There is a growing risk of liquidation of gold in India caused by a lockdown-triggered collapse in economic growth, wrote Christopher Wood, global head of equity strategy at Jefferies in his weekly note to investors, GREED & fear. The potential for forced selling in gold, Wood believes, could come from central banks given the dramatic fiscal deterioration being suffered by many countries. India, he said, is at risk given its substantial gold holdings. “Another potential seller is Saudi Arabia where fiscal pressures caused a draconian threefold increase in the value-added tax (VAT) rate to 15 per cent and the suspension of cost of living allowances,” Wood said. Given this backdrop, he feels gold prices may not break the $1800-1900 level in a hurry. “Still what investors should remember is that when gold finally takes out the 2011 high of $1921/ounce, it will be the proverbial ‘blue sky’,” Wood wrote. According to reports, official gold reserves in India totaled 653 tonnes at the end of March 2020, while those in Saudi totaled 323 tonnes. Bearish on banking stocks The growing pressure on banks to offer and even extend the moratorium on payment of installments seems to have Wood bearish on the sector, especially in the Indian context. In his Asia Pacific ex-Japan portfolio, Wood has exited his holding in Kotak Bank and replaced it with Maruti Suzuki. “This issuance of forbearance pressure on banks is not just an issue for India but one for bank stocks globally. It is why bank stocks would not be GREED & fear’s favourite way to add to cyclical exposure for those who buy GREED & fear’s base case that the health crisis will prove to be a three to four-month cycle and that life will return to normal much sooner than currently assumed by the chattering classes,” he wrote. However, Wood remains bullish on oil stocks, which he says, have truly suffered the perfect storm, and auto stocks, particularly those geared to emerging markets. Besides oil and auto, he is bullish on the Indian real estate sector and suggests Godrej Properties and DLF be the best options among the listed realty sector plays.
Investors with long-term holding power should stay invested in both these counters, he suggests.“The downturn in Indian residential property market is of a kind GREED & fear has never seen before, and that is saying something, because it has been driven by a series of policy triggered shocks of which the latest is the Modi-triggered lockdown long term beneficiaries of the ongoing brutal consolidation. There has been a now seven-year downturn in residential property while affordability is at its best level in 20 years. The mortgage payment to annual income ratio has declined from 49 per cent in FY12 to an estimated 26 per cent this fiscal year, with mortgage rates having declined by 350bp over the same period to 7.5 per cent,” Wood said. DLF is in GREED & fear’s Asia ex-Japan long-only portfolio while Godrej Properties was in the portfolio for three years until it was removed in December 2019.