Central banks may be forced to sell gold; India at risk: Chris Wood

According to reports, official gold reserves in India totaled 653 tonnes at the end of March 2020, while those in Saudi totaled 323 tonnes.

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.

Equity and credit markets can retest recent lows, warns Chris Wood

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a 'bull phase', typically defined as a rise of 20 per cent or more from the recent lows.

Equity and credit markets can go back to their recent lows, and probably slip even further if the infections caused by the coronavirus (Covid-19) pandemic do not peak out by April-end, wrote Christopher Wood, global head of equity strategy at Jefferies in GREED & fear, his weekly note to investors.

“In the unlikely case where infection rates do not peak out by the end of April, stock markets and credit markets will re-test recent lows and worse. At that point, there will be growing pressure for people to return to work because at a certain point the negative impact on the economy and people’s general livelihood becomes a bigger negative than the disease itself,” Wood said.

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a ‘bull phase’, typically defined as a rise of 20 per cent or more from the recent lows. The US, South Korea, Philippines and Indonesia have already entered technical bull markets, having risen over 20 per cent from their respective low levels. Indian benchmarks – the S&P BSE Sensex and the Nifty 50 – are also flirting with this territory now.

With most countries in a lockdown mode given how quickly Covid-19 has spread, Wood believes it will be tough to extend the lockdown phase beyond this quarter given the high debt levels. This, he says, is even more the case in the developing world than the developed since safety nets are not the same in the case of former to support the unemployed.

“It is hard to see the Western world locking itself down into another Great Depression. But that threat is real if the lockdowns are extended beyond this quarter because of the sheer level of outstanding debt. In this respect, it is hard to imagine that the three-week lockdown in activity ordered by Indian Prime Minister Narendra Modi on March 24 can be extended. That is assuming such a lockdown can even be implemented effectively in such a densely populated country,” Wood wrote.