インド

ハイライト COVID-19感染者数の急増がインドの株式および通貨市場を動揺させている。 懸念すべきは、複数の潜在的なスーパースプレッダー・イベントが進行中であるため、インドの新規感染者数がしばらく例外的に高水準で推移する可能性があることだ。 それでも、中期および長期の見通しは依然として明るい。 ボラティリティ許容度が低い資産配分担当者は、EMエクイティ・ポートフォリオでインドを戦術的にニュートラルに格下げすることを検討してよい。長期投資家はインド株を引き続きオーバーウエイトすべきである。 特集 インドの新型COVID-19新規感染者数は過去数週間で急増し、以前のピークを大幅に上回っている。同国は現在、世界の1日当たり新規感染者の40%を占めている（図表1および図表2）。これにより新たなロックダウンの可能性が高まり、その結果インド株と通貨は売りが先行し始めている。 Chart 1 インドの日次COVID-19新規感染者数は最近急増している … インドは戦術的な格下げに値する インドは戦術的な格下げに値する Chart 2 … 世界の新規感染者の40%および死者の20%を占めている … インドは戦術的な格下げを正当化する インドは戦術的な格下げを正当化する 当社はインドの景気循環的および構造的見通しが良好であることから、EMエクイティ・ポートフォリオでインドをオーバーウエイトしてきた。見解自体は変わらないが、COVID-19新規感染者数の放物線的な急増はインドの株式および通貨市場に短期的なボラティリティをもたらす可能性が高いと考えている。 したがって、ボラティリティ許容度が低い資産配分担当者には、今後数か月間、インド株を戦術的にニュートラルに格下げすることを推奨する。以下に、この短期的な格下げの理由と中期から長期にかけてのより楽観的な理由を詳述する。 新規感染者数は高水準が続く可能性 Chart 3 … 再び厳格なロックダウンの恐れを生じさせている インドは戦術的な格下げを正当化する インドは戦術的な格下げを正当化する 人口密度が高く生活環境が理想的とは言えない同国では、感染拡大を社会的距離政策で抑える試みは極めて困難だ。それでも当局は昨年春に世界で最も厳格なロックダウン措置を課すことでまさにそれを試みた（図表3）。その結果、経済活動は完全に崩壊し、鉱工業生産は前年同期比で半減し、2020年第2四半期のGDPは前年同期比で22%縮小した。 現在、前例のない新規感染者数の急増に直面しており、市場は一部のロックダウンでも景気回復の芽を摘むのではないかと懸念している。 懸念されるのは、インドの新規感染者数がしばらくの間例外的に高水準を維持する可能性があることだ。理由は、いくつかの潜在的なスーパースプレッダー・イベントが進行中だからである。同国では、数万人規模の集会の前で候補者が遊説する５州での州選挙が行われている。現在、最大で300万人が集まっている宗教的集会も行われている。 Chart 4 罹患率および死亡率が上昇すれば、厳格なロックダウンが避けられなくなる可能性がある インドは戦術的な格下げを正当化する インドは戦術的な格下げを正当化する 罹患率および死亡率はまだ上昇していない（図表4）。これは重要な指標であり、当局のロックダウン措置の厳しさを決定するだろう。首相は厳格なロックダウンは最後の手段だと述べているが、入院率や死亡率が上昇し始めればその可能性は排除できない。投資家の懸念を高めている点は次のとおりだ： 株式のバリュエーションが昨年春よりもはるかに高いことが、市場をさらに急落しやすくしている（図表5）。 インド株は過去12か月で記録的な外国ポートフォリオ投資の流入（合計で$34 billion）に恩恵を受けてきた。したがって、再度のロックダウンの脅威が現実になれば、これらの資金の一部が短期的に逆流するリスクが高く、それは株式市場とルピーの両方にとって逆風となる（図表6）。 最後に、米ドル高と今後数か月にわたるEMエクイティの総じてのアンダーパフォーマンスは、インドからの資金流出を促すだろう。 Chart 5 高まったバリュエーションがインド株の脆弱性を高めている インドは戦術的なダウングレードを正当化する インドは戦術的なダウングレードを正当化する Chart 6 海外ポートフォリオ投資の逆流は株式とルピーの両方を下落させるだろう インドは戦術的な格下げに値する インドは戦術的な格下げに値する 景気循環の見通しは引き続き良好 短期的な懸念を超えて、インドの景気循環的な見通しは引き続き良好だ。回復は以下の指標が示すように堅調である： E-wayビルの発行数（事業活動のバロメーター）が財・サービス税（GST）徴収機構の一部として着実に増加している。GSTの徴収自体も堅調であり、同じメッセージを裏付けている（図表7）。 製造業およびサービス業のPMIは3月に55を超え、活動が力強く拡大していることを示している。 RBIおよびダン・アンド・ブラッドストリートの調査が示すように、企業の受注残は強い。これらの指標は今後の鉱工業生産の改善を予告している（図表8）。 Chart 7 インドの基調的な景気回復はこれまで堅調である … インドは戦術的なダウングレードに値する インドは戦術的なダウングレードに値する Chart 8 … 強い受注残によって支えられている … インドは戦術的なダウングレードに値する インドは戦術的なダウングレードに値する 要するに、上記のすべては、厳格なロックダウンがない限り、今後数か月で企業の売上高（トップライン）が改善することを示唆している。 一方で、企業の利益率も著しく回復している。RBIの2600社超の調査によれば、粗利益率および純利益率はいずれも2020年12月時点でパンデミック前の水準を上回っていた（図表9）。 利益率が広がっているため、売上高の回復は今後の数四半期で利益の加速につながるだろう。 利益の再加速が近い兆候として、企業は新たな工場や機械への投資を始めている。資本支出は既に2020年第4四半期に2019年同期比でプラスに転じていた。資本財の輸入も増加し始めており、企業の新たな設備投資計画を裏付けている（図表10）。 Chart 9 … 健全な利益率 … インドは戦術的なダウングレードを正当化する インドは戦術的なダウングレードを正当化する Chart 10 … それが企業の設備投資再開を促した インドは戦術的な格下げに値する インドは戦術的な格下げに値する 新たな設備投資は需要の強まりに自信がある場合にのみ行われる。さらに、設備投資は通常、利益の増加に続いて行われる。したがって、資本財の輸入増と資本支出の増加は、企業が今後の売上と利益の両方について楽観的であることを示している。 中央銀行は多数のオープンマーケットオペレーションを実施することで銀行システムの流動性を十分に保っている。銀行貸出の伸び率は6.3%と依然低いが、底打ちしているように見える。近年、大企業が銀行借入を自国通貨建て債務の発行で代替していることを除けば、貸出成長率は9%に達する（図表11）。 COVID-19の感染拡大による短期的な懸念を超えれば、経済活動の回復に伴って貸出は加速する可能性が高い。それは銀行株にとって追い風となる。ちなみに、銀行はインドの株価指数における最大の構成比を占めている。 最後に、インドの小型株は大型株に対して引き続きアウトパフォームしている（図表12）。インドの小企業は成長の鈍化や信用環境の引き締まりに対して脆弱だ。彼らがアウトパフォームを続けているという事実は、投資家が今回のパンデミック再拡大が経済に重大かつ長期的な影響を与えるとは見ていないことを示唆している。 Chart 11 拡張が続けば銀行貸出は増加するだろう インドは戦術的な格下げに値する インドは戦術的な格下げに値する Chart 12 小型株のアウトパフォームは投資家が成長と信用環境に楽観的であることを示唆している インドは戦術的な格下げに値する インドは戦術的な格下げに値する 景気循環的な回復を超えて、我々はインドの長期的見通しにも強気である。その理由は、インドが意味のある構造改革を実施している数少ない新興国の一つであるからだ。人口構成も非常に好都合である。これらおよび他の構造的課題については、今後のレポートでより詳述する予定だ。 投資結論 インド株および通貨は、COVID-19感染者数の急増が利食い・売りを誘発したため、変動の時期に入っている。ボラティリティ許容度の低いEMエクイティ・ポートフォリオは、したがってこの株式市場を数か月間戦術的にニュートラルに格下げすることを検討すべきである。絶対リターン投資家（米ドル建て）も、短期的なインド株価のボラティリティに備えるべきだ。 しかし中期から長期では、インド株はEMの同業他国を上回るパフォーマンスを示し、絶対値でも上昇する可能性が高い（図表13）。 インドの銀行株も現在のボラティリティで影響を受けている。しかし、インドの民間銀行は効率性が高くバランスシートも優れていることから、長期投資家は当社推奨のインド銀行株ロング／EM銀行株ショートのトレードを引き続き維持すべきである（図表14）。 Chart 13 短期的なボラティリティを超えれば、インド株はEMの同業他国を上回る … インドは戦術的格下げに値する インドは戦術的格下げに値する Chart 14 … 同様にインドの銀行株もEMの銀行を上回るだろう インドは戦術的なダウングレードに値する インドは戦術的なダウングレードに値する フィクスト・インカム投資家は引き続きインドで10年物スワップ金利を受けるポジションを維持すべきだ。降水量が豊富なため食料価格は下落する見込みで、これがインフレを抑制するだろう。COVID-19の感染拡大と潜在的なロックダウンはディスインフレ的であり、スワップ金利を押し下げるだろう。   Rajeeb Pramanik シニアEMストラテジスト rajeeb.pramanik@bcaresearch.com

ハイライト 継続中かつ予想される財政・金融刺激策とCOVID-19対策の進展を受けた世界成長の強まりは、主要データ提供者による今年の石油需要前提を押し上げています。 当社は本月の需給バランスで2021年の世界需要見積りを64万b/d引き上げて98.25mm b/dとし、OPEC 2.0が脆弱な回復を乱さないようにブレント価格を$60/bbl付近に保つための必要な調整を行うと想定しています。 当社の2022年および2023年のブレント予測はそれぞれ$65/bbl、$75/bblで維持します。 コモディティ市場は、米国、ロシア、中国およびそれらの関係国・同盟国を巻き込む武力衝突の高まる確率を無視しています。ロシアはウクライナ国境に軍を集結させ、米国に干渉するなと警告しました。中国はフィリピン沖に戦艦を集結させ、台湾の防空識別圏への侵入を続けており、米軍を緊張させています。意図的あるいは偶発的な交戦が発生すれば石油価格は急騰します。 価格は上下双方にリスクがあふれています。武力衝突のリスクに加え、ワクチン配布の加速は回復を前倒しし、当社予測を超える価格上昇をもたらす可能性があります。一方で、ブラジル、インド、欧州での死亡者数および入院者数の上昇が示すように、COVID-19によるロックダウン再発の下振れリスクは依然として存在します（今週のチャート）。 特集 石油需要推計—当社の推計も含め—は、主要経済におけるCOVID-19の抑制に向けた測定可能な進展と、特に米国発の潤沢な財政・金融刺激策を受けて回復しています。1 IMFのGDP上方修正を受け、本月の需給バランスで当社は2021年の世界需要見積りを64万b/d引き上げて98.25mm b/dとしました。当社のモデリングでは、脆弱な回復を損なわないようにブレント価格を$60/bbl付近に保つために、サウジアラビア王国（KSA）とロシアが主導する生産者連合であるOPEC 2.0が必要な調整を行うと想定しています。 通常とは異なり、石油需要回復の初期段階は先進国市場（DM）がけん引すると見ています。先進国の代理としてOECDの石油消費を用いています（チャート2）。その後、来年以降は新興市場（EM）経済が再び成長を主導し、2023年にかけて続きます。 今週のチャート COVID-19の死者数・入院者数が世界的回復を脅かす 原油価格の上振れリスクが高まっている 原油価格の上振れリスクが高まっている チャート2 先進国（DM）の需要が今年急増 DMの需要が今年急増 DMの需要が今年急増 OPEC 2.0の余剰生産能力の吸収 当社はサウジアラビア王国（KSA）とロシアが主導する生産者連合であるOPEC 2.0を市場で支配的な生産者としてモデリングし続けています。今年予想する成長はOPEC 2.0の余剰生産能力のかなりの部分を吸収する見込みであり、その大半—約8mm b/dのうち約6mm b/d—がKSAにあります（チャート3）。 主要生産国の余剰生産能力は、米国のシェール生産者がリグと人員を動員して新規生産を集積ラインや主要パイプラインに導入するよりも速く、回復する需要に対応することを可能にします。 当社は米国のシェール生産者を市場価格を受け入れるコホート（価格受容群）としてモデル化しており、市場が許す限り生産すると想定しています。2020年に9.22mm b/dまで落ち込んだ米国生産は、今年9.56mm b/d、2022年に10.65mm b/d、2023年に11.18mm b/dまで回復すると見ています（チャート4）。米国内コンチネンタル産（Lower 48）の生産成長はシェールが主導し、各年とも米国総生産の約80%を占める見込みです。 チャート3 コアOPEC 2.0の余剰生産能力がまず需要増に反応する OPEC 2.0のコア予備生産能力は需要の増加に最初に反応する OPEC 2.0のコア予備生産能力は需要の増加に最初に反応する チャート4 シェールは価格受容群における限界供給源 シェールは価格受容群における限界バレルである シェールは価格受容群における限界バレルである 供給面でのOPEC 2.0の支配的地位は、余剰生産能力が枯渇するまでは非連合生産者に経済的地代を奪われることを許さず、非連合生産者にとっては抑制要因となります。その後、価格受容群は資本を呼び込む能力が限られているため、内部留保から多くの探査・生産（E+P）活動を賄う可能性が高いと考えられます。株主は配当の維持・成長、あるいは株式買戻しによる資本還元を要求し続けるでしょう。これが収益性のある企業に生産成長を限定する要因になります。 当社はOPEC 2.0連合の生産規律が供給を需要のわずか下にとどめ、在庫が減少し続けるようにするだろうと見ています。これはCOVID-19パンデミックで需要が破壊されたにもかかわらず実際に起きたことです（チャート5）。これらのモデリング前提から、当社は供給と需要が2023年にかけて均衡へ向かって動き続けると予想しています（表1）。 チャート5 2021年の需給バランス 2021年の需給バランス 2021年の需給バランス 表1 BCA 世界原油 需給バランス（MMb/d、ベースケース） 原油価格の上方リスクが高まっている 原油価格の上方リスクが高まっている 当社はこの需給均衡化が恒常的な物理的不足を誘発し、在庫は2023年にかけて減少し続けると予想しています（チャート6）。在庫が取り崩されるにつれて、OPEC 2.0の支配的な生産者地位はブレントおよびWTIのフォワードカーブをバックワーデーションに保つことを可能にします（チャート7）。2 当社は2022年および2023年のブレント予測をそれぞれ$65/bbl、$75/bblで維持しています（チャート8）。 チャート6 OPEC 2.0の政策は供給を需要の下に置き続ける... OPEC 2.0政策は供給を需要より下回る水準に保ち続けている… OPEC 2.0政策は供給を需要より下回る水準に保ち続けている… チャート7 OECD在庫は2023年までに減少 OECD Inventories Fall to 2023 OECD Inventories Fall to 2023 チャート8 世界経済回復に伴いブレント予測は上昇 世界経済の回復に伴い、ブレントは上昇が予想される 世界経済の回復に伴い、ブレントは上昇が予想される 価格の両方向リスクが充満 当社見解には上振れおよび下振れのリスクが数多くあります。 上振れの例として、英国と米国のワクチン配布の立ち上げ方が示唆に富みます。 両国とも当初はつまづきました。特に米国は1月時点でも戦略が整っていないように見えました。米国が調達と配布を本格化させると接種率は急上昇し、現在では米国内で「通常の」独立記念日（Fourth of July）を迎える見通しにあるようです。英国は今週再開を開始しました。両国は2021年第3四半期に集団免疫を達成すると予想されています。3 調達と配布を誤ったEUは、英国と米国の教訓から利益を得て2021年第4四半期に集団免疫を達成するとマッキンゼーの調査は示しています。このスケジュールの前倒しは、より強い成長と当社予測を上回る石油価格につながるでしょう。 次の大きな課題は、パンデミックが加速し変異株の発生・拡散に理想的な環境を提供している新興経済地域（特にそのような地域）にワクチンを供給することです。ブラジル、インド、欧州での死亡者数・入院者数の上昇が示すように、大規模なCOVID-19によるロックダウンの再発リスクは依然として残ります。 戦の狼煙（Cry Havoc） 当社が見るもう一つの大きな上振れリスクは、米国、ロシア、中国およびそれらの関係国・同盟国を巻き込む武力衝突です。 現時点でコモディティ市場はこれらのリスクを無視しています。戦争のレベルには達していないにせよ、機動的な交戦―航空機が撃墜されたり南シナ海で艦船が交戦するような事態―の確率は日々高まっています。 これは驚くべきことではなく、当社の同僚であるBCAリサーチの地政学ストラテジー（Geopolitical Strategy）が最近指摘した通りです。4 実際、マット・ガートケン（Matt Gertken）が率いる当該サービスは、バイデン政権が就任直後からロシアと中国によってこの種の試練にさらされるだろうと警告していました。 ロシアはウクライナ国境に軍を集結させ、米国に干渉するなと警告しています。中国はフィリピン沿岸に軍艦を集結させ、台湾の防空識別圏への侵入を続けており、米軍を緊張させています。米露、米中間の政治対話はますます激しくなっており、近い将来に和らぐ兆しは見えません。意図的であれ偶発的であれ交戦が発生すれば戦争の遁走を許し、石油価格は一時的に急騰する可能性があります。 最後に、当社が想定するようにイランが核合意（すなわち共同包括的行動計画：JCPOA）を西側諸国と再締結できれば、イランは「正式な」石油輸出国としての復帰を余儀なくされ、OPEC 2.0はこれを受け入れざるを得なくなります。JCPOAは2018年に当時のトランプ大統領によって破棄されました。 これは困難を伴う可能性があります。当社は2014–16年の石油価格崩壊が、サウジが市場シェア戦争を仕掛けて価格を暴落させ、2010年末から2014年半ばにかけて続いた1バレル当たり$100超の価格をイランに許さないための行動だったと考えています。OPEC 2.0、特にKSAは米国–イラン交渉に公には関与していません。しかし2014年に開始された壊滅的な市場シェア戦争の後、KSAおよびOPEC 2.0はJCPOA後にイランの市場復帰を受け入れたことを想起する価値があります。   ロバート・P・ライアン チーフ コモディティ＆エネルギー・ストラテジスト rryan@bcaresearch.com アシュウィン・シャイアム リサーチアソシエイト コモディティ＆エネルギー戦略 ashwin.shyam@bcaresearch.com   コモディティ概況 エネルギー： 強気 ブレントとWTI価格は、EIAの週間石油在庫報告が2021年4月9週終わりで米国の原油・製品在庫が910万バレル減少したことを示した後に急騰しました。これは商業用原油と蒸留油在庫の大幅な取り崩し（それぞれ590万バレル、210万バレル）が主導しました。これらの取り崩しは過去一週間に主要データ機関（EIA、IEA、OPEC）による世界需要の概ね強気な上方修正を背景としています。これらの評価は、精製製品需要、すなわち「product supplied」が4月9週終わりで日量110万b/d跳ね上がったというEIAデータに裏付けられています。ジョンソン＆ジョンソンの接種問題という挫折があったにもかかわらずワクチン配布が勢いを増しており、在庫の取り崩しと需要改善が上昇の触媒となったようです。米ドルの弱含みや米国の実質金利低下も追い風になりました。 ベースメタル： 強気 今週初めニッケル価格は下落しました。中国の国営新華社通信が中国の李克強首相が上昇するコモディティ価格の中で原材料市場の規制強化の必要性を強調したと報じ、企業の業績に圧力がかかっているとのことでした（チャート9）。この発言は中国のトップ経済顧問である劉鶴が先週コモディティ価格の追跡を当局に求めた後に出たものです。ニッケル価格はこの報を受けて今週初めにトン当たり約$500下落し、ロンドン金属取引所の取引で火曜日終値時点で$16,114.5/MTで取引されていました。他のベースメタルはこのニュースの影響を受けませんでした。 貴金属： 強気 今週初めに発表された3月の米国インフレデータを受けて米ドルと10年物米国債利回りは低下しました。米国の消費者物価は約9年ぶりの大幅上昇を記録しました。インフレヘッジ需要と米ドル・債利回りの低下が金の購入における機会費用を下げたことが金価格を押し上げました（チャート10）。この不確実性と米国の財政刺激策によるインフレ圧力の高まりが金需要を増加させます。スポットのCOMEX金は火曜日終値で$1,746.20/ozで取引されていました。 穀物・ソフトコモディティ： 中立 USDAの報告によると、米国のトウモロコシ期末在庫は13.5億ブッシェルで、市場予想の13.9億ブッシェルや先月の省の1.50億ブッシェル推定を下回っています（agriculture.comの集計）。世界のトウモロコシ在庫は2.839億トンで、市場予想の2.845億トンおよび省の推定2.876億トンを下回りました。 チャート9 ベースメタルは強気に動く ベースメタルは強気になっている ベースメタルは強気になっている チャート10 金価格の上昇 金価格が上昇へ 金価格が上昇へ   脚注 1     当社が2021年4月8日に発表したUS-Russia Pipeline Standoff Could Push LNG Prices Higherをご覧ください。簡単に言えば、IMFは今年および来年の成長率見通しをそれぞれ6%と4.4%に引き上げ、2021年1月の更新時点と比べてほぼ1ポイントの上方修正を行いました。 2     バックワーデーションのフォワードカーブ—先物の期近価格が期先価格を上回る状態—は需給タイトさを示す市場のシグナルです。精製業者が将来よりも今の原油の入手を高く評価していることを意味します。これはちょうど投資家が明日引き渡される1ドル札に対して1ドルを支払うことを好み、1年後に引き渡される同じ1ドル札には今日98セントしか払わないかもしれないのと同じダイナミクスです。 3    マッキンゼー・アンド・カンパニーが2021年3月26日に発表したWhen will the COVID-19 pandemic end?をご参照ください。 4    BCAの地政学ストラテジーが2021年4月2日に発表した先見的な分析The Arsenal Of Democracyをご覧ください。同レポートは、バイデン政権は中国/台湾、ロシア、イラン、さらには北朝鮮に関する初期のストレス・テストに直面していると指摘しています。ゲーム理論は金融市場が台湾海峡での危機の60%の確率を無視できない理由を説明するのに役立ちます。全面戦争の確率は依然低いものの、台湾は世界で最も重要な地政学的リスクであり続けます。   投資見解とテーマ 推奨事項 戦略的推奨 タクティカルトレード コモディティ価格とプレイ参考表 2021年にクローズしたトレード クローズしたトレードの概要 より高いインフレが到来 より高いインフレが到来

Highlights The Biden administration is combining Trumpian nationalism with a renewed push for US innovation in a major infrastructure bill that is highly likely to become law. Populism and Great Power struggle with China and Russia are structural forces that give enormous momentum to this effort. Don’t bet against it. President Biden’s $2.4 trillion infrastructure and green energy plan has a subjective 80% chance of passing into law by the end of the year, as infrastructure is popular and Democrats control Congress. The net deficit increase will range from $700 billion to $1.3 trillion depending on the size of corporate tax hikes in the final bill. The second part of Biden’s plan, the roughly $2 trillion American Families Plan, has a much lower chance of passage – at best 50/50 – as the 2022 midterm elections will loom and fiscal fatigue will set in. While the US infrastructure package is a positive cyclical catalyst, it was largely expected, and the Biden administration still faces early stress-tests on China/Taiwan, Russia, Iran, and even North Korea. Game theory helps explain why financial markets cannot ignore the 60% chance of a crisis in the Taiwan Strait. A full-fledged war is still low-probability but Taiwan remains the world’s preeminent geopolitical risk. In emerging markets, stay short Russian and Brazilian currency and assets – and continue favoring Indian stocks over Chinese. Feature The “arsenal of democracy” is a phrase that President Franklin Delano Roosevelt used to describe the full might of US government, industry, and labor in assisting the western allies in World War II. The US is reviving this combination of productive forces today, with President Joe Biden’s $4 trillion-plus American Jobs and Families Plan unveiled in Pittsburgh on March 31. The context is once again a global struggle among the Great Powers, albeit not world war (at least not yet … more on that below). The US is reviving its post-WWII pursuit of global liberal hegemony – symbolized by its role, growing once again, as the world’s chief consumer and chief warrior (Chart 1). Biden promoted his plan to build up the US’s infrastructure and social safety net explicitly as a historic and strategic investment – “in 50 years, people are going to look back and say this was the moment that American won the future.”1 It is critical for investors to realize that they are not witnessing another round of COVID-19 fiscal relief. That task is already completed with the Republican spending of 2020 and Biden’s own $1.9 trillion American Rescue Plan Act (ARPA), which together with the vaccine rollout are delivering a jolt to growth (Chart 2). Chart 1America Pursues Hegemony Anew Chart 2Consensus Expects 6.5% US GDP Growth After American Rescue Plan Our own back-of-the-envelope estimates of growth suggest that there is considerable upside risk even under current law (Chart 3). The output gap is also guesstimated here, and it will tighten faster than expected, especially as the service sector revives on economic reopening. Chart 3Back-Of-Envelope: US GDP And Output Gap Show Upside Risk After American Rescue Plan Act (ARPA) A growth overshoot is even more likely considering that the first part of Biden’s proposal, the $2.4 trillion American Jobs Plan consisting mostly of infrastructure and green energy, is highly likely to pass Congress (by July at earliest and December at latest, most likely late fall). Our revised estimates for the US budget deficit show that this bill will add considerably to the deficit in the coming years, peaking in three or four years, thus averting the “fiscal cliff” in 2022-23 and adding to aggregate demand in the years after the short-term COVID-era cash handouts dry up (Chart 4). The net deficit increase will be $700 billion if Biden gets all of his tax hikes and $1.3 trillion if he only gets half of them, according to our sister US Political Strategy. Chart 4US Budget Deficit Will Remain Fat In Coming Years We give Biden’s $2.4 trillion American Jobs Plan an 80% chance of passing through Congress by the end of the year. Infrastructure is broadly popular – as President Trump’s own $2 trillion infrastructure campaign proposal revealed – and Democrats have just enough votes to push it through the Senate via budget reconciliation, which requires zero votes from Republicans. Biden’s political capital is still strong given that his approval rating will stay above 50% as long as Trump is the obvious alternative and the Republicans are deeply divided over their own future (Chart 5).2 The second part of his plan, the $1.95 trillion American Families Plan, is much less likely to pass before the 2022 midterm elections – we would say 50/50 odds at best, if the infrastructure deal passes quickly. Chart 5Biden’s Political Capital Is Sufficient To Pass Another Major Law Of course there are very important differences between Biden’s $2.4 trillion infrastructure plan and the similarly sized proposal that Trump would have unveiled this month had he been re-elected: Biden’s proposal is probably heavier on innovation and research and development, and certainly heavier on unionization and labor regulation, than Trump’s would have been. Biden’s plan integrates infrastructure with sustainability, renewable energy, and climate change initiatives that will help the US catch up with Europe and China on the green front. The plan will consist of direct government spending – rather than government seed money to promote private investment. It will be partially offset by repealing the corporate tax cuts in Trump’s signature Tax Cuts and Jobs Act. Most importantly – from a geopolitical point of view – Biden is making a bid for the US to resume its post-WWII quest for global liberal hegemony. He argued that the US stands at the crossroads of a global choice between “democracies and autocracies” and that rebuilding US infrastructure is ultimately about proving that democracies can create consensus and “deliver for their people.” Autocratic regimes, fairly or not, routinely call attention to the divisiveness of modern party politics in the West and the resulting policy gridlock which produces bad outcomes for many citizens, resulting in greater domestic dysfunction and “chaos.” It is important to note that this bid for hegemony will be more, not less, destabilizing for global politics as it will make the US economy more self-sufficient and insulated from the world. It will intensify the US-China and US-Russia strategic competition while making it more difficult for Biden to conduct bilateral diplomacy with these states given their differences in moral values and frequent human rights violations. What is happening now is the culmination of political shifts that pre-date the pandemic, but were galvanized by the pandemic, and it is of global, geopolitical significance for the coming decade and beyond.3 Biden and the establishment Democrats – embattled by populism on their right and left flanks – are shamelessly coopting President Trump’s “Make America Great Again” nationalism with a larger-than-life, infrastructure-and-manufacturing initiative that emphasizes productivity as well as “Buy American” protectionism. Biden explicitly argued that Americans need to boost innovation to “put us in a position to win the global competition with China in the upcoming years.” At Biden’s first press conference on March 25, he made a similar point about China: So I see stiff competition with China. China has an overall goal, and I don’t criticize them for the goal, but they have an overall goal to become the leading country in the world, the wealthiest country in the world, and the most powerful country in the world. That’s not going to happen on my watch because the United States are going to continue to grow and expand.4 The US trade deficit is set to widen a lot further under this massive domestic buildout. It aims to be the largest government investment program since Dwight Eisenhower’s building of the highways or the Kennedy-Johnson-Nixon space race. But it explicitly aims to diminish China’s role as a supplier of US goods and materials and the US trade deficit already shows evidence of economic divorce (Chart 6). The US is bound to have a larger trade deficit due to its own savings-and-investment imbalances but it has a powerful interest in redistributing this trade deficit to its allies and reducing over-dependency on China, which is itself pursuing strategic self-sufficiency and military modernization in anticipation of an ongoing rivalry this century. Chart 6Biden's Coopts Trump's Trade And Manufacturing Agenda Bottom Line: Biden’s $2.4 trillion American Jobs Plan has an 80% chance of passing Congress later this year with a net increase to the fiscal thrust of between $700 billion and $1.3 trillion, depending on how many and how high the corporate tax hikes. The other $2 trillion social spending part of Biden’s plan has only a 50/50 chance of passage. The infrastructure and green energy rebuild should be understood as a return of Big Government motivated by populism and Great Power competition – it is a geopolitical theme with enormous momentum. The result will be faster US growth and higher inflation expectations, with the upside risk of a productivity boom (or boomlet) from the combination of public and private sector innovation. Investors should not bet against the cyclical bull market even though any increase in long-term potential GDP is speculative. A Fourth Taiwan Strait Crisis And The Cuban Missile Crisis Biden’s American Jobs Plan reserves $50 billion for US semiconductor manufacturing, a vast sum, larger than expectations and far larger than the relatively small public investments that helped revolutionize the US chip industry in the 1980s. But it will take a long time for these investments to pay off in the form of secure and redundant supply chains, while a semiconductor shortage is raging today that is already entangled with the US-China rivalry and tensions over the Taiwan Strait. The risk of a diplomatic or military incident is urgent because the chip shortage exacerbates China’s vulnerabilities at a time when the Biden administration is about to make critical decisions regarding the tightness of new export controls that cut off China’s access to US semiconductor chips, equipment, and parts. If the Biden administration appears to pursue a full-fledged tech blockade, as the Trump administration seemed bent on doing, then China will retaliate economically or militarily. Before going further we should point out that there are still areas of potential US-China cooperation under the Biden administration that could reduce tensions this year (though not over the long run). Biden and Xi Jinping might meet virtually as early as this month to discuss carbon emission reduction targets. Meanwhile China is positioning itself to serve as power-broker on two major foreign policy challenges – Iran and North Korea. Biden expressly seeks Chinese and Russian assistance based on the mutual interest in nuclear non-proliferation. Notably, Beijing’s renewed strategic dealings with Iran over the past month highlight its confidence that Biden does not have the appetite to stick with Trump’s “maximum pressure” but rather will seek to reduce sanctions and restore the 2015 nuclear deal. Hence China will seek to parlay influence over Tehran in exchange for reduced US pressure on its trade and economy (Chart 7). Beijing is making a similar offer on North Korea. Chart 7China Holds The Key To Iran, As With North Korea? Ironically both Iranian and North Korean geopolitical tensions should skyrocket in the short term since high-stakes negotiations are beginning, even though they are ultimately more manageable risks than the mega-risk of US-China conflict over Taiwan. China cannot gain the advanced technology it needs to achieve a strategic breakthrough if the US should impose a total tech blockade, e.g. draconian export controls enforced on US allies. Yet it is highly unlikely to gain the tech by seizing Taiwan, since war would likely destroy the computer chip fabrication plants and provoke global sanctions that would crush its economy. The result is that China is launching a massive campaign of domestic production and indigenous innovation while circumventing US restrictions through cyber and other means. Still, a dangerous strategic asymmetry is looming because the US will retain access to the most advanced computer chips via its alliances and on-shoring, whereas China will remain vulnerable to a tech blockade via Taiwan. This brings us to our chief global geopolitical risk: a US-China showdown in the Taiwan Strait. Highlighting the urgency of the risk, Admiral John Aquilino, the nominee for Commander of the US Indo-Pacific Command, told the Senate Armed Services Committee that China might not wait six years to attack Taiwan: “My opinion is that this problem is much closer to us than most think and we have to take this on.”5 To illustrate the calculus of such a showdown – and our reasons for maintaining an alarmist tone and building up market hedges and safe-haven investments – we turn to game theory. Game theory is not a substitute for empirical analysis but a tool to formalize complex international systems with multiple decision-makers. An obvious yet fair analogy to a US-China-Taiwan crisis is the Cuban missile crisis of 1962.6 The standard construction of the Cuban missile crisis in game theory goes as follows: if the US maintains a blockade and the Soviets withdraw their missiles a compromise is achieved and war is averted; if the US conducts air strikes and the Soviets maintain or use their missiles then war ensues. The payouts to each player are shown in the matrix in Diagram 1. Diagram 1Cuban Missile Crisis, 1962 One concern about this construction is that the payouts may underestimate the costs of war since nuclear arms could be used. We insert a comment into the diagram highlighting that the payouts could be altered to account for nuclear war. Note that this alteration does not change the final outcome: the equilibrium scenario is still US blockade and Soviet withdrawal, which is what happened in reality. If we model a US-China-Taiwan conflict along similar lines, the US takes the role of the Soviet Union while China stands where the US stood in 1962 (Diagram 2). This is a theoretical scenario in which the US offers Taiwan a decisive improvement in its security or offensive military capabilities. However, because of the unique circumstances of the Chinese civil war, in which the victors established the People’s Republic of China in Beijing in 1949 and the defeated forces retreated to Taiwan, China’s regime legitimacy is at stake in any showdown over Taiwan. If Beijing suffered a defeat that secured Taiwan’s independence while degrading Beijing’s regime legitimacy and security, the Chinese regime might not survive the domestic blowback.7 Diagram 2Fourth Taiwan Strait Crisis – What Happens If The US Offers Game-Changing Military Support To Taiwan? Thus we reduce the Chinese payout in the case of American victory. In the top right cell of Diagram 2, the row player’s payout falls from two points (2ppt) in the first diagram to one point (1ppt) in this diagram. This seemingly slight change entirely alters the outcome of the game. Beijing now faces equally bad outcomes in the event of defeat, whereas victory remains preferable to a tie. Therefore as long as China believes that the US will not resort to nuclear weapons to defend Taiwan (a reasonable assessment) then it may make the mistake of opting for military force to ensure victory. Fortunately for global investors the US is not providing Taiwan with game-changing military capabilities, although it is ultimately up to China to decide what threatens its security and the US is in the process of upgrading Taiwan’s defense in an effort to deter Beijing from forceful reunification. Thus the exercise demonstrates why we do not expect immediate war – no game-changer yet – but at the same time it shows why war is much likelier than the consensus holds if the military or political status quo changes in a way that China deems strategically unacceptable. A lower-degree Taiwan crisis should be expected – i.e. one in which the US maintains tech restrictions, offers arms sales or military training that do not upend the military balance, or signs free trade agreements or other significant upgrades to the US-Taiwan relationship.8 We would give a 60% probability to some kind of crisis over the next 12-24 months. The global equity market could at least suffer a 10% correction in a standard geopolitical crisis and it could easily fall 20% if US-China war appears more likely. What would trigger a full-fledged Taiwan war? We would grow even more alarmed if we saw one of three major developments: Chinese internal instability giving rise to a still more aggressive regime; the US providing Taiwan with offensive military capabilities; or Taiwan seeking formal political independence. The first is fairly likely, the second lends itself to miscalculation, and the third is unlikely. But it would only take one or two of these to increase the war risk dramatically. Bottom Line: The Taiwan Strait is still the critical geopolitical risk and Biden’s policy on China is still unclear. Iranian and North Korean tensions will escalate in the short run but the fundamental crisis lies in Taiwan. Since some kind of showdown is likely and war cannot be ruled out we advise clients to accumulate safe-haven assets like the Japanese yen and otherwise not to bet headlong against the US dollar until it loses momentum. Emerging Markets Round-Up In this section we will briefly update some important emerging market themes and views: Chart 8Favor USMCA Over Putin's Russia Russia: US-Russia tensions are escalating in the face of Biden’s reassertion of the US bid for liberal hegemony, which poses a direct threat to Russia’s influence in eastern Europe and the former Soviet Union. Ukraine is expected to see a renewed conflict this spring. The top US and Russian military commanders spoke on the phone for the second time this year after Ukrainian military reports indicated that Russia is amassing forces on the border. We also assign a 50/50 chance that the US will use sanctions to prevent the completion of the NordStream II pipeline from Russia to Germany, an event that would shake up the German election as well as provoke a Russian backlash. The Russian ruble has suffered a long slide since Putin’s invasion of Georgia in 2008 and Crimea in 2014 and the country’s currency and equities have not staged much of a comeback amid the global cyclical upswing and commodity price rally post-COVID. We recommend investors favor the Canadian dollar and Mexican peso as oil plays in the context of American stimulus and persistent Russian geopolitical risk (Chart 8). We also favor developed market European stocks over emerging Europe, which will suffer from renewed US-Russia tensions. Brazil: Brazilian President Jair Bolsonaro’s domestic political troubles are metastasizing as expected – the rally-around-the-flag effect in the face of COVID-19 has faded and his popular approval rating now looks dangerously like President Trump’s did, relative to previous presidents, which is an ominous warning for the “Trump of the South,” who faces an election in October 2022 (Chart 9). The COVID-19 deaths are skyrocketing, with intensive care units reaching critical levels across the country. The president has reshuffling his cabinet, including all three heads of the military in an unprecedented disruption that compounds fears about his willingness to politicize the military.9 Meanwhile the judicial system looks likely (but not certain) to clear former President Luiz Inácio Lula da Silva to run against Bolsonaro for the presidency, a potent threat (Chart 10). Bolsonaro’s three pillars of political viability have cracked under the pandemic: the country remains disorderly, the systemic corruption and the “Car Wash” scandal under the former ruling party are no longer at the center of public focus, and fiscal stimulus has replaced structural reform. Chart 9Brazil: Will ‘Trump Of The South’ Face Trump’s Fate? Our Brazilian GeoRisk Indicator has reached a peak with Bolsonaro’s crisis – and likely breaking of the fiscal spending growth cap put in place at the height of the political crisis in 2016 – while Brazilian equities relative to emerging markets have hit a triple bottom (Chart 11). It is too soon for investors to buy into Brazil given that the political upheaval can get worse before it gets better and a Lula administration is no cure for Brazil’s public debt crisis, though a short-term technical rally is at hand. Chart 10Brazil’s Lula Looks To Be A Contender In 2022? Chart 11Brazil: Policy Risk Peaks, Equities Hit Triple-Bottom Versus EM India: A lot has happened since we last updated our views on India, South Asia, and the broader Indian Ocean basin. Farmer protests broke out in India, forcing Prime Minister Narendra Modi to temporarily suspend his much-needed structural reforms to the agricultural sector, while China-backed military coup broke out in Myanmar, and the US election set up a return to negotiations with Iran and the Taliban in Afghanistan. Perhaps the biggest surprise was the Indo-Pakistani ceasefire, despite boiling tensions over India’s decision to make Jammu and Kashmir a federal union territory. The ceasefire is temporary but it does highlight a changing geopolitical dynamic in the region. India and Pakistan ceased fire along the Line of Control where they have fought many times. The ceasefire does not resolve core problems – Pakistan will not stop supporting militant proxies and India will not grant Kashmir autonomy – but it does show their continued ability to manage the intensity of disputes while dealing with the global pandemic. An earlier sign of coordination occurred after the exchange of air strikes in early 2019, which preceded the Indian election and suggested that India and Pakistan had the ability to control their military encounters. India’s move to revoke the autonomy of Jammu and Kashmir in August 2019, along with various militant operations, created the basis for another major conflict this year. After all, the Kargil war in 1999 followed nuclear weaponization, while the 2008 conflict followed the Mumbai attack. But instead India and Pakistan have agreed to a temporary truce. A major India-Pakistan conflict would be a “black swan” as nobody is expecting it at this point. Not coincidentally, India and China also reduced tensions after the flare-up in their Himalayan territorial disputes in 2020. China may be reducing tensions now that it no longer has to distract its population from Trump and the US election. China is shifting its focus to the Myanmar coup, another area where it hopes to parlay its influence with a Biden administration preoccupied with democracy and human rights. Sino-Indian tensions will resume later, especially as China continues its infrastructure construction at the farthest reaches of its territory for the sake of economic stimulus, internal control, and military logistics. The Biden administration is adopting the Trump administration’s efforts to draw India into a democratic alliance. But more urgently it is trying to withdraw from Afghanistan and cut a deal with Iran, which means it will need Indian and Pakistani cooperation and will want India to play a supportive role. Typically India eschews alliances and it will disapprove of Biden’s paternalism. For both China and Pakistan, making a temporary truce with India discourages it from synching up relations with the US immediately. Still, we expect India to cooperate more closely with the US over time, both on economic and security matters. This includes a beefed up “Quad” (Quadrilateral Security Dialogue) with Japan and Australia, which already have strong economic ties with India. Biden’s attempt to frame US foreign policy as a global restoration of democracy and liberalism will not go very far if he alienates the largest democracy in the world and in Asia. Nor will his attempt to diversify the US economy away from China or counter China’s regional assertiveness. Therefore Biden will have to take a supportive role on US-India ties. We are sticking with our contrarian long India / short China equity trade (Chart 12). India cannot achieve its geopolitical goals without reforming its economy and for that very reason it will redouble its structural reform drive, which is supported by changing voting patterns in favor of accelerating nationwide economic development. India will also receive a tailwind from the US and its allies as they seek to diversify production sources and reduce supply chain dependency on China, at least for health, defense, and tech. Meanwhile China’s government is pursing import substitution, deleveraging, and conflict with its neighbors and the United States. While Chinese equities are much cheaper than Indian equities on a P/E basis, they are not as pricey on a P/B and P/S basis (Chart 13) – and valuation trends can continue under the current macro and geopolitical backdrop. Indian equities are more volatile but from a long-term and geopolitical point of view, India’s moment has arrived. Chart 12Contrarian Trade: Stick To Long India / Short China Bottom Line: Stay long Indian equities relative to Chinese and stay short Russian and Brazilian currencies and assets. These views are based on political and geopolitical themes that will remain relevant over the long run but are also seeing short-term confirmation. Chart 13Indian Stocks Not As Over-Priced On Price-To-Book, Price-To-Sales Investment Takeaways To conclude we want to highlight two investment takeaways. First, while the market has rallied in expectation of the US stimulus package, Biden must now get the package passed. This roller coaster process, combined with the inevitable European recovery once the vaccine rollout gets on its feet (Chart 14), will power an additional rally in cyclicals, value stocks, and commodities. This is true as long as China does not tighten monetary and fiscal policy too abruptly, a risk we have highlighted in previous reports. Chart 14Europe's Vaccination Problem While the US is pursuing “Buy American” provisions within its stimulus package, its growing trade deficit shows that it will be forced to import goods and services to meet its surging demand. This is beneficial for its nearest trade partners, Canada and Mexico, and Europe – as well as China substitutes further afield in some cases. Our European Investment Strategist Mathieu Savary has pointed out the opportunities lurking in Europe at a time when vaccine troubles and lockdowns are clouding the medium-term economic view, which is brightening. He recommends going long the “laggard” sectors and sub-sectors that have not benefited much relative to “leaders” that rallied sharply in the wake of last year’s stimulus, vaccine discovery, and defeat of President Trump (Chart 15). The laggard sectors are primed to outperform on rising US interest rates and decelerating Chinese economy as well (Chart 16). Therefore we recommend going long his basket of Euro Area laggards and short the leaders. Chart 15Europe’s Laggards And Leaders Chart 16Macro Forces Favor The Laggards over the Leaders Chart 17Will OPEC 2.0 Maintain Production Discipline To Keep Oil Supplies Tight? Commodities – especially base metals – will continue to benefit from the global and European reopening as well as the US infrastructure buildout, assuming that China does not shoot its economy in the foot. Our Commodity & Energy Strategy highlights that global oil prices should remain in a $60-$80 per barrel range over the coming years on the back of tight supply/demand balances and ongoing OPEC 2.0 production management (Chart 17). We continue to see upside oil price risks in the first half of the year but downside risks in the second half. The US pursuit of a deal with Iran may trigger sparks initially – i.e. unplanned supply outages – but this will be followed by increased supply from Iran and/or OPEC 2.0 as a deal becomes evident.   Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com   Footnotes 1 White House, "Remarks by President Biden on the American Jobs Plan," Pittsburgh, Pennsylvania, March 31, 2021, whitehouse.gov. 2 A bipartisan bill is conceivably, barely, since Republicans face pressure to join with such a popular bill, but they cannot accept the corporate tax hikes, unionization, or green boondoggles that will inevitably occur. 3 The pandemic and President Trump’s hands-off attitude toward it helped galvanize this revival of Big Government, but the revival was already well on its way prior to the pandemic. 4 White House, "Remarks by President Biden in Press Conference," March 25, 2021, whitehouse.gov. 5 Again, "the most dangerous concern is that of a military force against Taiwan," though he implied that Beijing would wait until after the February 2022 Winter Olympics before taking action. He requested that the US urgently increase regional military defense. See Senate Armed Services Committee, "Nomination – Aquilino," March 23, 2021, armed-services.senate.gov. 6 At that time the Soviet Union stationed nuclear missiles in Cuba that threatened the US homeland directly and sent a convoy to make the missile installation permanent. The US imposed a blockade. A showdown ensued, at great risk of war, until the Soviets withdrew and the Americans made some compromises regarding missiles in Turkey. 7 Note that this was not the case for the US in 1962: Cuba did not have special significance for the legitimacy of the American republic and the American regime would have survived a defeat in the showdown, although its security would have been greatly compromised. 8 Taiwan is proposing to buy a missile segment enhancement for its Patriot Advanced Capability-3 missile defense system for delivery in 2025, though this is not yet confirmed by the Biden administration. See for example Yimou Lee, "Taiwan To Buy New U.S. Air Defence Missiles To Guard Against China," Reuters, March 31, 2021, reuters.com. 9 See Monica Gugliano, "I Will Intervene! The Day Bolsonaro Decided To Send Troops To The Supreme Court," Folha de São Paulo, August 2020, piaui.folha.uol.com.br.

Highlights The Biden Administration's $2.25 trillion infrastructure plan rolled out yesterday will, at the margin, boost global demand for energy and base metals more than expected later this year and next.  Global GDP growth estimates – and the boost supplied by US stimulus – once again will have to be adjusted higher (Chart of the Week). Energy and metals fundamentals continue to tighten. OPEC 2.0's so-far-successful production management strategy will keep the level of supply just below demand, which will keep Brent crude oil on either side of $60/bbl. Base-metals output will struggle to meet higher demand from the ongoing buildout of renewables infrastructure and growing electric-vehicle sales. Of late, concerns that speculative positioning suggests prices will head lower – or, at other times, higher – are entirely misplaced: Spec positioning conveys no information on price levels or direction.  Energy and metals prices, on the other hand, do convey useful information on spec positioning, demonstrating specs do not lead the news or prices, they follow them. Short-term headwinds caused by halting recoveries and renewed lockdowns – particularly in the EU – will fade in 2H21 as vaccines roll out, if the experience of the UK and US are any guide.  Continued USD strength, however, would remain a headwind. Feature If the Biden administration is successful in getting its $2.25 trillion infrastructure-spending bill through Congress, the US will join the rest of the world in the race to re-build – in some cases, build anew – its long-neglected bridges, roads, schools, communications and high-speed transportation networks, and, critically, its electric-power grid.  There's a lot of game left to play on this, but our Geopolitical Strategy group is giving this bill an 80% of passage later this year, after all the wrangling and log-rolling in Congress is done. In and of itself, the infrastructure-directed spending coming out of Biden's plan will be a catalyst for higher US industrial commodity demand – energy, metals and bulks.  In addition, it will support the lift in the demand boost coming out of higher GDP growth globally, which will be pushed higher by US fiscal spending, as the Chart of the Week shows.  Of note is the extremely robust growth expected in India, China and the US, which are among the largest consumers of industrial commodities globally.  Overall growth in the G20 and globally will be expansive in 2022 as well. Chart of the WeekBiden's $2.25 Trillion Infrastructure Bill Will Boost Global Commodity Demand Higher GDP growth translates directly into higher demand for commodities, all else equal, as can be seen in the relationship between EM and DM GDP, supply and inventories and Brent crude oil prices in Chart 2.  While we have reduced our Brent forecast for this year to $60/bbl on the back of renewed demand-side weakness in the EU due to problems in acquiring and distributing COVID-19 vaccines, we expect this to be reversed next year and into 2025, with prices trading between $60-$80/bbl (Chart 3).  OPEC 2.0, the oil-producer coalition led by the Kingdom of Saudi Arabia (KSA) and Russia, has done an excellent job of keeping the level of oil supply below demand over the course of the pandemic, which we expect to continue to the end of 2025.1 Chart 2Higher GDP Growth Presages Higher Commodity Demand Chart 3Brent Crude Oil Prices Will Average - / bbl to 2025 As the Biden plan makes its way through Congress, markets will get a better idea of how much diesel fuel, copper, steel, iron ore, etc., will be required in the US alone.  What is important to note here that the US is just moving to the starting line, whereas other economies like China and the EU already have begun their investment cycles in renewables and EVs.  At present, key markets already are tight, particularly copper (Chart 4) and aluminum (Chart 5).  In both markets, we expect physical deficits this year and next, which inclines us to believe the metals leg of this renewables buildout is just beginning – higher prices will be required to incentivize the development of new supply.2  Chart 4Copper Will Post Physical Deficit... Chart 5...As Will Aluminum This is particularly important in copper, where growth in mining output of ore has been flat for the past two years.  Copper is the one metal that spans all renewables technologies, and is a bellwether commodity for global growth.  We expect copper to trade to $4.50/lb (up ~ $0.50/lb vs spot) on the COMEX in 4Q21 on the back of increasing demand and tight supplies – i.e., falling mining supply and refined copper output growth (Chart 6). Worth noting also is steel rebar and hot-rolled coil prices traded at record highs this week on Chinese futures markets.  Stronger steel markets continue to support iron ore prices, although the latter is trading off its recent highs and likely will move lower toward the end of the year as Brazilian supply returns to the market.3  We use steel prices as a leading indicator for copper prices – steel leads copper prices by ~ 9 months.  This makes sense when one considers steel is consumed early in infrastructure and construction projects, while copper consumption occurs later as airports and houses are fitted with copper for electric, plumbing and communications applications. Chart 6Copper Ore Output Flat   Does Speculative Positioning Matter? Of late, media pundits and analysts have cited an unwinding of speculative positions in oil and metals markets following sharp run-ups in net long positions as a harbinger of weaker prices in the near future (Chart 7).4  At other times, speculation has been invoked as a reason for price surges – e.g., when oil rocketed  toward $150/bbl in mid-2008, which was followed by a price collapse at the start of the Global Financial Crisis (GFC).5 Brunetti et al note, "The role of speculators in financial markets has been the source of considerable interest and controversy in recent years. Concern about speculative trading also finds support in theory where noise traders, speculative bubbles, and herding can drive prices away from fundamental values and destabilize markets." (p. 1545) Chart 7Speculative Positioning Lower In Brent Than WTI We recently re-tested earlier findings in our research, which found that knowledge of how specs are positioned – either on the long or the short side of the market – conveys no information on the level of prices or the change that should be expected given that knowledge.  However, knowledge of the price level does convey useful information on how speculators are positioned in futures markets.6 In cointegrating regressions of speculative positions in crude oil, natural gas and copper futures on price levels for these commodities, we find the level of prices to be a statistically significant determinant of spec positions. We find no such relationship using spec positions as an explanatory variable for prices.7 On the other hand, Chart 2 above is an example of statistically significant relationships for Brent and WTI price as a function of supply-demand fundamentals displaying coefficients of determination (r-squares) of close to 90% in the post-GFC period (2010 to now).  This supports our earlier findings regarding spec behavior: They follow prices, they don't lead them.8 We are not dismissive of speculation.  It plays a critical role in markets, by providing the liquidity that enables commodity producers and consumers to hedge their price exposures, and to investors seeking to diversify their portfolios with commodity exposures that are uncorrelated to their equity and bond holdings.  Short-Term Headwinds Likely Dissipate COVID-19 remains the largest risk to markets generally, commodities in particular.  The mishandling of vaccine rollouts in the EU has pushed back our assumption for demand recovery deeper into 2H21, but it has not derailed it.  We expect COVID-related deaths and hospitalizations to fall in the EU as they have in the UK and the US following the widespread distribution of vaccines, which should occur in the near future as Brussels organizes its pandemic response (Chart 8).  Making vaccines available for other states in dire straits will follow, which will allow the global re-opening to progress as lockdowns are lifted (Chart 9). Chart 8EU Vaccination Rollouts Will Boost Global Economic Recovery Chart 9Global Re-Opening Has Slowed, But Will Resume In 2H21 The other big risk we see to commodities is persistent USD strength (Chart 10).  The dollar has rallied for the better part of 2021, largely on the back of improving US economic prospects relative to other states, and success in its vaccination efforts.  The resumption of the USD's bear market may have to wait until the rest of the world catches up with America's public-health response to the pandemic, and the global economy ex-US and -China enters a stronger expansionary mode. Bottom Line: We remain bullish industrial commodities expecting demand to improve as the EU rolls out vaccines and begins to make progress in arresting the pandemic and removing lockdowns.  Global fiscal and monetary policy, which likely will be bolstered by a massive round of US infrastructure spending beginning in 4Q21 will catalyze demand growth for oil and base metals.  This will prompt another round of GDP revisions to the upside.  The dollar remains a headwind for now, but we expect it to return to a bear market in 2H21. Chart 10The USD's Evolution Remains Important   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Commodities Round-Up Energy: Bullish Going into the April 1 meeting of OPEC 2.0 today, we are not expecting any increase in production.  OPEC earlier this week noted demand had softened, mostly due to the slow recovery from the COVID-19 pandemic in the EU, which, based on their previous policy decisions, suggests the producer coalition will not be increasing production.  The coalition led by KSA and Russia will have to address Iran's return as a major exporter to China this year, which appears to have been importing ~ 1mm b/d of Iranian crude this month (Chart 11).  This puts Iran in direct competition with KSA as a major exporter to China, in defiance of the US re-imposition of sanctions against Iranian exports.  China and Iran over the weekend signed a 25-year trade pact that also could include military provisions, which could, over time, alter the balance of power in the Persian Gulf if Chinese military assets – naval and land warfare – deploy to Iran under their agreement.  Details of the deal are sparse, as The Guardian noted in its recent coverage.  Among other things, government officials in Tehran have come under withering criticism for entering the deal, which they contend was signed with a "politically bankrupt regime."  The Guardian also noted US President Joe Biden " is prepared to make a new offer to Iran this week whereby he will lift some sanctions in return for Iran taking specific limited steps to come back into compliance with the nuclear agreement, including reducing the level to which it enriches uranium," in the wake of the signing of this deal. Base Metals: Bullish Copper fell this week, initially on an inventory build, and has now settled right under the $4/lb mark, as investors await details on the US infrastructure bill unveiled in Pittsburgh, PA, on Wednesday.  According to mining.com, a major chunk of the proposed bill will be devoted to investments in infrastructure, which will be metals-intensive.  Precious Metals: Bullish Gold fell further this week, as US treasury yields rose, buoyed by the increased US vaccine efforts and President Biden’s proposed spending plans (Chart 12). USD strength also worked against the yellow metal, which has been steadily declining since the beginning of this year.  COMEX gold fell below the $1,700/oz mark for the third time this month and settled at $1,683.90/oz on Tuesday. Chart 11 Chart 12     Footnotes 1     Please see Five-Year Brent Forecast Update: Expect Price Range of $60 - $80/bbl, which we published 25 March 2021.  It is available at ces.bcaresearch.com. 2     Please see Industrial Commodities Super-Cycle Or Bull Market?, which we published 4 March 2021 for additional discussion, particularly regarding the need for additional capex in energy and metals markets. 3    Please see UPDATE 1-Strong industrial activity, profit lift China steel futures, published by reuters.com 29 March 2021. 4    See, e.g., Column: Frothy oil market deflates as virus fears return published 23 March 2021. 5    Brunetti, Celso, Bahattin Büyüksahin, and Jeffrey H. Harris (2016), " Speculators, Prices, and Market Volatility," Journal of Financial and Quantitative Analysis, 51:5, pp. 1545-74, for further discussion. 6    Please see Specs Back Up The Truck For Oil, which we published 26 April 2018, and Feedback Loop: Spec Positioning & Oil Price Volatility published 10 May 2018.  Both are available at ces.bcaresearch.com. 7     We group money managers (registered commodity trading advisors, commodity pool operators and unregistered funds) and swap dealers (banks and trading companies providing liquidity to hedgers and speculators) together to test these relationships. 8    In our earlier research, we also noted our results generally were supported in the academic literature.  See, e.g., Fattouh, Bassam, Lutz Kilian and Lavan Mahadeva (2012), "The Role of Speculation in Oil Markets: What Have We Learned So Far?" published by The Oxford Institute For Energy Studies.   Investment Views and Themes Strategic Recommendations Commodity Prices and Plays Reference Table Summary of Closed Trades

Highlights Indian private sector banks have shown a remarkable improvement in their operating efficiency and have largely cleansed their balance sheets. Further, they have plenty of room to grow as they will continue to grab market share from public sector banks. Investors should go long Indian banks and short EM banks. EM equity portfolios should upgrade the Indian bourse from neutral to overweight. Feature Indian bank stocks have been the star performers among emerging markets banks over the past 20 years (Chart 1). They have consistently outperformed the broader Indian markets too, except in 2020 (Chart 2). What led to such a sustained outperformance? And more importantly, are Indian banks still a buy? Chart 1Indian Bank Stocks Have Been The Star Performer Among EM Banks Chart 2Indian Banks: 2020 Underperformance Is Reversing   Changing Landscape Our research indicates that listed Indian banks have displayed remarkable improvement in their operating efficiencies in the past 15 years. Lately, they have also cleansed their balance sheets meaningfully. Before we delve deeper into the drivers of their outperformance and prospects, we need to be aware of the changing structure in the Indian banking sector, and the disconnect it has created between banks’ assets versus banks’ market capitalization. Even though India’s public sector (PSU) banks have been steadily losing their market share to private ones over the past three decades, they still dominate the Indian banking scene with a 60% slice in terms of assets and loans. Private sector banks’ market share is a third of the total, with the rest belonging to foreign banks and smaller local banks. Yet, Indian bank stock indexes are comprised predominantly of private sector banks. For example, they make up 95% of India’s MSCI bank index1 – a share that has risen rapidly over the past decades. India’s bank stock performance, therefore, has been largely a reflection of its private sector banks. Robust Operating Efficiency Chart 3Indian Private Banks Have Shown Remarkable Operating Efficiency... In terms of operational efficiency, Indian private sector banks have shown significant improvement over the past 20 years. Their operating profit-to-assets ratio went up from around 2% in 2000 to 2.8% currently (Chart 3, top panel). On the flip side, PSU banks’ operating profits have dwindled to 1.6% of their assets. The improving performance of private sector banks also boosted India’s bank stock indexes as they continued to have ever larger weights therein. This remarkable divergence between the operating profits of public and private banks has been caused by several factors:  Private sector banks have been more aggressive than PSU banks in terms of the assets they accumulated, as well as in their management of asset-liability mismatch. This has helped them generate significantly higher net interest income relative to their assets (Chart 3, middle panel). Over the past several years, private sector banks have ramped up their loan book (higher-yielding) while trimming their investments portfolio (lower-yielding government paper). The opposite has happened with PSU banks (Chart 4, top panel). As a result, private banks’ interest income relative to their assets has risen more than that of PSU banks. In their loan portfolio, private banks maintained a higher share of term loans relative to working capital loans (Chart 4, bottom panel). Term loans often entail higher yield as they typically lock-in funds for a longer period than do working capital loans. But term loans also need to be funded by longer duration liabilities to avoid asset-liability mismatch. These liabilities are typically term deposits. Since term deposits cost more than demand or savings deposits, it’s important to balance the term liabilities with term assets. Private sector banks have mobilized term deposits in line with their needs to finance their term loans (Chart 5, top panel). PSU banks, on the other hand, have had much more (higher-cost) term deposits compared to their term loans. Chart 4...Supported By Prudent Asset-Liability Management... Chart 5...That Yielded Higher Cost-Adjusted Return On Loans...   This is one of the reasons why the profitability of banks loans for private banks, after adjusting for funding costs, has been superior to that of PSU banks (Chart 5, bottom panel). Private banks have also made a stronger foray into the world of unsecured loans (Chart 6). These are typically credit card loans and personal lines of credit. Since unsecured loans usually earn a higher rate of interest, this strategy has worked in favor of boosting their net interest margins. Finally, private banks have always had significantly more non-interest income (i.e., fee-based income). This has helped improve their operating profits meaningfully (Chart 3, bottom panel). Notably, in terms of employee cost and other operating costs, private sector banks do not do any better than PSU banks. In fact, the operating expenditure as a percentage of assets has always been higher for private banks than for PSU banks (Chart 7). This divergence has mainly been due to a difference in employee compensation expenditure. Chart 6...And An Aggressive Credit Strategy Chart 7Private Banks' High Operating Cost Was More Than Offset By A Higher Operating Income   Put differently, the “operating efficiency” of private sector banks stems from their built-in business model, in which they take slightly more business risks than their PSU counterparts. But in the process, private banks earn significantly more operating income than PSU banks. This more than offsets their relatively higher operating expenditure resulting in higher operating profitability (Chart 3, top panel). Crucially, private sector banks have steadily taken market share from PSU banks in all four types of loans: agricultural, industrial, services, and personal loans (Chart 8). Their loan book is also quite balanced, with no excessive exposures to any type of borrowers (Chart 9). Yet, their presence in the economy is proliferating at a fast clip. It’s no wonder then that their stock prices have commanded a steady premium over their PSU counterparts. They also gradually displaced the latter in India’s stock market indexes. Chart 8Private Banks Are Grabbing Market Shares In All Areas... Chart 9...But They Are Not Over-Exposed To Any One Type Of Loans   The Saga Of NPLs And Provisions The diverging operating profits of public and private sector banks got more accentuated when it came to net profits. The reason is a much higher share of bad loans among PSU banks. This forced PSU banks to make higher loan loss provisions, which weighed on their net profits (Chart 10). One development that aggravated PSU banks’ market share and NPL woes is the rising trend of disintermediation by corporate borrowers. Large industrial sector borrowers have been increasingly relying on corporate bond markets for their financing needs instead of bank credit. Indeed, disintermediation of large industrial loans is the main reason why overall bank credit in India has decelerated so much recently. Excluding this sector, bank credit growth has been quite decent (Chart 11). Chart 10Private Banks' Robust Operating Margins Let Them Make Aggressive NPL Provisions Chart 11PSU Banks Got Disproportionately Hurt By Decelerating Industrial Loans   Chart 12 shows that the amounts raised by corporates via local debt issuance has far outstripped the incremental bank credit to the industrial sector in the past.  One incentive for large firms to issue debt instead of taking on more credit is that corporate bond yields for top borrowers (AAA and AA rated) have been lower than the prime lending rates of banks. With bond markets maturing in India, corporates are increasingly taking advantage of the situation (Chart 13). Chart 12Large Industrial Firms Shunned Bank Credit In Favor Of Debt Issuance... Chart 13...As Financing Cost Via Debt Issuance Became Increasingly More Attractive   This general shift in credit markets caught PSU banks off-guard. Since almost 90% of all industrial loans were from PSU banks at the beginning of the past decade (Chart 8), the disintermediation process hurt them disproportionately compared to private banks. PSU banks are also now stuck with an ever higher share of old, ageing industrial loans in their books. Older loans are more prone to turning into NPLs as compared to fresh, newly issued loans. This is one of the reasons why the NPL ratio has been higher for PSU banks. Private sector banks, on the other hand, have had a relatively higher share of their loan book in personal and services sector loans. These loans have traditionally been much less prone to turning sour. RBI’s data shows that the stressed loans in the personal loans sector have remained around 2% for the past several years while that of industrial loans hovered in double digits (Chart 14). This is another reason why private sector banks faced relatively lower NPL problems over the years.  The top panel of Chart 15 shows the gross NPL ratios of both public and private sector banks. The middle panel shows the yearly provisions they made as a share of their total loans. Chart 14Industrial Loans Have A High Propensity To Become NPL; Personal Loans Low Chart 15Private Banks' Copious NPL Provisioning Led To Lower Net NPL Chart 16In Past Decade Private Banks Have Provisioned For Half Of Their Average Loan Book! Evidently, over the years private banks have made nearly as much provisions (as a % of loans) as their PSU counterparts, even though the former has had much less gross NPLs. This is why private banks’ balance sheets are cleaner now, i.e., they have less net NPLs (Chart 15, bottom panel). Notably, these data also indicate that private sector banks have set aside a mammoth INR 5.5 trillion as cumulative provisions over the past ten years. This would be equivalent to 55% of their average gross loans outstanding that existed over a five-year period between 2010 and 2014 (both years inclusive) (Chart 16). Since most of these provisions have since been used up to write-off bad loans, one could estimate that around half of the loans that existed in the early 2010s have since been written off. The same figure for PSU banks would be INR 14 trillion, and about a third of their average loans between 2010 and 2014 have already been provisioned for. These figures are all as of March 2020, i.e., before the pandemic kicked in. This entails that Indian banks’ balance sheets, especially those of private sector banks, were largely clean going into the pandemic. The reported net NPL ratio of 1.5% for private sector banks as of March 2020 is therefore a credible figure. The Pandemic And Its Aftermath Banks’ NPLs will surely rise as the negative ramifications of the prolonged country-wide lockdown becomes clearer in the months ahead. That said, the RBI and banks have taken several prudential measures to minimize the fallout: During the pandemic, the RBI (and later the Supreme Court) had allowed a loan moratorium period from March to August 2020. Borrowers needed not to pay any instalment or interest for loans during that period, and their loans would still not be downgraded to NPLs. What’s more, for loans up to INR 20 million (all small, medium and micro enterprises, and personal loans), the borrowers won’t have to pay the foregone instalments after the moratorium period is over. They won’t have to pay even the incremental interest that will have accrued on their loans as their principal balance stayed higher for six months than if they would have continued making repayments. The federal government has agreed to pay for the incremental interest, which has mitigated the loss of profitability for banks on these loans. Thus, most borrowers are unlikely to face sudden, additional debt servicing burdens after the moratorium period is over. This would help in avoiding more accounts from turning bad. Banks, at the same time, did make separate provisions – whenever instalments or interests remained overdue during the pandemic – as if no moratorium was in place. As such, banks have already taken the hit in their income statements for any slippage in their loan books. Excluding the moratorium-period new NPLs and provisions, private sector banks’ regular stock of provisions stood at 80% of their gross NPLs as of September 2020. For some listed private banks, the figure was well over 100%. For PSU banks, this figure was 70.5% as of last September. Hence, the bottom line is that in the absence of further pandemic and lockdown-related growth slumps, the private sector banks’ NPL profile is quite benign. To assess the future impact on banks’ NPL and capital adequacy, the RBI conducted a stress test in January this year: As per their projections (not forecast), in the worst case scenario where GDP would grow only at 3.8% in the six months from April to September 2021 (against the IMF’s base line projection of 11.5% growth in April 2021 to March 2022), the gross NPL ratio of PSU banks could rise from 9.7% in September 2020 to 17.6% a year later. For private sector banks, it could rise from 4.6% to 8.8%.  In that case, assuming that banks will set aside another 4% of loans as provisions this year (as they did last year), net NPLs for PSU banks will rise from 2.9% to 6.8%, but that of private banks will remain largely unchanged at 1.2%. Since private banks dominate the bank stock index, there will be a muted negative ramification on stock prices, if any, on account of such a pessimistic scenario of a new wave of NPLs.   Investment Conclusions Indian private sector banks have had plenty of tailwinds: high net interest margins and profitability, good asset-liability management, and exposure to good-quality credit. Besides, they have been aggressive in the provisioning of their NPLs. More importantly, going forward, these banks have plenty of room to grow. Their market share is still relatively small, and India’s bank credit to-GDP ratio is also relatively low at 55% of GDP. Including corporate bonds, total borrowings of non-financial, non-government sectors are still not high at 72% of GDP (Chart 11, bottom panel). Post-pandemic, once India’s economy gets back in the groove, these banks are very well placed to exploit the opportunity over a sustained period. This warrants a bullish view on Indian private sector banks: While their valuation remains expensive, they have fallen somewhat compared to the past several years. Given their balance sheets are now much cleaner than they were in the recent past, they offer a better risk-reward profile (Chart 17). A good harvest and lingering domestic demand weakness will keep inflation in check in India. This also means that the RBI is unlikely to raise rates anytime soon. Periods of low inflation and no monetary tightening are beneficial for both banks and borrowers. Indeed, bank stocks usually do well, both in absolute terms and relative to overall markets, whenever inflation is under control (Chart 18). Chart 17Bank Valuations Are Better Than In Recent Years Given Balance Sheets Are Cleaner Chart 18Muted Inflation And Lower Policy Rates Are Supportive Of Bank Stocks   Investors should go long Indian banks and short EM banks. We recommend dedicated EM equity portfolios to use the latest relapse in India’s relative equity performance to upgrade the country's allocation from neutral to overweight (Chart 19). India’s yield curve remains steep with the ten-year swap rate 120 basis points above the policy rate. Indian local currency government bonds offer value relative to both US and EM bonds. The spread of India’s GBI bond index over the same duration of US and EM local currency bonds are 570 and 150 basis points respectively. Investors should stay on with our recommendation to receive ten-year swap rates. Finally, the rupee is likely to stay well bid thanks to a strong balance of payments – which was boosted by copious capital flows (Chart 20). A potential rebound in the US dollar could produce a mild setback in the rupee. However, this currency will outperform the majority of EM exchange rates. Chart 19Upgrade Indian Stocks To Overweight In An EM Portfolio Chart 20A Strong Balance Of Payment Is Supportive Of Indian Rupee   Rajeeb Pramanik Senior EM Strategist rajeeb.pramanik@bcaresearch.com   Box 1 A Note On India’s Agriculture Reforms We published a report on India’s Agricultural reforms on November 19, 2020 where we elaborated on why this law was very important for India’s structural outlook. As we contended therein, it’s a highly politically sensitive issue. Expectedly, it was met with political resistance from a few political parties and a section of farmers. Just to provide some context to the agitations, out of the 500 million agricultural workers in India, only about 50 thousand or so large farmers from a particular region in India are protesting. While these protesters have significant political clout, they can hardly be called representative of all farmers. As to the reason for these protests, the new law will upend the monopoly and vested interests of many large farmers who benefitted from the current system for decades. Even though the reforms will usher in private capital, improving overall farm productivity, they will also introduce competition in procurement and distribution. The latter will certainly hurt many large farmers who practically run the current “mandi” system (designated marketplaces where farmers sell their produce). It’s still uncertain how this will play out. As many as 11 rounds of discussions between the farmers’ representatives and the government failed to sort out the issue. Meanwhile, the Supreme Court intervened and formed a committee to look into the matter over the next six weeks, but the protesting farmers have refused to accept its involvement and forthcoming ruling. The government’s offer to put the act on hold for the next 12-18 months while discussion continues has also been refused by the farmers. The protesters’ sole demand is a complete repeal of the law. Our best guess is, eventually, there will be some modification in the most contentious parts of the new laws, and the roll out will probably be delayed by a year or so. In any case, we will keep you updated. Footnotes 1 The MSCI India Financials index makes up 27% of the broader MSCI India index, and the MSCI India Banks index makes up 20%. The latter is dominated by private sector banks with 19% weights, and figure in only one PSU bank, the State Bank of India (SBI), which has an index weight of 1%. However, SBI’s assets or deposits are still higher than the rest of the index constituents (all private sector banks) combined.