Economic Outlook - what's the impact on commodities?

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Objective Capital's Global Resources Investment Conference 2011 …

Objective Capital's Global Resources Investment Conference 2011
Stationers' Hall, City of London
27-28 September 2011
Day 1- Session1: The context in which we operate
Speaker: Chris Watling, Longview Economics

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  • 1. Opening Keynote: Economic outlook – what's the impact on commodities? Chris Watling – Longview Economics
  • 2. Other sponsors & participating organisations: GLOBAL RESOURCES INVESTMENT CONFERENCE 2011 Lead sponsor: Media partners: @Objectivelive
  • 3. Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com Macro & Markets Chris Watling, CEO, Longview Economics September 2011
  • 4. Contents
    • Macro Outlook
      • Euro crisis
      • Structural growth headwinds
      • Whiffs of Western Stagflation
      • Slowing EM economies
      • Risks in China’s property and infrastructure bubble
    • Western Indebtedness & structural deleveraging
    • Commodities outlook
      • Next 12 months
      • Next 5 - 10 years
    Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11
  • 5. Rising Sovereign Risk – Italy; Belgium; Spain amongst others Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Cost of Insuring against Default in Various Euro zone sovereign bonds (CDSs bps) Cost of Insuring against Default in Various Euro zone sovereign bonds (CDSs bps) Spain, Italy & Belgium Ireland, Portugal & Greece
  • 6. Euro Crisis - Possible outcomes/Policy Options
    • A disorderly default (i.e. with markets forcing that default) – this would be the worst of all outcomes with particularly severe global economic outcomes. In particular this would likely lead to bankruptcy of many parts of the European financial system, a major tightening of credit conditions and with that a major European (& probably global) recession/a depression.
    • Unsterilised ECB intervention – i.e. The ECB ‘electronically’ prints money and buys the sovereign bonds of the troubled euro zone economies. This, however, compromises the ECB’s monetary independence and risks its own solvency (i.e. as it would then grow the size of its balance sheet with assets of questionable quality). Its independence is compromised because monetary policy would be operating in the sphere of fiscal policy;
    • Full political/fiscal union – i.e. some form of communal guarantee of all euro zone debt by all euro zone countries (e.g. a Eurobond). There appears, however, to be little appetite in Northern Europe (i.e. the fiscally strong Euro zone countries) for this outcome. Opinion polls in Germany highlight a growing preference, for example, amongst a growing segment of the population to leave the Euro – rather than become more deeply intertwined. The recent election success of the ‘True Finns’ party in Finland, who campaigned on a platform of ‘no more bailouts’, highlights the lack of Finnish enthusiasm for deeper European fiscal integration.
    • A European bailout led by and primarily (or at least significantly) funded by the emerging market world . Many of the BRIC economies, Middle Eastern economies and other emerging market economies have significant reserves at their disposal. With the right attached conditionality, it would be in the interest of the emerging economies to use these funds to invest in propping up the Euro area in some way (e.g. by committing to and becoming a major buyer of Euro zone debt in Italy, for example, or by buying EFSF debt).
    • Leveraging the EFSF – perhaps in conjunction with the ECB – thereby increasing up the €440 billion current firepower up to €1.5 – 2 trillion.
    Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11
  • 7. Structural western economic growth headwinds Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 See Longview Letter no 56 July 29 th 2011 for full update: “The ‘Old’ or ‘New’ Normal” Structural Growth Headwinds i) Downtrend in US/UK Real House Prices . In real terms, US house prices are still above trend and are expected to continue to trend lower.…a resumption of normal housing activity has not begun. ii) Structural Deleveraging . While there is evidence of some modest growth in consumer credit since September last year, the overarching theme with respect to debt is one of deleveraging. Because the deleveraging was ‘cut short’ during the recession iii) Future & current Fiscal Austerity : Loose fiscal policy and the use of the government’s balance sheet to ‘bailout’ companies, financial institutions, households (e.g. cash for clunkers, housing stimulus) and the economy (extending the Bush tax cuts, fiscal stimulus packages etc) during the crisis has created major fiscal imbalances. iv) Jobless Recovery : With most sectors of the economy facing headwinds, job creation which responds to actual and perceived demand growth, is anaemic.
  • 8. Structural deleveraging 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 US financial sector debt as % of GDP
  • 9. BRIC – Leading Economic Indicators – Mostly turning/trending lower… Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 BRIC economies – Leading economic indicators (index)
  • 10. Various (Western) Leading Economic Indicators Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 US vs. Euro zone LEIs (Y-o-Y %) Euro zone LEIs are now in/very close to recession warning territory
  • 11. Market overly optimistic on China….…. Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Investment Share as % of GDP – Various Asian economies
  • 12. Chinese Overbuild? Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 “ Perhaps Rome cannot be built in a day. But at China’s current rates of construction, it would take roughly two weeks. It took the Asian hyper-economy (i.e. China) roughly a decade to build the equivalent of Europe’s entire housing stock (excluding Turkey), and there are few signs that the seemingly insatiable appetite of Chinese consumers for bigger and better housing will slow substantially.” From attached EIU report – published last week.
  • 13. (Slowly) building global inflationary pressures Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 UK, US & Euro zone Longview Inflation Pervasiveness models
  • 14. Indebtedness of the Western Economies 29/09/11 www.longvieweconomics.com 29/09/11
  • 15. Why BUY Commodities? 1. The alternatives….. Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 29/09/11 www.longvieweconomics.com
  • 16. The (biggest) Bear case – US & Europe follow Japanese Path….. Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Europe, US & Japan – rebased to 100 10 years prior to the end of their secular BULL market* *i.e. 1979 for Japan, 1990 for US & Europe
  • 17. Attractive Valuation or Value Trap? Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Equity Risk Premium (US equities) US Cyclically adjusted PER (Shiller)
  • 18. 29/09/11 www.longvieweconomics.com 29/09/11 S&P500 & DJIA inflation adjusted indices (1896 to 2010) Western Equities – in a Secular Bear Market
  • 19. The Alternatives: Government bonds - attractive? Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 German 10 year government bond yields (1870 – 2011)
  • 20. Why BUY Commodities? 2. The Demand drivers Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11
  • 21. Demand Drivers: Developing (& industrialising) Asia: A 3 billion elephant 29/09/11 www.longvieweconomics.com 29/09/11 a: excludes HK, Japan, Singapore, South Korea & Taiwan NB USA = 3 rd 304mn pop; Brazil =5 th 191mn; Russia = 8 th 142mn; Nigeria = 9 th 137mn; Japan = 10 th 128mn; Mexico = 11 th 110mn Largest non developed Asian economies Asia (Population rank in size relative to RoW) GDP ($bn 2008) GDP per capita (US$2010) population (bn; % of ASIAN total) Long term Real growth rates Asia (23) (a) $7,239bn 4,070 3.60 (100.0%) China (1 st ) $3,206bn 3,999 1.33 (36.9%) 9.1% (1997-2007) India (2 nd ) $1,200bn 1,124 1.13 (31.4%) 9.7% (1997-2007) Indonesia (4 th ) $433bn 2,858 0.23 (6.4%) 5.9% (2001-2010) Pakistan (6 th ) $143bn 1,067 0.164 (4.6%) 4.8% (2000-2009) Bangladesh (7 th ) $68.4bn 624 0.147(4.1%) 7.4 % (1997-2007) Vietnam (12 th ) $68.6bn 1,168 0.086 (2.4%) 10.0% (1997-2007)
  • 22. Forecasts for Next 40 years Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 09/29/11
  • 23. China’s Coming Car growth Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Industrialisation & vehicles per 1000 people Source: Longview Economics, Reuters EcoWin The number of vehicles per 1,000 people in China is relatively low (32) - NB India (15), Brazil (198), Canada (597) & US (820) If China industrialises with the same vehicle intensity of GDP growth as other emerging markets the number of vehicles per 1,000 people in 2030 should still be at low levels (at 170 vehicles)
  • 24. China’s share of world energy reserves Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Energy resources: Share of proven world reserves (%) – key countries
  • 25. China’s Strategic Overseas Investments (2005 – 2011) Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Source: Heritage Foundation, China Global Investment Tracker Summary by Sector Outward Chinese Investment Sector Total Invested (2005 - 2011) Share of total (%) US$bn Agriculture 7.0 2.7% Energy 114.6 43.6% Finance 34.3 13.1% Industry 5.1 2.0% Metals 69.4 26.4% Power 8.1 3.1% Real Estate 11.2 4.2% Technology 4.5 1.7% Transport 8.4 3.2% Total 262.7
  • 26. China - Expanding Trade Relationships China’s global reach has expanded significantly in the last decade Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Source: Longview Economics, Reuters Ecowin Share of selected countries'/regions' trade (imports plus exports) with China   2000 2009 last 12 months*     2000 2009 last 12 months*     2000 2009 last 12 months* G20         Other Significant trading partners   Other Significant trading partners South Korea 9% 20% 23%   Mongolia 33% 48% 61%   Africa 3% 12% 14% Australia 7% 20% 21%   Kyrgyz Republic 8% 64% 57%   Ghana 3% 13% 14% Japan 10% 20% 21%   North Korea 17% 42% 46%   Bangladesh 5% 10% 13% United States 6% 14% 15%   Sudan 27% 39% 45%   Iraq 5% 8% 13% Brazil 2% 13% 14%   Angola 18% 30% 37%   Thailand 5% 12% 12% South Africa 3% 14% 14%   Tajikistan 1% 19% 33%   Zimbabwe 2% 7% 11% Indonesia 5% 12% 13%   Myanmar 13% 24% 29%   Middle East 4% 10% 11% Saudi Arabia 3% 12% 13%   Congo 5% 20% 25%   Singapore 5% 10% 11% India 2% 9% 11%   Kazakhstan 6% 21% 24%   Sri Lanka 2% 10% 10% Argentina 4% 9% 11%   Uzbekistan 1% 15% 18%   CIS and Mongolia 4% 10% 10% Russia 5% 9% 9%   Nepal 5% 12% 18%   Venezuela 0% 7% 8% Canada 2% 7% 7%   Malaysia 3% 13% 17%   Syrian Arab Republic 2% 7% 7% Turkey 2% 6% 7%   Iran 5% 15% 17%   Nigeria 1% 7% 7% UK 2% 6% 6%   Zambia 1% 8% 17%   Somalia 0% 5% 5% Germany 2% 6% 6%   Philippines 2% 8% 15%   Spain 2% 4% 4% Italy 2% 4% 5%   Turkmenistan 1% 11% 15%   Qatar 3% 3% 4% EU-25 2% 4% 5%   Pakistan 4% 10% 15%   Azerbaijan 1% 3% 3% Mexico 1% 8% 5%   APEC 7% 14% 14%   Afghanistan 4% 3% 2% France 2% 3% 4%                     * from Dec 2009 to Nov 2010. Calculated as each country's total exports to China + total imports from China / the country's total exports + total imports
  • 27. Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 China’s Tentacles (EurAsia, Africa & beyond)
  • 28. Long term Risk: Geopolitics Resource Bottlenecks – Potential Conflict Flashpoints Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11 09/29/11 Global trade chokepoints/bottlenecks
  • 29. Conclusion
    • Euro zone recession – likely
    • US recession – close call (probably not)
    • Euro crisis – all outcomes possible – depends on European policy makers’ decisions (& with that their electorates)
    • Emerging market economies – slowing BUT good long term growth outlook
    • Commodities – benefit from: i) inflation hedge; ii) Emerging market demand growth; iii) supply challenges
    Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11
  • 30.
    • Disclosures : This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. The information on which the report is based has been obtained from sources which we believe to be reliable, but we have not independently verified such information and we do not guarantee that it is accurate or complete. All expressions of opinion are subject to change without notice. This report has been prepared solely for the person to whom it is addressed and must not be relied upon by any other person for any purpose whatsoever. We accept no responsibility whatsoever for any investment or asset allocation decision taken on the back of any or all of the information and/or advice in this report.
    • Longview Economics is not authorised nor regulated by the FSA.
    Twitter: [email_address] LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com 09/29/11