BHUSHAN MANJAREKAR, SAFE HAVEN INVESTMENTS

India Update May 13th 2020

The signs of coming great depression:

Yield Curve:

India’s bond yields have declined pretty fast over the last year. This has created a very sharp steepening
in the front end of the curve. Interest in the 3 months bonds have fallen from 6.46% last year to more
recently 3.45%, i.e. more that 3% or 301 bps. However, yields at higher tenors like 5yrs drop 152 bps, 10
yrs just 128 bps. So, at front end the difference is twice or more than that compared at those of 5yr and
10yr. 3.45% interest rate for bonds maturing in 3 months is below the current RBI repo rate of 3.75%
(picture under Repo section). That means bond markets are dragging down these rates significantly. What
does that mean?

Charlie McElligott of Nomura Securities explains it here and also “Fear the Steepener.” In his own words:
“…steepener thesis was that front-end yields were going to probably be collapsing as the market sniffed
the slowdown, forced the Central Bank into a much more aggressive easing cycle than many people
believed was possible… these steepenings come before the recessions do tend to hit on that kind of six to
nine months lag.”
 BHUSHAN MANJAREKAR, SAFE HAVEN INVESTMENTS

India has not entered in technical recession yet. Although by now pretty much everyone knows that
officially its just the formality to be announced when we will get the GDP numbers for this quarter. The
message the bond markets are telling us here is that the recovery won’t be V-shape (immediate) at all.
Rather it’d take at least a few couple of years for even to begin [contingent on policies and
implementation]. Usually things are pretty difficult to do in bad times than they’re in good times.

You can notice above in the picture and as I discussed in first paragraph that the spread between the
yields now and last year gets thinner at long end of the curve (long end means right end). Yield drops 65
bps at 30 yr maturity since last year. However, 5s30s has steepened from 46 bps last year to 133 bps now.
That’s three times! If you take Charlie’s word here, it’s a good sign in a way. Not so fast because that’s not
true anymore when we know precisely what’s lying ahead for all of us.

The reason the short term paper yields are dropping so fast is flight to liquidity / flight to safety. People
who care about the safety of their money are flocking to buy the paper, shorter the maturity the better.
Which explains the higher drops in the front end. Unlike banks, money invested in Government Bonds is
considered risk-free. There is no requirement for insurance cover of INR 5 lakhs. And you get the instant
access to liquidity whenever you want. And that’s the cause of preserving wealth, liquidity. These papers
are also treated as Cash equivalent because investors can post them as collateral wherever they seek
cheap funding (at Repo Rate in theory, at least big houses do this).

Repo:

Repo is a great way to raise money because cost of your funding gets really cheap. For example, let say
you hold 10% bearing 30y bond paper of notional INR 200,000 from five years ago and yet the paper has
25 more years to go. Now because the yields have fallen more than 400 bps you’re deep in the money
may be somewhere INR 300,000 already as price of the bonds is inversely proportional to yields. In a Repo
transaction your bond stays yours and with some haircut calculated by the bank you can borrow cash at
current Repo rate of 3.75% for overnight maturity! That’s a great spread of 6.25%. With rates further
guaranteed for decline as we can see forced by the bond markets, the deal only gets sweetened.
 BHUSHAN MANJAREKAR, SAFE HAVEN INVESTMENTS

Oil:

WTI (US) Oil futures contract are considered good proxy for world oil demand. Of course, there is always
a spread involved depending on quality and other factors when other contracts elsewhere in the world.
For example, Brent (UK). The futures curve for the WTI is entirely in Contango. Information can be
accessed here on daily basis. Investors are predicting $35.85 oil at June 2022, that’s two years ahead of
today’s meager $25.34 spot. Not to forget just last month end prices for first month futures were trading
in deep negative territory (-$40). Mizuho economist is predicting same fate for June contracts at negative
$100. So, market is still gauging how it sees the panic how long ahead in time. Even if we think of $35 oil
in two years’ time that would still be too depressing for world economy.

PMI:

More than half the India GDP comes from Services sector Most services are dependent on the west for
business. There is a pretty good chance this won't peak up because when the West opens, it has its own
unprecedented unemployment levels to tackle (second image below). That means many jobs will be
forced to introduce back in the west by policymakers. India jobs will not revive for further long, which may
impact demand of IT sector’s peripheral needs, jobs that support the whole work environment in Indian
cities.
 BHUSHAN MANJAREKAR, SAFE HAVEN INVESTMENTS

Real Estate:

Almost all buyers who are currently owning residential properties are in debt. In past two years,
apparently INR 5 trillion worth of loans were distributed by banks/NBFCs. Now that means a lot of players
who have already lost their jobs or don't want to continue taking price risk of holding a property will first
realize that even before removal of lockdown i.e. still in place and may continue till June, their equity of
20% has already either all or almost gone. That in practice should panic markets further because unless
they sell their properties by their own, banks will take the possession. Not just that but banks will compete
against their very own customers with the foreclosed stock in hand for obvious reasons of liquidity. In any
case that sort of sold inventory being dumped on top of developers’ unsold units means utter chaos.

Solutions and Contact:

You already know one solution that institutional and big investors are using to save their money, i.e. Repo.
Of course, India doesn’t allow its citizens to be part of the story but there are many funds which may or
may not involve. In fact without going into deep, let me tell you how funds which you invest money like
short term AAA funds who only invest in government and best corporate papers for maximum maturity
of 6 months (and yet go bust, remember Franklin Templeton?) actually take refuge in Repo. They may
further be involved in something called hypothecation and rehypothecation. Welcome to the world of
securitization. So, the point behind this story is you may think you’re caring low risk because that’s what
they tell you in good times by showing you a nice three-way indicator. The real risk is something never
disclosed. Nor regulators get it. If they’d have any close of understanding anything, they’d rather working
in private sector which has not much different spread ( in India ) either.

My Investment Advisery [yes it’s a word, https://www.thefreedictionary.com/advisery] Safe Haven

Investments is eagerly willing to serve you in your investments and wealth decisions in these times of high
uncertainty. We advise investing only in countries where people have utmost respect for law and order
and are known for preserving capital of investors during all the testing times for centuries. Certainly not
in India: don’t take it negatively but mantra of investing is never keep all your eggs in one bucket. Diversify
them maintaining complexity.

I’m offering investment research in "Capital Preservation" using various traditional and non-traditional
vehicles to help you preserving money and its value with your full control by

• Diversifying investments across geopolitical boundaries

• Investment ideas in precious metals firms, currency deposits in safe jurisdictions

• Strategies to turn low yields in high yields using derivatives

• Investments in Land (Cheap and yet in law abiding jurisdictions)

Thank you.

Bhushan Manjarekar

Investment Adviser, Safe Haven Investments

Email: bhushan@tim.it

WhatsApp: +91 9920 797 236