1. This is a brief outline of the presentation done by Russell Napier, author and consultant, CLSA Asia Pacific
Markets in association with Reliance Mutual Fund and India CFA Society. The topic of Presentation was
“It’s not the economy, Stupid! Why equities go up in a double dip!”
Key Highlights
• As compared to bonds, US equities are as cheap as they have been in 50 years
• Although there are fears of deflation in the US economy, there are certain positives like growth
in the bank credit, broad money and commercial money market
• A great bear market in bonds is beginning but in its early stages will not stop a rise in equities of
more than 30%
Reasons for this Optimism in US Equities
Dividend Yield Ratio (Dividend Yield/10 Year Bond Yield) is currently above the 1974 and 1979 levels,
and in the past 50 years, whenever this ratio has been at the current levels, it has resulted in more than
30% upside in equities after a time frame of eighteen months. Currently, the dividend data shows that
equities are undervalued due to low payouts and stock buybacks however, Russell does not expect
earnings to fall much, as investors will become confident of the stability in the corporate earnings. This
is based on the fact that US corporate deposit balances are at US$2.4 trillion and the annual corporate
cash flow is at a record US$1.7 trillion. In addition to this, bank credit has grown at 6% since June, key
segments of bank loans have started showing signs of contraction and ABS Commercial Paper financing
is growing at 15%. All this means that US corporates are flooded with liquidity, which has to finally go to
the shareholders. Since corporates are not using this liquid balances, they will have to eventually use it
for the benefit of the economy or asset prices.
Two-Three Year Outlook
Equities are cheap even on the back of a double dip recession. If the trend in credit and corporate
balances continues to grow at the current rate then it will lead to acceleration in economic growth and
ultimately, benefit the equity market. The bond market has entered a bearish phase and it has been
seen that in the early stages of a bearish bond market, equities will do well till inflation reaches 4% and
bond yields trade at 5.5% level. Russell is of the view that investors should stay away from the US bond
market on account of the huge US deficit. Furthermore, there has been a shift in emerging market
monetary policy due to the inflation threat faced by these economies.
As far as the Indian markets are concerned, Russell maintains a cautious view as he is of the opinion that
the markets are currently overvalued and this current rally is being driven by FII inflows. This will reverse
once the developed markets starts outperforming the emerging markets and will consecutively lead to a
correction in the domestic market.

2. Disclaimer
This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an
investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial
products /investment products mentioned in this article or an attempt to influence the opinion or behaviour of the investors
/recipients. Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole
discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives
of the specific person or group of persons. Opinions expressed herein are subject to change without notice.