Global Strategy Powerpoint For Na Trip

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A presentation I prepared on the shape of the global recovery and macro investment strategy.

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Global Strategy Powerpoint For Na Trip

  1. 1. The Shape Of The Global Recovery: Risks and Opportunities Justin Patrie, Head of Country Risk & Financial Markets Business Monitor International
  2. 2. Outline <ul><li>1. Global Strategic Outlook: A downturn in 2011 looms </li></ul><ul><li>2. Europe: The Global Weak Link </li></ul><ul><li>3. US: Lacklustre Consumer Unlikely To Recover </li></ul><ul><li>4. China: Recession Risks </li></ul><ul><li>5. EM Strategy: Favouring Domestic Demand Plays </li></ul>
  3. 3. Global Strategic Outlook <ul><li>2010 will be characterised by a sharp bounce in headline growth… </li></ul><ul><li>… but we doubt the sustainability of that growth once base effects wear off </li></ul><ul><li>The crisis has negatively impacted growth on a structural basis, while risks still abound in the US, Eurozone and China. Expect a downturn in 2011 . </li></ul><ul><li>The good news is that the contraction has stopped, but a fundamental and rapid recovery is not on the cards yet </li></ul>
  4. 4. This can be your title page Eurozone: The Global Weak Link <ul><li>Greek crisis has highlighted a systemic problem of over-leverage </li></ul><ul><li>The nature of the debt problem differs from state to state, but the end-game is universal: deleveraging </li></ul><ul><li>The demand outlook is precarious as fiscal austerity becomes the policy focus, private consumption/capital investments undermined by ‘internal devaluations’, and a lacklustre export outlook </li></ul><ul><li>Inflation and interest rates will remain extremely low , feeding through to our market convictions on euro, fixed income and equities </li></ul>BMI Forecasts 2007 2008 2009 2010f 2011f 2012f 2013f 2014f Real GDP Growth (%) 2.7 0.7 -3.9 1.0 1.4 1.9 1.8 1.9 GDP Per Capita (US$) 37,705 41,401 38,416 38,976 39,398 39,795 39,044 39,972 Fiscal Balance, % of GDP -0.6 -1.9 -6.5 -5.5 -4.8 -3.7 -3.0 -2.5 Current Account (% GDP) -0.1 -0.9 -1.3 -1.2 -0.3 -0.0 0.1 0.1 Exports, US$bn 3,867 4,323 3,489 3,664 3,667 3,741 3,861 4,059 Inflation (average, %) 2.2 3.2 0.2 0.9 1.5 1.7 1.6 1.6 ECB Refinancing Rate (%) 4.00 2.50 1.00 1.00 1.00 2.00 3.00 4.00
  5. 5. This can be your title page A Greek Fiscal Time-Bomb Explodes… <ul><li>Chronic fiscal deficits (avg 5.5% of GDP) and high gov’t debt </li></ul><ul><li>(over 100% of GDP), combined with recession and a heavy </li></ul><ul><li>roll-over ratio in Q210 created the sovereign debt crisis </li></ul>
  6. 6. This can be your title page It’s Not Just Greece… <ul><li>As an aggregate, the Eurozone has NEVER kept to the SGP </li></ul><ul><li>maximum limit for government debt </li></ul><ul><li>Reining in deficits will have a greater impact on aggregate demand </li></ul><ul><li>in Europe than in the US </li></ul>
  7. 7. This can be your title page Monetary Union Under Severe Strain <ul><li>Divergences within the Eurozone have been exacerbated. </li></ul><ul><li>Addressing the structural imbalances will be crucial for </li></ul><ul><li>sustainable growth over the long run </li></ul>
  8. 8. This can be your title page Internal Devaluation At Work <ul><li>The dichotomy within the eurozone is exemplified by the </li></ul><ul><li>divergence in jobless rates. Without intra-European currency depreciation, Spain’s economic adjustment is taking place entirely through nominal contractions in output, wages and jobs. </li></ul>Unemployment, %
  9. 9. This can be your title page Deflation Remains A Major Risk <ul><li>Deflation has been a natural consequence of the ‘internal </li></ul><ul><li>devaluation’ strategy </li></ul><ul><li>Weak growth and low inflation will make managing the debt </li></ul><ul><li>load particularly difficult, preventing a quick recovery </li></ul>Inflation, % y-o-y
  10. 10. This can be your title page Capacity Overhang Reinforces Weak Outl ook <ul><li>Signs of recovery from global demand is positive, but with </li></ul><ul><li>capacity utilisation remaining at record lows, capital </li></ul><ul><li>investments will continue to lag </li></ul>Industrial capacity utilisation, %
  11. 11. EU Policy Risks Exacerbating The Problem <ul><li>There has been a noted lack of coordination in the policy response from key stakeholders, especially between the governments and ECB </li></ul><ul><li>Domestic political risks within Germany held back a rapid and effective refinancing programme </li></ul><ul><li>These uncertainty risks have exacerbated the negative trends in capital markets, not ‘speculators’ </li></ul>
  12. 12. This can be your title page A Demand Crisis Looms <ul><li>While Greek yields spike on default risks, rates in Germany </li></ul><ul><li>have been falling, as investors price out near-term ECB hikes and </li></ul><ul><li>a lower interest rate trajectory over the long run. </li></ul><ul><li>The 10-year moves are signalling protracted low growth, reinforcing </li></ul><ul><li>our macro forecasts </li></ul>
  13. 13. This can be your title page Bank Risks Come Into Focus <ul><li>Direct exposure to Greek sovereign debt is only part of the problem </li></ul><ul><li>The weak demand outlook will hamper credit demand and keep </li></ul><ul><li>non-performing loan rates elevated. </li></ul><ul><li>Easy asset expansion is over. Profitability will not return to pre-crisis </li></ul><ul><li>levels and banks will focus on consolidation and ‘smarter’ lending </li></ul>
  14. 14. This can be your title page The Recession In Focus: LIFO Does Not Apply Real GDP Growth, % Q-O-Q Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Eurozone 0.8 -0.3 -0.4 -1.9 -2.5 -0.1 0.4 0.0 0.2 Germany 1.6 -0.6 -0.3 -2.4 -3.5 0.4 0.7 0.0 0.2 France 0.5 -0.4 -0.2 -1.5 -1.3 0.3 0.2 0.6 0.1 Netherlands 1.0 0.0 -0.7 -1.2 -2.3 -1.1 0.5 0.2 0.2 Italy 0.4 -0.6 -0.9 -2.2 -2.7 -0.5 0.5 -0.3 0.4 Spain 0.4 0.0 -0.6 -1.1 -1.7 -1.0 -0.3 -0.1 0.1 Greece 0.7 0.6 0.1 -0.7 -1.0 -0.3 -0.5 -0.8 -1.0 Portugal 0.1 0.2 -0.5 -1.7 -1.9 0.6 0.5 -0.2 1.1 UK 0.7 -0.1 -0.9 -1.8 -2.6 -0.7 -0.3 0.4 0.3 Real GDP Growth, % Y-O-Y Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Eurozone 2.1 1.4 0.4 -1.9 -5 -4.9 -4.1 -2.2 0.6 Germany 2.9 2.0 0.8 -1.8 -6.7 -5.8 -4.8 -2.4 1.5 France 1.9 1.0 0.1 -1.7 -3.4 -2.8 -2.3 -0.3 1.2 Netherlands 4.1 3.3 1.7 -0.9 -4.1 -5.2 -4.0 -2.6 0.1 Italy 0.2 -0.6 -1.6 -3.3 -6.2 -6.1 -4.8 -3.0 0.5 Spain 2.5 1.7 0.5 -1.2 -3.3 -4.2 -4.0 -3.1 -1.3 Greece 2.7 2.7 1.9 0.7 -1.0 -1.9 -2.5 -2.5 -2.5 Portugal 0.9 0.7 0.4 -1.8 -3.8 -3.4 -2.5 -1.0 1.8 UK 2.4 1.7 0.2 -2.1 -5.3 -5.9 -5.3 -3.1 -0.2
  15. 15. This can be your title page Euro Finally Comes Under Pressure <ul><li>Very little reason to like euro right now </li></ul><ul><li>Falling interest rate expectations, commensurate with an </li></ul><ul><li>improving outlook in the US suggests further EUR weakness </li></ul><ul><li>This will be good for exporters, but no panacea. Ultimately, </li></ul><ul><li>it is indicative of poor demand prospects. </li></ul>Exchange Rate, US$/EUR
  16. 16. This can be your title page US: A Structural Shift Is Underway <ul><li>A strong bounce in H209-H110 will be followed by weaker growth </li></ul><ul><li>Consumer activity will be subdued, as households repay debt and increase savings </li></ul><ul><li>Inflation and interest rates will remain extremely low </li></ul><ul><li>Government spending helped prevent another Great Depression, but there is a long-term price to pay </li></ul>BMI Forecasts 2007 2008 2009 2010f 2011f 2012f 2013f 2014f Real GDP Growth (%) 2.1 0.4 -2.4 2.8 1.8 2.1 2.2 2.2 GDP Per Capita (US$) 46,611 47,375 46,365 48,225 49,487 51,101 52,848 54,727 Private Consumption Growth (%) 2.6 -0.2 -0.6 2.0 1.5 1.9 1.9 1.8 Current Account (% GDP) -5.2 -4.9 -2.9 -2.8 -2.8 -2.6 -2.6 -2.6 Fiscal Deficit (% of GDP) -1.1 -3.2 -9.9 -8.9 -5.6 -3.7 -3.1 -3.0 Inflation (average, %) 2.9 3.8 -0.4 1.0 1.0 1.9 2.2 2.3 Fed Funds Rate (%) 4.25 0.00 0.00 0.00 0.50 2.50 4.00 4.25
  17. 17. This can be your title page Unprecedented Monetary Easing… Source: US Federal Reserve System <ul><li>Quantitative easing significantly expands the monetary </li></ul><ul><li>base in an effort to prevent a protracted credit crunch </li></ul>
  18. 18. This can be your title page … Has Ended The Liquidity Crisis <ul><li>Interbank rates and mortgage spreads have been reined in as a result of QE, resolving the liquidity crisis fairly quickly </li></ul>
  19. 19. This can be your title page But You Can’t Force A Bank To Lend… <ul><li>QE is great for restoring liquidity, but is not designed to restore </li></ul><ul><li>solvency. Therefore lending and the structural problems of </li></ul><ul><li>overleverage remain unresolved </li></ul>
  20. 20. This can be your title page … So The Labor Market Stays Weak <ul><li>Labor market indicators highlight huge capacity slack in the </li></ul><ul><li>US economy. This will exacerbate the deleveraging effect from </li></ul><ul><li>the housing price crash, hampering consumption as well as capital investment in the private sector. </li></ul>Source: Bureau of Labor Statistics
  21. 21. This can be your title page And Housing Prices Remain Down… <ul><li>nominal housing price deflation has ended, but with real lending and consumer demand remaining weak, they will not bounce like equities </li></ul>
  22. 22. This can be your title page … And The Savings Rate Rises <ul><li>A necessary rise in the savings rate will help rein in </li></ul><ul><li>leverage, but will restrict potential consumption growth </li></ul>
  23. 23. This can be your title page To Thrive, Consumers Need: <ul><li>Employment, and rising incomes </li></ul><ul><li>Wealth generated from assets (ie. real estate, equities) </li></ul><ul><li>Access to credit </li></ul><ul><li>Lower taxes </li></ul><ul><li>Lower prices for goods & services </li></ul>Aside from lower prices, none of these is likely to be a positive factor in the coming years.
  24. 24. This can be your title page Consumer Demand Will Remain Weak <ul><li>A strong bounce in H209-H110 will be followed by weaker growth </li></ul><ul><li>Consumer activity will be subdued, as households repay debt </li></ul><ul><li>Inflation and interest rates will remain extremely low </li></ul><ul><li>Government spending helped prevent another Great Depression, but there is a long-term price to pay </li></ul>BMI Forecasts 2007 2008 2009 2010f 2011f 2012f 2013f 2014f Real GDP Growth (%) 2.1 0.4 -2.4 2.8 1.8 2.1 2.2 2.2 GDP Per Capita (US$) 46,726 47,469 46,361 48,226 49,491 51,105 52,843 54,734 Private Consumption Growth (%) 2.6 -0.2 -0.6 1.6 1.5 1.9 1.9 1.8 Current Account (% GDP) -5.2 -4.9 -3.0 -2.9 -2.9 -2.8 -2.7 -2.7 Fiscal Deficit (% of GDP) -1.1 -3.2 -9.9 -10.0 -8.0 -5.8 -4.5 -4.0 Inflation (average, %) 2.9 3.8 -0.4 1.0 1.0 1.9 2.2 2.3 Fed Funds Rate (%) 4.25 0.00 0.00 0.00 0.50 2.50 4.00 4.25
  25. 25. This can be your title page Breakdown of US Growth Forecasts By Category Weaker Growth Ahead
  26. 26. This can be your title page China: Recession Risks <ul><li>There is a real estate bubble. The property market will deflate. </li></ul><ul><li>This will weigh heavily on investment, which in turn will feed through to much slower economic growth </li></ul><ul><li>The consumer will be insufficient to make up for investment drop-off </li></ul><ul><li>A yuan devaluation is a very real risk </li></ul>BMI Forecasts 2007 2008 2009 2010f 2011f 2012f 2013f 2014f Real GDP Growth (%) 13.0 9.0 8.7 8.8 7.5 8.6 7.6 7.1 GDP Per Capita (US$) 2,533 3,214 3,499 3,916 4,284 4,768 5,300 5,895 Gross Domestic Product, US$bn 3,385 4,329 4,750 5,358 5,907 6,626 7,422 8,317 Current Account (% GDP) 11.0 8.5 5.9 3.7 3.8 3.3 2.8 2.2 Exports, US$bn 1,220 1,434 1,202 1,420 1,491 1,588 1,705 1,831 Inflation (average, %) 4.8 5.9 -0.7 3.6 2.6 2.2 1.7 2.0 Exchange Rate, CNY/US$ (eop) 7.30 6.83 6.83 6.83 6.83 6.69 6.52 6.36
  27. 27. This can be your title page Emerging Markets Outlook: EM To Outperform, Favour Domestic Demand Plays
  28. 28. ‘ The EM Story’ <ul><li>EM growth will continue to outperform in the long run, as lower debt and healthier credit markets combine with faster gains in productivity and better demographics to drive growth </li></ul><ul><li>The EM domestic demand story will supplant that of the </li></ul><ul><li>export-driven narrative </li></ul><ul><li>EM will benefit from higher growth and higher interest rates, which will incentivise capital to move from North to South. EM weightings in portfolios are expected to rise significantly, further driving growth and convergence </li></ul>
  29. 29. This can be your title page The “EM Story” <ul><li>By the end of the decade, EM nominal GDP in US$ terms will equate that of the developed world. Furthermore, half of the world’s 20 largest economies will be EM. </li></ul>
  30. 30. This can be your title page Re-Appraising Emerging Markets Risk <ul><li>Markets are re-pricing relative risk between developed and EM </li></ul><ul><li>Orthodox assumptions that a ‘developed’ market is by definition </li></ul><ul><li>less risky can no longer be counted upon </li></ul>
  31. 31. This can be your title page BMI’s Emerging Markets Checklist <ul><li>Healthy banking system? </li></ul><ul><li>Limited levels of debt? </li></ul><ul><li>Demographic potential? </li></ul><ul><li>Resource rich? </li></ul><ul><li>Market friendly policy commitment? </li></ul><ul><li>Capital investment deficit? </li></ul>     
  32. 32. EM Strategies <ul><li>Asia : India over China. Prefer domestic demand driven economies over those reliant on trade ie. Indonesia </li></ul><ul><li>Europe : Turkey and Poland as strategic outperformers. Smaller trade-integrated states in central Europe to suffer alongside eurozone </li></ul><ul><li>Latin America : Exposure to Chinese demand will add to risks for Chile, Argentina and Brazil in 2011. Colombia is our regional favorite </li></ul><ul><li>Middle East : Favour Egypt, Saudi Arabia and Oman. Don’t expect a sharp bounce in over-leveraged gulf states </li></ul><ul><li>Africa : Frontier markets will go beyond commodities, consumer demand to drive growth in key markets like Ghana and Uganda </li></ul>
  33. 33. BMI Global Strategy: Conclusions <ul><li>US and Eurozone demand to remain weak : consumers and public sector to focus on deleveraging, saving and austerity </li></ul><ul><li>Major risks to the China growth story in 2011 : this will pose serious challenges for global economic performance. </li></ul><ul><li>EM to outperform : healthier credit conditions, positive demographics and market liberalisation will drive a structural convergence trend </li></ul><ul><li>We favour domestic demand plays : With trade flows unlikely to recover to pre-recession peaks, economies with orientations to domestic demand and healthy local capital markets will outperform </li></ul>
  34. 34. This can be your title page Thank You Business Monitor International [email_address]

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