A Call for Stronger Growth

Transcription

1 Goi ngi tal one: Ca nt heusdec oupl ef r om t hegl oba l E c onomy? Gr egmei er I nv es t ments t r a t eg i s t Al l i a nzgl oba l I nv es t or s Ma r c h30, 2015 Unde r s t a nd. Ac t.

2 Agenda A Call for Stronger Growth First Derivative: A Stronger Dollar Second Derivative: Fallout From the Dollar Rally Market Implications Conclusions 2

3 A Call for Stronger Growth 3

4 IMF: The Best Year for US Growth Since 2003 IMF GDP Forecasts 15 Percent Change (Annual) China United States Euro Zone Japan Source: IMF. As-of: 10/8/14. 4

5 Engines of the Recovery: Labor Market Gains Unemployment has Fallen Quicker than Expected 8.5% Unemployment Rate 7.5% 6.5% 5.5% *Lower band of Federal Reserve forecast range Sources: Federal Reserve; US BLS. As-of: 3/19/15. 5

6 Engines of the Recovery: Labor Market Gains The employment gap the difference between actual unemployment and the rate at which inflation starts to accelerate should close soon. The US Employment Gap is Closing Fast Percent (2009) (2008) (2010) (2013) (2012) (2011) (2014) (2015) 0.10 (2016) Source: OECD. As-of: 3/19/15. 6

7 Engines of the Recovery: The Consumer Balance Sheet Consumers have gone through an unprecedented degree of deleveraging. This is a financial stress-reliever, freeing up resources for spending, saving or investment. An Historic Drop in Consumer Debt Debt/GDP: Max: (Q1-09) Debt/Service: Max: (Q4-07) Debt as % of GDP Debt/GDP (Left) Debt/Service (Right) Debt as % of Disposable Income Sources: Federal Reserve; US BEA. As-of: 4Q14. 7

8 Engines of the Recovery: Cheaper Energy The drop in gasoline prices from $3.75/gallon last July to $2.57/gallon in March 2015 amounts to a savings of $447 million per day for US drivers. Oil and Gasoline Prices are Tightly Correlated Correlation: 0.98 Dollars per gallon Dollars per barrel Retail gasoline (Left) WTI Oil (Right) Sources: FactSet; US DOE. As-of: 3/13/15. 8

9 Engines of the Recovery: Real Wage Growth Real Earnings vs. Real Spending Correlation: Real Earnings vs. Real Spending 2011 to Current Correlation: Percent change (annual) Percent change (annual) Real Weekly Earnings Real Consumer Spending (PCE) Real Weekly Earnings Real Consumer Spending (PCE) 2015 Source: US BEA. As-of: 1/31/15. 9

10 Engines of the Recovery: Reduced Fiscal Drag The drag from fiscal consolidation is reversing, as the outlook for public finances (temporarily) improves. This may continue in 2015, reducing pressure on public sector hiring, wages and spending. Public Payrolls and the Federal Budget Change in Payrolls (1000s of Jobs) Correlation: Public Payrolls (Left) Federal Budget (Right) Deficit/Surplus (% of GDP) Sources: CBO; US DOL. As-of: 12/31/14. 10

11 Engines of the Recovery: Low Interest Rates With the economy improving, the Fed is considering the first rate hike since Even when rates rise, policy should stay easy for some time. Monetary Policy is Light Years From "Normal" Max: (25-FEB-80) Min: 0.25 (16-DEC-08) Percent Fed Funds Target Rate Average Source: Federal Reserve. As-of: 3/18/15. 11

12 First Derivative: Faster Growth + Policy Tightening = A Stronger US Dollar 12

13 Divergent Global Prospects Have Kept US Yields High Other central banks are massively easing while the Fed shifts toward tightening. This is widening the spread between US and foreign bond yields. 10-Year Government Bond Yields Percent US Japan Germany Source: FactSet. As-of: 3/18/15. 13

14 Yield-Seeking Investors are Bidding Up the US Dollar 10-Year Yields vs. USD 1986 to Current Correlation: 0.40 Treasury Yield Jan-86 Jan-94 Jan-02 Jan-10 US Dollar Index (Right) 10-year Treasury Yield (Left) US Dollar Index 10-Year Yields vs. USD Last 12 Months Correlation: Treasury Yield Apr-14 Jul-14 Oct-14 Jan-15 US Dollar Index (Right) 10-year Treasury Yield (Left) US Dollar Index Source: FactSet. As-of: 3/18/15. 14

15 Second Derivative: Fallout From the Dollar Rally 15

16 Dollar Rally Fallout: Weaker US Exports Exports have added on average 0.6 percentage points to quarterly GDP since 2010, accounting for roughly ¼ of total US growth. Exports Should Contribute Less to US GDP 1947 to Present 4Q14 Last 5 Years 0.00% 0.20% 0.40% 0.60% Average Contribution to Quarterly GDP Source: US BEA. As-of: 4Q14. 16

17 Dollar Rally Fallout: Weaker Corporate Earnings Foreign Exposure: US GDP Exports as % GDP Domestic Economy Foreign Exposure: S&P 500 Domestic Revenue Foreign Revenue 13% 37% 87% 63% Sources: Standard & Poor s; FactSet. As-of: 3/18/15. 17

18 Dollar Rally Fallout: Cheaper Consumer Goods Dampened by cheaper input and transportation costs, prices of consumer durables are sinking. Combined with labor market gains and the improved consumer balance sheet, this may further bolster spending. Consumer Durable Goods Prices (PCE) Max: (Apr-75) Min: (Oct-03) Percent Change (Annual) Source: US BEA. As-of: 1/31/15. 18

19 Dollar Rally Fallout: Cheaper Commodities Prices Factors ranging from the US shale oil boom to slowing growth in China have sent commodity prices lower. Add US dollar strength to the list. The US Dollar vs. Commodity Prices Index Correlation: Index US Dollar Index (left) Reuters CRB Index (right) Source: FactSet. As-of: 3/18/15. 19

20 Market Implications 20

21 Market Implications: Downward Price Pressures The deflationary impact of the 2014 energy market bust is compounded by cheaper prices on imports and other commodities. Headline consumer prices may dig deeper into deflationary territory before recovering. The Inflation Rate may Fall Further Annual Change 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% Deflation Risk Zone 230 Index US CPI (Annual Change; Left) US CPI (Index; Right) Sources: US DOL; Allianz Global Investors. As-of: 2/28/15. 21

22 Market Implications: A Slower Fed Rate Hike Cycle Bets on the fed funds rate liftoff date continue to get pushed back. We think the Fed will move later this year, but unexpectedly weak growth or inflation could further delay/slow the pace of policy normalization. Fed Rate Hike Expectations Odds of a Rate Hike Mar-14 Jun-14 Dec Mar % 80% 60% 40% 20% 0% FOMC Meeting Dates Sources: CME; Allianz Global Investors. As-of: 3/18/15. 22

23 Market Implications: Flattening of the Yield Curve Massive QE by the ECB and the Bank of Japan should help keep a lid on global long-term yields. If/When the Fed hikes, the US yield curve could flatten further. US Yield Curve Yield (%) 6M1Y2Y3Y 5Y 10Y 15Y 20Y 30Y 0.0 Now One Month Ago One Year Ago Source: FactSet. As-of: 3/18/15. 23

24 Market Implications: More Volatility As policymakers change gears from record easing to the first rate hike since 2006 market volatility will likely rise. Monetary Policy vs. S&P 500 Volatility August 1, 1990 to July 1, 1995 Correlation: 0.60 Standard Dev. Weekly Returns (%) Equity Market Volatility (Left) Fed Funds Target Rate (Right) Sources: FactSet; Federal Reserve. As-of: 3/18/ Percent 24

25 Market Implications: US Earnings Adjustments Earnings forecasts have come down across all S&P 500 sectors since the start of the year. Corners of the market with the least foreign revenue exposure have taken less of a hit. US Revenue Base Change in 1Q15 Earnings Forecasts (Since 12/31/14) S&P % -8.7% Tech 41% -5.6% Materials 51% -17.3% Energy 57% -34.0% Health Care 61% -4.2% Industrials 62% -6.7% Consumer Staples 64% -6.2% Consumer Disc. 69% -7.9% Financials 80% -2.5% Utilities 96% -0.9% Telecom 99% -1.9% Source: FactSet. As-of: 3/13/15. 25

26 Market Implications: Foreign Currency Challenges For investors in foreign markets, local asset returns could be swamped by currency market performance. MSCI Benchmark YTD % Return (Local) YTD % Return (USD) Difference (Currency Loss) Brazil 3.99 (12.55) (16.54) Denmark (12.32) Ireland (11.85) Portugal (11.83) Germany (11.78) Italy (11.62) Netherlands (11.62) Belgium (11.58) France (11.50) Finland (11.46) Austria (11.34) Spain (10.76) Source: MSCI. As-of: 3/23/15. 26

27 Market Implications: Potential for an EM Crisis Rouble per USD Russia - FX & Reserves Roubles per USD (Left) Reserves (Right) 600, , , , , ,000 0 Millions of USD Bolivares per USD Venezuela - FX & Reserves Bolivars per USD (Left) Reserves (Right) Millions of USD Source: FactSet. As-of: 3/13/15. 27

28 Conclusions 28

29 Unexpected Headwinds = Fragile Recovery 2011: Greek crisis, Fukushima, US debt downgrade 2012: Euro crisis & recession, Japan recession 2013: Euro crisis & recession, Fed taper tantrum 2014: US winter storms, Japan recession, oil bust The Post-Crisis Recovery has been Weak Averge Since 1950: 3.28% Percent Change : US port strike & -2 winter storms, EM -4 crisis? Annual GDP Source: US BEA. As-of: 4Q14. Average Since 2010: 2.21% Average 29

30 The IMF Record The IMF has overestimated GDP in 7 of the past 10 years. The economic collapse in 2008 and 2009 was completely missed. Actual Annual US GDP vs. IMF Forecasts Percent Change (Annual) Actual GDP -2 IMF Forecast -3 Sources: IMF; US BEA. As-of: 4Q14. 30

31 End Greg Meier Investment Strategist Allianz Global Investors March 30, 2015 Understand. Act.

32 Appendix 32

33 Appendix: The Fed s Dual Mandate Fed Unemployment & Inflation Targets Unemployment: Max: (Nov-82). Min: 2.50 (May-53) PCE: Max: (Oct-74). Min: (Jul-09) Percent Inflation (Headline PCE) Unemployment Rate Average Unemployment (since 1948) Source: US BLS. As-of: 2/28/15. 33

34 Appendix: The Fed vs. the Bank of Japan & ECB QE as % GDP (Quarterly) 8 QE as % GDP (Cumulative) 70 Percent of GDP Percent of GDP Fed Bank of Japan Bank of Japan Fed ECB Source: FactSet. As-of: 4Q14. 34

35 Appendix: US vs. German Yield Curve US Yield Curve 6M1Y2Y3Y5Y 10Y 15Y 20Y 30Y 0.0 Now One Month Ago One Year Ago Yield (%) German Yield Curve M1Y2Y3Y5Y 10Y 15Y 20Y 30Y -1.0 Now One Month Ago One Year Ago Yield (%) Source: FactSet. As-of: 3/18/15. 35

36 Appendix: The Negative Yield Club Two-Year Government Bond Yields Percent UK Italy Spain France Austria Finland Netherland German Sweden Denmark Switzerland Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Source: FactSet. As-of: 3/18/15. 36

37 Appendix: US 10-Year Yield 10-Year Treasury yields 16 Max: (30-SEP-81) Min: 1.39 (24-JUL-12) 12 Percent year Treasury yield Average Source: FactSet. As-of: 3/18/15. 37

38 Appendix: Stock Valuations (NTM) Last 5 Years Since P/E Ratio (IBES, NTM) P/E Ratio (IBES, NTM) S&P 500 Average S&P 500 Average Source: FactSet. As-of: 3/13/15. 38

39 Appendix: Stock Valuations (NTM) Valuations vs. USD S&P 500 PE Correlation: US Dollar Index Valuations vs. Oil S&P 500 PE Correlation: Oil Price ($/bbl) S&P 500 P/E (53 Week Lag) (Left) US Dollar Index (Right) S&P 500 PE (Left) Crude Oil (Right) Source: FactSet. As-of: 3/13/15. 39

40 Appendix: US Oil Inventories & Rig Counts US Oil Inventories vs. Oil Rig Counts Millions of barrels (1-yr moving avg) US Crude Oil Stocks Ex-SPR (Left) Oil Rigs (Right) ,600 1,400 1,200 1, Number of Oil Rigs Sources: US DOE; Baker Hughes. As-of: 3/13/15. 40

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