case for the Indian bourse. In fact, India’s latest corporate earnings season was lackluster and many companies across various sectors have warned about slowing growth. More visibility on an ameliorating profit outlook as well as lower valuation multiples are needed for share prices to reach a sustainable bottom. India Is Joining The “Kick The Can Down Road” Club Banks have been the star performers within the Indian bourse with non-financials generating underwhelming returns. This warrants particular attention to bank stocks’ fundamentals and valuations. Recent media reports have been highlighting that India’s NPL cycle has finally turned for the better – marking an end to the country’s bad asset cycle that started in 2013. However, scratching below the surface, the recent reduction in India’s NPLs ratio has not occurred due to organic improvement in India’s corporate borrowers’ ability to service debt. For instance, the EBITDA-to-interest expense ratio for the country’s non-financial publically-listed companies has not improved at all (Chart II-5). Chart II-5Poor Debt Servicing Ability Among Indian Corporate Borrowers Rather, what seems to be driving the NPLs ratio lower is a regulatory forbearance: The new Governor of the RBI – Shaktikanta Das – issued a new circular on NPL recognition in June. It essentially provides commercial banks with much more flexibility in the way they can deal with their bad assets and permits them to delay their NPL recognition. The central bank also allowed India’s manufacturing and infrastructure corporates in default to borrow via the External Commercial Borrowing route in order to pay down their domestic loans under a one-off settlement. Furthermore, the RBI permitted commercial banks to restructure loans of micro-, small-, and medium-sized businesses before they turn bad - allowing banks to delay the proper recognition of such types of loans as well. Finally, the RBI reduced the risk weight of consumer credit from 125% to 100% in its monetary policy meeting yesterday. The objective of this measure is to accelerate consumer credit growth even though the latter has been booming in the past ten years. All in all, these regulatory measures reverse banks and corporate sector restructuring efforts and thereby are negative from a structural perspective. In the past, we were positive on the Indian banking system structurally because the central bank was promoting critical reforms.   Under the new leadership of the RBI, India is now joining the “kick the can down the road” club. This warrants somewhat lower equity multiples for banks than before. Financials Stocks Are Still Expensive Despite the selloff, Indian bank stocks are not yet cheap. For Indian public banks we focused our analysis on the State Bank of India (SBI) as it is the largest and only public bank that has performed reasonably well. This bank presently trades at a price-to-book value (PBV) ratio of 1.15.  Our analysis shows that at a more realistic 12% NPL ratio4 and assuming a 30% recovery ratio, 25% of its equity would be impaired. This would move its adjusted PBV ratio to 1.5. Assuming a fair-value PBV ratio of 1.3, the SBI appears to be overvalued by 15-17%. As to private banks,5 they are also expensive. For instance, if their NPLs rise to 6% from around 3% currently, they would seem overvalued by at least 12% (Table II-1). The analysis assumes a generous recovery ratio of 50% and a very high fair-value PBV ratio of 3.3.  Chart II-6Major Asset-Liability Mismatches In Non-Bank Finance Sector Finally, a comment on non-bank financial companies (NBFCs) is warranted. Their liquidity situation is extremely grim. Chart II-6 shows that our proxy for liquidity, measured as short-term investments (including cash) minus short-term borrowing for the 11 large NBFCs we assessed,6 is in a deep negative territory. In other words, these companies have a substantial maturity mismatch. Remarkably, these non-bank organizations grew their assets at a 20% annual compounded growth rate since 2009. Odds are they have misallocated capital to a large extent and their NPL ratio is probably in the double-digits. According to the RBI, non-bank financials’ gross NPLs ratio stood at 6.6% as of March 2019. By comparison the NPLs ratio of Indian banks peaked at 11.2%. Meanwhile, their valuations are not cheap at all. For instance, the NBFCs included in the MSCI India equity index carry a PBV ratio of 3.5 for consumer finance focused companies and a PBV ratio of 3 for thrift & mortgage finance focused companies. Bottom Line: Share prices of banks and non-bank financials are far from being cheap and remain at risk of further decline. Chart II-7Ominous Signals From The Indian Broader Equity Market Investment Recommendations In absolute U.S. dollar terms, Indian stocks have meaningful downside. This is confirmed by some precarious technical signals: the equal-weighted stocks index has dropped by 28% from its top in January 2018 and small-cap stocks are breaking down (Chart II-7). Finally, while the RBI cut rates yesterday, share prices still closed lower. In terms of our relative strategy, we continue to recommend that dedicated EM equity investors keep underweighting Indian stocks for now, but our conviction level is lower than it was in May. The basis is that ongoing fiscal and monetary easing, coupled with very low U.S. bonds yields and oil prices, might help Indian equities to outpace their EM peers at some point. For now, we will wait for a better entry point to upgrade. Our strongest conviction is that Indian stocks will underperform the global equity index in common currency terms (please see Chart II-1 on page 11). As for the currency, lingering problems in the NBFC sector will force the RBI to keep liquidity in the banking system abundant. Excessive liquidity expansion amid the ongoing selloff in EM currencies will hurt the rupee. Fixed-income investors should play a yield curve steepening trade as lower short rates and rupee deprecation could generate a yield curve steepening. Ayman Kawtharani, Editor/Strategist ayman@bcaresearch.com Footnotes 4      Instead of the 7.5% ratio it reported last week. 5      We analyzed the six largest private banks: HDFC Bank, ICICI Bank, Axis Bank, Yes Bank, IDFC First Bank and Kotak Mahindra Bank 6      Six of which are listed in the MSCI India equity index and account for 12% of MSCI total market cap.

Analysis on India is available below. Highlights Moderate RMB depreciation is consistent with the economic as well as political objectives of Chinese authorities. Yet, this is bad news for EM currencies and risk assets. As EM currencies depreciate, driven by a weaker RMB and lower commodities prices, foreign investors will head for the exit and EM risk assets will plummet. Meanwhile, there are tell-tale signs of an incipient EM breakdown. We continue to recommend shorting a basket of the following EM currencies versus the U.S. dollar: ZAR, CLP, COP, IDR, MYR, PHP and KRW. We also remain structurally short the RMB. Feature In our May 23 report titled The RMB: Depreciation Time? , we argued that the odds of an RMB depreciation were rising and that the currency would likely depreciate by some 6-8% versus the dollar. We contended that this would be bad news not only for EM currencies but also for all EM risk assets. EM fundamentals have been poor – both exports and cyclical domestic sectors have been contracting for some time. We illustrated the weak domestic demand conditions experienced by the majority of developing economies in our recent report, Domestic Demand In Individual EM Countries. Nevertheless, many investors have been ignoring the growing evidence of deteriorating growth conditions. The recent breakdown in the CNY/USD cross has reminded investors of the 2015 episode, when global risk assets – particularly in EM – tumbled following the yuan’s depreciation. We expect the RMB to depreciate by another 5-6% or so. We expect the RMB to depreciate by another 5-6% or so (Chart I-1). This will likely trigger a full-scale breakdown in EM risk assets. With respect to investor positioning, sentiment on EM was buoyant up until last week. Chart I-2 shows that asset managers’ and leveraged funds’ net long positions in EM equity index futures and high-beta liquid currencies futures was elevated as of Friday August 2. Chart I-1More Downside In RMB Chart I-2Investor Sentiment On EM Was Positive As Of Last Week With negative news proliferating on many fronts – the U.S.-China confrontation, slumping global trade, shrinking EM profits, tumbling commodities prices and RMB depreciation – the risk of a portfolio capital exodus from EM is rising, and a liquidation phase is highly probable. Implications Of RMB Depreciation It is impossible to know whether the recent RMB depreciation was market-driven or engineered by the PBoC. Our best guess is that the latest RMB depreciation was driven by both market pressures as well as the authorities’ increased tolerance of a weaker RMB.  The mainland economy requires a weaker currency to counteract accumulating deflationary pressures from deteriorating domestic and foreign demand, as well as to offset rising U.S. import tariffs. The Chinese leadership likely regards RMB depreciation as an economic and political response to U.S. import tariffs. That said, the Chinese authorities have significant latitude to control the exchange rate, not only via selling the central bank’s foreign currency reserves and tightening capital controls but also by utilizing foreign currency forward swaps. Therefore, the RMB depreciation will run further but will unlikely spiral out of control. Regardless of the cause of the depreciation, a weaker RMB will affect the rest of the world in general and EM in particular. Regardless of the cause of the depreciation, a weaker RMB will affect the rest of the world in general and EM in particular via the following two channels: Escalating competitive devaluation: The RMB is causing a breakdown in other Asian currencies, especially those exposed to manufacturing exports (Chart I-3). Critically, falling export prices herald currency depreciation not only in China but also in other Asian economies such as Korea, Singapore and Taiwan (Chart I-4). Chart I-3Breakdown In Emerging Asian Currencies Chart I-4Lower Export Prices Warrant Currency Depreciation Less Chinese imports = a drag on global trade: An RMB devaluation reduces Chinese importers’ purchasing power in U.S. dollar terms. The same amount of credit and fiscal stimulus in yuan when converted into U.S. dollars can be used to procure less goods and commodities. In brief, the gap between mainland imports in yuan and in dollars will widen (Chart I-5). Chart I-5Chinese Imports In Dollars Will Continue Shrinking Chinese imports in dollar terms will continue contracting. Many EM and some DM currencies will be negatively affected, since China is a major source of demand for these economies. Bottom Line: Moderate RMB depreciation is consistent with the economic as well as political objectives of Chinese authorities. Yet, this is bad news for EM currencies and risk assets. An EM Breakdown Is In The Making There are a number of financial markets and individual share prices that have been forewarning of potential breakdowns in EM/China plays and global pro-cyclical assets. In particular: Having failed to break above its 200-day moving average, the Risk-On vs. Safe-Haven currency ratio1 has dropped below its three-year moving average (Chart I-6, top panel). This indicator has had a very high correlation with EM stocks and global materials equities. Hence, its breakdown heralds a gap down in EM share prices as well as global materials stocks (Chart I-6, middle and bottom panels). Chart I-6Beware Of Breakdowns The rationale for using the 400-day (18-month), 800-day (three-year) and other long-term moving averages is similar to why investors utilize the 200-day (nine-month) moving average. When a market fails to punch below or above any of its long-term moving averages, odds are that it will make a new high or low, respectively. We discussed these technical indicators and have offered empirical examples of how these signals have historically worked in principal markets such as the S&P 500 and U.S. bond yields in our past reports.   Base metals (including copper) and oil prices as well as global steel stocks have broken below their three-year moving averages (Chart I-7). Commodities prices have been exhibiting a very bearish chart formation, and will likely plunge further. BCA’s Emerging Markets Strategy team remains bearish on commodities prices, even though BCA’s house view is bullish. The primary basis for this divergence in view has been and remains the Chinese growth outlook. Chart I-7Commodities Are In A Trouble Spot Chart I-8Canary In A Coal Mine For Commodities Share price of Glencore – a major player in the commodities space – has plunged below its three-year moving average, which has served as a support a couple of times in recent years2 (Chart I-8). Crucially, this stock has exhibited a head-and-shoulders formation, and has nose-dived below its neckline. Kennametal (KMT) – a high-beta U.S. industrial stock – leads the U.S. manufacturing cycles and has formed a similar configuration as Glencore’s (Chart I-9). This raises the odds that the U.S. manufacturing PMI will drop below the 50 line. Finally, the relative performance of S&P 500 global cyclical stocks versus global defensives3 has resumed its downtrend after failing to break above its 200-day moving average (Chart I-10). This foreshadows a poor global growth outlook and serves as a downbeat signal for global cyclical plays. Chart I-9Canary In A Coal Mine For U.S. Industrials Chart I-10A Message From S&P 500 Industry Groups Does all of the above imply that the global growth slowdown is already priced into global financial markets? Not necessarily. These breakdowns have occurred on the fringes of markets. As the average investor heeds to these signals and as these breakdowns move from the periphery to the center, there will be more damage to global risk assets in general and EM in particular. Importantly, there are cyclical segments of global and EM financial markets that have not adjusted and remain vulnerable. For example, global semiconductor stocks and global industrial share prices remain elevated despite the enduring global manufacturing recession (Chart I-11). Chart I-11Mind The Gaps The wide gap between share prices and revenues of these cyclical sectors implies that investors have been pricing an imminent business cycle recovery. Odds are that the current global manufacturing downturn will last longer or that a bottoming-out phase will be more extended than in 2012 and 2015. We have elaborated on the rationale for a more extended downturn in our past reports, and our conclusions still stand: A lack of aggressive stimulus in China, a lower propensity to spend among Chinese households and companies, as well as the ongoing trade war will continue to dampen business sentiment worldwide. Consequently, the current gap between share prices of these cyclical sectors and their underlying revenues will likely be closed via lower stock prices. As to non-cyclical equity sectors, they are less vulnerable to a profit downturn but their valuations are very expensive, and investor positioning is heavy. Further, EM local currency bonds as well as EM sovereign and corporate credit markets have been buoyant because of falling U.S. interest rates. Yet EM currencies are at risk from both RMB devaluation and falling commodities prices. EM currency depreciation will in turn undermine returns on EM local currency bonds and spur an investor exodus from high-yielding domestic bonds. Chart I-12Which Way These Gaps Will Close? Excess returns on EM sovereign and corporate credit have historically correlated with EM currencies and commodities prices as well as with equity returns (Chart I-12). Commodities prices, EM currencies and share prices are all poised to weaken further. It will be very surprising if sovereign and corporate spreads do not widen from their current tight levels. Bottom Line: There are a number of tell-tale signs of an incipient EM breakdown. As EM currencies depreciate driven by a weaker RMB and lower commodities prices, foreign investors will head for the exit and all EM risk assets will plummet. Investment Recommendations We are reiterating our negative stance on EM currencies and risk assets both in absolute terms and relative to their DM counterparts. Our recommended country overweights and underweights for EM equity, sovereign credit and local currency bond portfolios are always available at the end of our reports (please refer to pages 18 and 19 ). As to exchange rates, we continue to recommend shorting a basket of the following EM currencies versus the U.S. dollar: ZAR, CLP, COP, IDR, MYR, PHP and KRW. We also remain structurally short the RMB. In a nutshell, EM currency depreciation will -- for now -- overwhelm the positive impact of lower domestic interest rates on EM equities and in some cases will prevent developing nations’ central banks from reducing rates further. Finally, we recommended a long gold / short oil and copper trade on July 11 and this has panned out nicely (Chart I-13). Gold has made a structural breakout versus the rest of commodities complex and investors should hold into this position. We recommended a long gold / short oil and copper trade on July 11 and this has panned out nicely. Chart I-13A Structural Breakout In Gold Versus Oil And Copper Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com Indian Stocks: Poor Profit Outlook Amid Rich Valuation Indian stocks have failed to break out above their highs, in both local currency and U.S. dollar terms, and have rolled over decisively (Chart 1, top panel). Chart II-1Indian Stocks Failed To Break Major Resistance Levels Relative to the EM equity benchmark, Indian share prices have recently been underperforming despite collapsing oil prices and plunging U.S. interest rates. Furthermore, this bourse’s relative performance against the global equity index in common currency terms has bounced lower from a major structural technical resistance (Chart II-1, bottom panel). India’s recent underwhelming equity dynamics have transpired despite ongoing monetary policy easing by the country's central bank. In a nutshell, the roots of this poor equity performance trace back to lackluster profitability, rich equity valuations and overcrowded positioning. We recommend investors continue avoiding Indian equities for now as more downside is likely. Domestic Growth/Corporate Earnings Slump Indian domestic demand growth has been nosediving with no clear end in sight: Sales of passenger cars, two-wheelers, three-wheelers, tractors as well as medium & heavy commercial trucks are all contracting at double-digit rates (Chart II-2). Similarly, real gross fixed capital formation growth has decelerated, the number of capex projects underway are falling, capital goods imports and production are contracting and cement production growth has plummeted (Chart II-3). Chart II-2Domestic Demand Is Very Weak Chart II-3Capex And Infrastructure Are Heading South Some cracks are also appearing in India’s real estate sector. Chart II-4 shows nationwide housing price growth is decelerating in nominal terms and deflating in real (inflation-adjusted) terms. Chart II-4House Prices Are Contracting In Real Terms Typically, share prices become extremely sensitive to business cycles slowdowns when valuations are elevated. This is currently the case for the Indian bourse. In fact, India’s latest corporate earnings season was lackluster and many companies across various sectors have warned about slowing growth. More visibility on an ameliorating profit outlook as well as lower valuation multiples are needed for share prices to reach a sustainable bottom. India Is Joining The “Kick The Can Down Road” Club Banks have been the star performers within the Indian bourse with non-financials generating underwhelming returns. This warrants particular attention to bank stocks’ fundamentals and valuations. Recent media reports have been highlighting that India’s NPL cycle has finally turned for the better – marking an end to the country’s bad asset cycle that started in 2013. Chart II-5Poor Debt Servicing Ability Among Indian Corporate Borrowers However, scratching below the surface, the recent reduction in India’s NPLs ratio has not occurred due to organic improvement in India’s corporate borrowers’ ability to service debt. For instance, the EBITDA-to-interest expense ratio for the country’s non-financial publically-listed companies has not improved at all (Chart II-5). Rather, what seems to be driving the NPLs ratio lower is a regulatory forbearance: The new Governor of the RBI – Shaktikanta Das – issued a new circular on NPL recognition in June. It essentially provides commercial banks with much more flexibility in the way they can deal with their bad assets and permits them to delay their NPL recognition. The central bank also allowed India’s manufacturing and infrastructure corporates in default to borrow via the External Commercial Borrowing route in order to pay down their domestic loans under a one-off settlement. Furthermore, the RBI permitted commercial banks to restructure loans of micro-, small-, and medium-sized businesses before they turn bad - allowing banks to delay the proper recognition of such types of loans as well. Finally, the RBI reduced the risk weight of consumer credit from 125% to 100% in its monetary policy meeting yesterday. The objective of this measure is to accelerate consumer credit growth even though the latter has been booming in the past ten years. All in all, these regulatory measures reverse banks and corporate sector restructuring efforts and thereby are negative from a structural perspective. In the past, we were positive on the Indian banking system structurally because the central bank was promoting critical reforms.   Under the new leadership of the RBI, India is now joining the “kick the can down the road” club. This warrants somewhat lower equity multiples for banks than before. Financials Stocks Are Still Expensive Despite the selloff, Indian bank stocks are not yet cheap. For Indian public banks we focused our analysis on the State Bank of India (SBI) as it is the largest and only public bank that has performed reasonably well. This bank presently trades at a price-to-book value (PBV) ratio of 1.15.  Our analysis shows that at a more realistic 12% NPL ratio4 and assuming a 30% recovery ratio, 25% of its equity would be impaired. This would move its adjusted PBV ratio to 1.5. Assuming a fair-value PBV ratio of 1.3, the SBI appears to be overvalued by 15-17%. As to private banks,5 they are also expensive. For instance, if their NPLs rise to 6% from around 3% currently, they would seem overvalued by at least 12% (Table II-1). The analysis assumes a generous recovery ratio of 50% and a very high fair-value PBV ratio of 3.3.  Finally, a comment on non-bank financial companies (NBFCs) is warranted. Their liquidity situation is extremely grim. Chart II-6 shows that our proxy for liquidity, measured as short-term investments (including cash) minus short-term borrowing for the 11 large NBFCs we assessed,6 is in a deep negative territory. In other words, these companies have a substantial maturity mismatch. Chart II-6Major Asset-Liability Mismatches In Non-Bank Finance Sector Remarkably, these non-bank organizations grew their assets at a 20% annual compounded growth rate since 2009. Odds are they have misallocated capital to a large extent and their NPL ratio is probably in the double-digits. According to the RBI, non-bank financials’ gross NPLs ratio stood at 6.6% as of March 2019. By comparison the NPLs ratio of Indian banks peaked at 11.2%. Meanwhile, their valuations are not cheap at all. For instance, the NBFCs included in the MSCI India equity index carry a PBV ratio of 3.5 for consumer finance focused companies and a PBV ratio of 3 for thrift & mortgage finance focused companies. Bottom Line: Share prices of banks and non-bank financials are far from being cheap and remain at risk of further decline. Investment Recommendations In absolute U.S. dollar terms, Indian stocks have meaningful downside. This is confirmed by some precarious technical signals: the equal-weighted stocks index has dropped by 28% from its top in January 2018 and small-cap stocks are breaking down (Chart II-7). Finally, while the RBI cut rates yesterday, share prices still closed lower. Chart II-7Ominous Signals From The Indian Broader Equity Market In terms of our relative strategy, we continue to recommend that dedicated EM equity investors keep underweighting Indian stocks for now, but our conviction level is lower than it was in May. The basis is that ongoing fiscal and monetary easing, coupled with very low U.S. bonds yields and oil prices, might help Indian equities to outpace their EM peers at some point. For now, we will wait for a better entry point to upgrade. Our strongest conviction is that Indian stocks will underperform the global equity index in common currency terms (please see Chart II-1 on page 11). As for the currency, lingering problems in the NBFC sector will force the RBI to keep liquidity in the banking system abundant. Excessive liquidity expansion amid the ongoing selloff in EM currencies will hurt the rupee. Fixed-income investors should play a yield curve steepening trade as lower short rates and rupee deprecation could generate a yield curve steepening. Ayman Kawtharani, Editor/Strategist ayman@bcaresearch.com Footnotes 1      Average of CAD, AUD, NZD, BRL, CLP & ZAR total return (including carry) indices relative to average of JPY & CHF total returns. 2      The drop occurred well before the latest negative profit report. 3      These indexes are based on U.S. S&P 500 industry groups and published by Goldman Sachs. The Bloomberg tickers for S&P 500's global cyclicals and global defensives indexes are GSSBGCYC and GSSBGDEF, respectively. 4      Instead of the 7.5% ratio it reported last week. 5      We analyzed the six largest private banks: HDFC Bank, ICICI Bank, Axis Bank, Yes Bank, IDFC First Bank and Kotak Mahindra Bank 6      Six of which are listed in the MSCI India equity index and account for 12% of MSCI total market cap. Equity Recommendations Fixed-Income, Credit And Currency Recommendations  

While the media has zeroed in on the newly announced tariffs on Mexico late last week, tariffs on Indian imports and the narrowly avoided Australia trade war front barely made the news. This heightened policy uncertainty has taken investors aback. Worrisomely, the recent May update of the “Baker, Bloom, and Davis” categorical trade policy uncertainty index surged, which bodes ill for the overall market (trade policy uncertainty shown inverted, top panel). Similarly, we updated the article count that mention “trade war” using Bloomberg data and the message is similar: the opening up of new trade war fronts will continue to weigh on the broad market (trade war article count shown inverted, bottom panel). Bottom Line: Refrain from trying to catch a falling knife, a tactically cautious equity market stance is still warranted.

India: How Sustainable Is A 2.0 Modi Rally? Prime Minister Narendra Modi, and his party – the Bharatiya Janata Party – have won a strong majority in the Indian general election this month. Indian stocks surged in the past month as evidence was emerging that Modi was in the lead. Chart II-1Facing Resistance? Yet this Modi 2.0 rally is unlikely to last for too long. First, as EM stocks continue selling off, Indian share prices will not defy gravity and will fall in absolute terms. Interestingly, the Indian stock market has hit its previous highs – levels at which it failed to break above in the past 12 years (Chart II-1, top panel). We expect this resistance line to hold this time around too. Likewise, we are still reluctant to upgrade this bourse on a relative basis as it has reached its previous highs. This level will likely prove to be a hindrance, at least for the time being (Chart II-1, bottom panel). The basis for betting against a break out in Indian equity prices in both absolute terms and relative to the EM benchmark over the next couple of months is because of the following: Domestic Growth Weakness: India’s domestic growth has been decelerating sharply. The top two panels of Chart II-2 illustrate that manufacturing and intermediate goods production as well as capital goods production growth are all either contracting or on the verge of shrinking. Similarly, domestic orders-to-inventories ratio for businesses is pointing to a further growth slump according to a survey conducted by Dun & Bradstreet (Chart II-2, bottom panel). Furthermore, sales growth of all types of vehicles are either contracting or have stalled (Chart II-3). Chart II-2Business Cycle Is Weak Chart II-3Domestic Demand Is Fragile Regarding the financial sector, Indian banks – encouraged by a more permissive and forbearing central bank on the recognition of non-performing loans – have recently lowered provisions to boost their earnings (Chart II-4). Share prices should not normally react to such accounting changes. Banks either do carry these NPLs or do not. Therefore, the stock price of a bank should not fluctuate much if a central bank is forcing it to recognize those NPLs or if the latter is relaxing recognition and provisioning standards. Chart II-4Less Provisions = More Paper Profit Chart II-5Very Weak Equity Breadth In brief, we are skeptical about the sustainability of the current rally in bank share prices based on the relaxation of some accounting rules. Unfavorable Technicals & Valuations: Technicals for India’s stock market are precarious. Participation in this rally has been very slim. Indian small cap stocks have not rallied much, lagging dramatically behind large-cap stocks (Chart II-5, top panel). Our proxy for market breadth – the ratio of equal-weighted stocks to market-cap weighted stocks – has also been deteriorating and is sending a very bearish signal for the overall stock market (Chart II-5, bottom panel). Finally, the Indian stock market is overbought and vulnerable to a general selloff in EM stocks. Namely, foreign investors have rushed into Indian equities as of late. This raises the risk of a pullout as foreign investors become disappointed by India’s dismal corporate earnings and outflows from EM funds leads them to pare their holdings. As for valuations, the Indian stock market is still quite expensive both in absolute and relative terms. Oil Prices: Although oil prices will likely drop,1 Indian stocks could still underperform the EM equity benchmark in the near term. Chart II-6India Versus EM & Oil Prices The rationale for this is that Indian equities have brushed off the rise in oil prices since the beginning of the year and outperformed the majority of other EM bourses (Chart II-6). By extension, Indian equities could ignore lower oil prices for a while and underperform the EM benchmark in the near term. Beyond near term underperformance, however, India will likely resume its outperformance. First, sustainably lower oil prices will begin to help the Indian stock market later this year. Second, the growth impact of ongoing fiscal and monetary easing will become visible toward the end of this year. Meanwhile, food prices are starting to pickup and this will support rural income and spending. Finally, the Indian economy is much less vulnerable to a slowdown in global trade because Indian exports make only 13% of the country's GDP. Bottom Line: We are maintaining our underweight stance in Indian equities for tactical considerations, but are putting this bourse on an upgrade watch-list. Ayman Kawtharani, Editor/Strategist ayman@bcaresearch.com     Footnotes 1 The view on commodities of BCA’s Emerging Markets Strategy service is different from BCA’s house view due to the difference on the view on the global business cycle and Chinese demand.