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Asset Management Presentation on Global Economic Outlook
- 1. Date Presenter ABSA Asset Management Senate Conference : 2 November 2017 : Eben Maré
- 2. So the cursed year of 1916 comes to and end … I hope things will be better in 1917. Tsar Nicholas II (1868 – 1918)
- 3. “Economist are often asked to predict what the economy is going to do. But economic predictions require predicting what politicians are going to do – and nothing is more unpredictable” – Thomas Sowell
- 4. 4 ZAR vs. EM FX 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
- 5. 5 SA GDP vs SARB Leading Indicator -2.5 -1.0 0.5 2.0 3.5 5.0 6.5 8.0 9.5 30 40 50 60 70 80 90 100 110 1961 1964 1967 1969 1972 1975 1978 1980 1983 1986 1988 1991 1994 1997 1999 2002 2005 2008 2010 2013 2016 GDP Growth %YoY (rhs) SARB Leading Indicator (lhs)
- 7. 7 Biggest Drivers for Emerging Markets – Bloomberg survey, Oct 2017 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% FED and USD Trump tax and policies Geopolitical risks DM monetary policies Oil/Commodities China growth risk Europe/Latam politics High Medium Low
- 8. 8 Global Economic Policy Uncertainty 0 50 100 150 200 250 300 350 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
- 9. 9 Geopolitical Risk Index 0 50 100 150 200 250 300 350 400 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
- 10. 10 Developed Economies GDP vs. Weighted Policy Rates -8 -6 -4 -2 0 2 4 6 2004 2006 2008 2010 2012 2014 2016 Developed Economies (OECD) Real GDP (Annual YoY%) Developed Economies (OECD) Central Bank Rate (%) (GDP Weighted)
- 11. 11 $13.9Trn = $1845 for each person on earth 0 2 000 4 000 6 000 8 000 10 000 12 000 14 000 16 000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 USD(Bn) FED Assets BOJ Assets ECB B/S Total
- 13. 13 VIX - Regimes 0 10 20 30 40 50 60 70 80 90 2004 2006 2008 2010 2012 2014 2016 VIX Low Vol Regime High Vol Regime
- 14. 14 US: CAPE 0 2 4 6 8 10 12 14 16 18 0 5 10 15 20 25 30 35 40 45 50 1880 1900 1920 1940 1960 1980 2000 2020 Long-TermInterestRates Price-EarningsRatio(CAPE,P/E10) 2000 1981 1929 1901 1921 1966
- 15. 15 US – Inflation Measures 0 1 2 3 4 5 6 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year-on-YearChange(%) Core CPI Core PCE Revised FRB Cleveland Median CPI Revised FRB Cleveland 16% Trimmed Mean
- 16. 16 US – Inflation Expectations 2.00 2.05 2.10 2.15 2.20 2.25 2.30 2.35 2.40 0 10 20 30 40 50 60 70 80 90 100 110 120 InflationExpectation(%) Months Ahead Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17
- 17. 17 US – Inflation Expectations 2.00 2.05 2.10 2.15 2.20 2.25 2.30 2.35 2.40 0 10 20 30 40 50 60 70 80 90 100 110 120 InflationExpectation(%) Months Ahead Sep-15 Sep-16 Sep-17
- 18. 18 REMINDER: NAIRU is not a holiday destination … it’s a place where rates move higher 3.5% 4.5% 5.5% 6.5% 7.5% 8.5% 9.5% 10.5% 11.5% 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2004 2006 2008 2010 2012 2014 2016 2018 CBO Natural Rate Unemployment U-3 Unemployment
- 19. 19 Recent comments by FED Chair Yellen “Sustained low inflation such as this is undesirable because, among other things, it generally leads to low settings of the federal funds rate in normal times, thereby providing less scope to ease monetary policy to fight recessions. In addition, a persistent undershoot of our stated 2 percent goal could undermine the FOMC’s credibility, causing inflation expectations to drift and actual inflation and economic activity to become more volatile.” “ … my colleagues and I currently think that this year’s low inflation is probably temporary, so we continue to anticipate that inflation is likely to stabilize around 2 percent over the next few years. But our understanding of the forces driving inflation is imperfect, and we recognize that something more persistent may be responsible for the current undershooting of our longer- run objective. Accordingly, we will monitor incoming data closely and stand ready to modify our views based on what we learn.” “Most of this uncertainty reflects the influence of unexpected movements in oil prices and the foreign exchange value of the dollar, as well as that of idiosyncratic developments unrelated to broader economic conditions. These factors could easily push overall inflation noticeably above or below 2 percent for a time. But such disturbances are not a great concern from a policy perspective because their effects fade away as long as inflation expectations remain anchored. For this reason, the FOMC strives to look through these transitory inflation effects when setting monetary policy.” “Another risk is that our framework for understanding inflation dynamics could be misspecified in some fundamental way, perhaps because our econometric models overlook some factor that will restrain inflation in coming years despite solid labor market conditions. ”
- 20. 20 US Financial Conditions -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
- 21. 21 Outlook for Q4 – 2017 / Q1 - 2018 1. Domestic rates held steady. 2. USD/ZAR range bound. 3. Domestic confidence remains challenged. 4. CPI surprises on the downside. 5. Debt-rating downgrade a real downside risk for 2018. 6. FED hikes in December. 7. Balance sheet normalisation “kicks-in.” 8. Expect more volatility.
- 22. QUESTIONS? “It is better to know some of the questions than all of the answers.” – James Thurber