Economic update – Keith Wade’s presentation at the LBS Investing Strategy event

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Keith Wade is Chief Economist and strategist at Schroders. He is responsible for the economics team and the house view of the world economy. Prior to joining Schroders he was a researcher at London Business School's Centre for Economic Forecasting. In the presentation he discusses the current economic cycle, the likely trajectory and investment options for pension schemes having long term outlooks but short term pressure to manage volatility.
The “Investment Strategy 2013: Peering into the Crystal Ball” event was organised by The Pensions Management Institute and London Business School’s Alumni Club. It took place on 8 October 2012.

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Economic update – Keith Wade’s presentation at the LBS Investing Strategy event

  1. 1. Economic updateWorld economy: help neededKeith WadeChief EconomistSeptember 2012For professional investors only. This material is not suitable for retail clients September 2012 | For professional investors only. This material is not suitable for retail clients
  2. 2. Early QERare archive footage of young Ben (or is it Mervyn?)Macro and Markets | September 2012 1
  3. 3. Keeping the printing presses rollingQE – to infinity and beyond?
  4. 4. Economic updateWorld economy: help neededI. The BBB recovery: bumpy, brittle and below parII. Where now for the Euro? – has Super Mario cracked it?III. In the long run?Macro and Markets | September 2012 3
  5. 5. 1. The BBB recoveryClassic post crisis experience: deep recession, slow recoveryMacro and Markets | September 2012 4
  6. 6. I. The BBB recoveryGlobal economy hits another soft patchManufacturing Purchasing Managers IndexIndex7065 Output expanding605550454035 Output contracting3025 07 08 09 10 11 12 US UK EZ Japan BRICsSource: Schroders, Markit PMI, NBER (National Bureau of Economic Research), August 2012BRICs: Brazil, China, India & RussiaGDP weights based on nominal GDP in USD from IMFMacro and Markets | September 2012 5
  7. 7. I. The BBB recoveryHeading for a hard landing in China?100 16 80 14 60 12 40 10 20 8 0 -20 6 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 Gross revenue – games of fortune YoY % change China real GDP YoY % change MonthlySource : Thomson Reuters Datastream Reuters graphic/Scott Barber 07 September 2012Asset Manager Day| September 2012 6
  8. 8. I. The BBB recovery – a bright spotPick up in US housing starts indicates stronger residential investment in 20122.5 7 62.0 51.5 41.0 30.5 2 60 65 70 75 80 85 90 95 00 05 10 RESID. INV (% GDP) RHS Private Starts Million ARSource: Thomson Reuters Datastream, Schroders, Updated 16 August 2012Macro and Markets | September 2012 7
  9. 9. I. The BBB recoveryPerformance divergence reflected in credit growth 8
  10. 10. II. Where now for the Euro? – has Super Mario cracked it?Peripheral bond yields rally as ECB moves ahead of politicians• 3-year LTROs helped provide liquidity for banks• OMT: Promise of bond buying & dropping seniority is helping reduce yields• Now waiting for Spain to ask for help• Euro tail risks reduced 9
  11. 11. II. Where now for the Euro? Capital flight – is Spain following Greece? Change in banking deposits, y/y20%15%10% 5% 0% -5%-10%-15%-20%-25% 2007 2008 2009 2010 2011 2012 Greece Spain Source: Thomson Datastream; Bank of Spain; Bank of Greece. Updated 10 July 2012 Asset Manager Day| September 2012 10
  12. 12. The Eurozone’s hidden balance of payments crisisTARGET 2.0 central banks’ claims at ECBSource: Thomson Datastream, Schroders. Updated 7/09/2012 11
  13. 13. II. Where now for the Euro?Can you deflate your way out of a debt crisis?Unemployment Rate % 25 20 15 10 5 2004 2005 2006 2007 2008 2009 2010 2011 2012 Greece Spain Portugal GermanySource: Thomson Reuters Datastream; Schroders; Updated 16 August 2012Macro and Markets | September 2012 12
  14. 14. II. Competitiveness is at the heart of the problemPeripheral Europe has lost competitiveness through higher inflation2000 = 100, real effective exchange rates based on unit wage costs170160 Switzerland150140 Italy130 Spain120 Greece110 France100 Portugal Germany 90 UK 80 70 60 US 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Italy Spain France Portugal Germany UK US Greece SwitzerlandSource: OECD, Thomson Reuters Datastream, Bloomberg, SchrodersAsset Manager Day| September 2012 13
  15. 15. III. In the long runGovernment debt hits WW2 levels in the advanced economiesGross Government Debt as % Nominal GDPSource: Reinhart, Reinhart & Rogoff (2010, 2012)Macro and Markets | September 2012 14
  16. 16. III. De-leveraging in the USGovernment debt rockets as private sector retrenchesUS debt as a % of GDP: by sector% of GDP100 90 80 70 60 50 40 30 20 1960 1970 1980 1990 2000 2010 Households Non Financial Business Federal GovernmentSource: Thomson Reuters Datastream, Schroders, Updated 13 June 2012Macro and Markets | September 2012 15
  17. 17. III. A de-leveraging check listThe US is well ahead of the Eurozone, but has done no fiscal tightening US UK Eurozone Core Periphery Financial sector stability yes yes no yes no Lending picking up? yes no no no no House prices stable yes yes yes yes no Private investment rising yes no no no no Fiscal deficit reduction plan no yes yes yes yes Competitive economy yes yes no yes noSource: SchrodersMacro and Markets | September 2012 16
  18. 18. III. De-leveraging Roadmap: lessons from historySwedish & Finnish credit crisis from the 90sPhase 1 Deleveraging begins in the private sector and takes about 5 years Government debt continues to rise Economy stabilisesPhase 2 Private sector begins to re-leverage Economy picks up Deleveraging begins in the public sector and takes about 10 yearsUS nearing end of phase 1, about to start phase 2 (fiscal cliff?)UK and Eurozone attempting to implement phases 1 & 2 simultaneously. Result no growth.Source: International Monetary Fund; Haver Analytics; McKinsey Global InstituteMacro and Markets | September 2012 17
  19. 19. III. UK: Has the Chancellor seen the light? Government pushes out fiscal tightening PSBR, % of GDP Change in structural deficit, % of GDP Fiscal tightening delayed Source: OBR, HMT, Schroders. Updated 23/03/2012. 1818
  20. 20. III. Help neededConclusions Recovery remains inconsistent – creating market volatility – risk on/ risk off Central banks have reduced the tail risks and stand ready to do more Risk premiums have narrowed and may close in further Fiscal challenge remains, but de-leveraging is a marathon not a sprintSource: International Monetary Fund; Haver Analytics; McKinsey Global InstituteMacro and Markets | September 2012 19
  21. 21. Important informationFor professional advisers only. This material is not suitable for retail clients.Past performance is not a guide to future performance and may not be repeated. The value of investments andthe income from them may go down as well as up and investors may not get back the amount originally invested.Schroders has expressed its own views and these may change.The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided onlyas at the date of issue. Our forecasts are based on our own assumptions which may change. We accept noresponsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to ourassumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.The data contained in this document has been sourced by Schroders and should be independently verified beforefurther publication or use.Issued in September 2012 by Schroder Investments Limited, 31 Gresham Street, London EC2V 7QA. RegisteredNo: 2015527 England. Authorised and regulated by the Financial Services Authority. UK03709Asset Manager Day| September 2012 20

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