Presentation 2017 macro themes

Bank of Tokyo-Mitsubishi UFJ A member of MUFG, a global financial group
Global – Seven Themes to Watch in 2017
Amir Khan
Economic Research | London Desk
February 2017
*Data sourced from Macrobond & IMF/World Bank unless otherwise stated

Coverage
► Recap of 2016
► Outline of 2017 Themes
► Key risks/take-aways
2 Global – Seven Themes to Watch in 2017 | February 2017

Recap of 2016

2016 – All about surprises
► 2016 was a year that populism & political risk came to haunt the developed market
economies, capped by the Brexit vote & the election of Donald Trump.
► Economic growth – rather than accelerating – relapsed somewhat, with overall growth
falling below the post-crisis average of around 3.2%.
► Markets continued to charge ahead with the rally in risk assets broadening out to other
assets classes e.g. commodities.

2017 Themes

Setting the scene – 2017 – Winds of change…
Change is sweeping through politics, economics and markets & this threatens to bring with it a new direction for
the global economy & financial markets. The underlying drivers behind this include the following:
► Rising populism
► Increasing headwinds to globalisation
► Transition in the policy landscape

…Which has helped to determine our choice of themes for this year
1.
• Tepid growth but momentum set to pick up
2.
• Markets likely to remain in thrall to Donald Trump
3.
• Commodity markets set to see further light at the end of the tunnel
4.
• A pivot from monetary to fiscal policy
5.
• Emerging Markets under the spotlight
6.
• Political uncertainties in Europe set to rise
7.
• Banks back in vogue

Theme #1: Tepid growth but momentum set to pick up…
► Although we expect growth through the course of 2017 to pick up slightly from last year’s subdued level of
around 3.1%, at under 3.5%, our sense is that it will remain broadly in line with the average figure that we
have seen since the financial crisis.
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2017
Figure 1: Global GDP growth has undergone a structural
slowdown
Pre-financial crisis average
2000-07 (4.5%)
Post crisis average
2008-16 (3.2%)
(%, y/y)
2017 consensus
market estimate
(3.2%)

Theme #1 cont.:…If forward-looking surveys are anything to go by
► Since the latter half of last year, PMI surveys appears to suggest that growth momentum is showing
meaningful signs of improvement.
► Supportive of this is the fact that with new orders outpacing inventory build-up this will provide the basis for
an upturn in the investment cycle.
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Jan/10
Jan/11
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Jan/16
Figure 2: PMI surveys point to a synchronised uptick in
growth...
US United Kingdom Euro Area China Japan
(Reading >50 denotes expansion)
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1
1.1
1.2
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1.4
Jan/10
Jan/11
Jan/12
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Jan/15
Jan/16
Figure 3:...A trend which appears to confirmed by a
favourable evolution of the new orders/inventories ratio
US UK Euro Area China Japan
(Ratio)

Theme #1 cont: At the country level, the spotlight will fall on the US
► With the Chinese authorities having managed to stabilise the country’s growth through the course of last
year, attention has shifted to the US & whether it can do any better with the arrival of a new president.
► While hopes are high – borne out by sentiment & real economic data – the scope for disappointment is no
less significant especially if Trump’s policies fuel a move towards greater trade protectionism.
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Figure 5:...And this will be supported by a rebound in
corporate sentiment as well as real economic activity
US Corp. confidence Index (RHS) US Econ. Surprise Index (LHS)
Pre-crises Post-crises Change
2000-07 2008-16 2014 2015 2016 2017f 2017vs.2016*
US 2.7 1.3 2.4 2.6 1.6 2.3 0.7
UK 2.9 1.0 3.1 2.2 2.0 1.2 -0.8
EuroArea 2.2 0.4 1.1 2.0 1.6 1.5 -0.1
Japan 1.5 0.2 0.0 0.5 1.0 1.0 0.0
China 10.5 8.4 7.3 6.9 6.7 6.5 -0.2
World 3.3 3.2 3.4 3.2 3.1 3.2 0.1
amongthemajoreconomies(%,y/y)…
Figure4:ConsensusfiguresappeartosuggestthattheUSwilllead globalgrowth

Theme #2: Markets likely to remain in thrall to Donald Trump…
► The convincing electoral victory of Donald Trump over Hillary Clinton late last year, while unexpected, was
well received by the markets.
► While this rally – dubbed the “Trumpflation trade” – has lost some momentum recently, our sense is that it
has further to run, especially if Trump embarks on implementing his pro-growth fiscal stimulus.
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0.9
1.1
1.3
1.5
1.7
1.9
2.1
Jan/16
Feb/16
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Apr/16
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Sep/16
Oct/16
Nov/16
Dec/16
Jan/17
Figure 6:The market's inflation expectations have spiked
upwards in the beliefthat a Trump presidency will serve to
boost growth...(%, y/y)
Trump electoral
victory
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08/11/2016
15/11/2016
22/11/2016
29/11/2016
06/12/2016
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27/12/2016
03/01/2017
10/01/2017
Figure 7:...And this, in turn, has served as a leg-up for
US Equity markets & the dollar
Dollar index
S&P 500
(Rebased, 8 Nov = 100)

Theme #2 Cont.:…But this will be subject to a number of caveats…
► If the arrival of Trump causes an unsustainable move upwards in the USD it could undermine the prospects
of S&P500 companies, which have a high reliance on foreign currency earnings.
► A rising USD may undermine commodity prices, most of which tend to be denominated in the US currency.
► The low level of market volatility & high correlations across different asset classes – which have
characterised the markets in recent years – may be set to change going forward.
► While the likelihood of an activist fiscal policy under a Trump administration has been much touted, it’s
important to note that fiscal policy works with inherent time lags.

Theme #2 Cont.:…Suggesting that markets will become more discerning going
forward
► Since the election of Donald Trump, there has been a sharp divergence between the internationally focused
S&P 500 vs the more domestically focused Russell 2000 Index.
► Beyond this, divergences across different industry sector have also come to the fore.
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08/Nov
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06/Dec
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27/Dec
03/Jan
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24/Jan
31/Jan
Figure 9: S&P500 has lagged the Russell 2000 Index since
the election of Trump...
S&P500 Index Russell 2000 Index
(Index rebased, 8 Nov = 100)
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110
120
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08/Nov
15/Nov
22/Nov
29/Nov
06/Dec
13/Dec
20/Dec
27/Dec
03/Jan
10/Jan
17/Jan
24/Jan
31/Jan
Figure 10:...While banks & other domestically focused sectors
have outperformed their peers
Banks Construction &engineering Telecoms Energy Pharma
(Index rebased, 8 Nov = 100)

Theme #3: Commodity markets set to see further light at the end of the tunnel…
►With continued progress being made to reduce the overhang of excess supply across a number of commodity markets,
e.g. oil, we expect the prospects for the commodity markets as a whole to undergo further improvements this year.
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Jan/10
Jan/11
Jan/12
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Jan/17
Figure 11: Oil prices continueto hover above
key technicallevels...
Brent crude 200 MA 50 MA
(US$/barrel)
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40
60
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100
120
140
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Libya
Bahrain
Algeria
Oman
S.Arabia
Qatar
Iran
UAE
Iraq
Kuwait
Figure12:...Butdespitethis prevailing prices
remain shy of the levels requiredto balance
OPEC members fiscal& external balances
Fiscal breakeven 2017
External breakeven 2017
(US$/barrel)
Current oilprice

Theme #3 Cont.:…But with some pull-back cannot be ruled out
► On the downside, of note here is that with metals prices, such as iron ore, already experiencing a substantial
run-up in prices in 2016 – in excess of 90% in the case of iron ore – some pull-back in prices cannot be
ruled out 2017.
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Jan/17
Figure 13: Commodity markets have seen a pretty broad-based
improvement, led by the energy segment
Energy Industrial Metals Precious Metals Overall Index
(Index rebased, Jan-16=100)

Theme #4: A pivot away from monetary policy…
► Central banks have done most of the heavy lifting in terms of propping up growth & financial markets around
the globe, but this overreliance has caused a number of unintended side-effects. Result push-back
against such policies.

Theme #4:…Towards greater fiscal support
► With monetary policy increasingly out of favour, attention has shifted towards fiscal policy & not just in the
US.
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Germany France Italy Spain Japan US
Figure 15: Change in cyclically adjusted primary balance (% of
GDP), 2015-18
2014 2015 2016 2017
Tighter
Looser

Theme #5: Emerging Markets under the spotlight
► Although EMs have so far avoided a “taper tantrum” style sell-off seen in 2013, our sense, however, is that
markets may become more discriminating going forward.
► This is based on two factors: i) the Fed that is looking to normalise its policy settings at more rapid pace than
previously anticipated; and ii) markets have greater policy uncertainty to deal with under Trump.
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Figure 16:With market expectations ofthe Fed funds
rate having risen in the aftermath of Trump's election...
Latest
July-2016
(%)

Theme #6: Political uncertainties in Europe set to rise…
► While concerns over Brexit & the electoral victory of Trump continue to hog the limelight for the time being,
this doesn’t preclude the fact that populist tendencies are also sweeping across a range of other European
countries as well.
(Source) YouGov/BuzzFeed, BTMU Economic Research Office
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Romania
Poland
France
Holland
Finland
Denmark
UK
Italy
Sweden
Spain
Germany
Figure 18: Number of Europeans espousing
authoritarian/populist views (%, total)

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Theme #6 Cont.:… As a number of EU countries are set to go the polls
Key election/political events ahead in 2017
Low/moderate Moderate High
Italy: With the former PM Renzi
resigning following an unsuccessful
referendum vote on constitutional
reforms on 4 Dec, there is a risk
that Italy may once again go the
polls in 2017. This could see the
Eurosceptic Five-Star Movement
do well.
Germany: Federal elections Sept/Oct 2017.
Mainstream coalition govt likely to win, but
the result of the far-right AfD needs to be
closely monitored.
France: Presidential elections Apr/May
2017. Possible good result for National
Front’s Marine Le Pen in the 1st round.
Unlikely to win run-off, though outcome
is rather uncertain.
Netherlands: Mar 2017 General
election could see a strong result
from Geert Wilder’s far-right PVV,
but unlikely to be able to form a govt.
Global – Seven Themes to Watch in 2017 | February 2017

Theme #7: Banks back in vogue
After being faced with a litany of headwinds since the financial crisis, we’re of the view that 2017 could be the
year that banks start to turn the corner. Some supporting factors include:
► Economic growth is set to improve somewhat, particularly among the developed market economies.
► Under the Trump administration, the regulatory burden on banks may be pared back somewhat.
► The problem of NPLs appears to have peaked, with the exception of some peripheral economies in the EU.
► With global interest rates set to rise going forward, led by the US, this will help to improve the net interest
margin (NIM) and, hence, profitability position of banks.

Key Risks/Take-aways

Q&A

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