Credit, Commodities, and Consumers: An Economic Update

Transcription

1 Credit, Commodities, and Consumers: An Economic Update ROBIN J. ANDERSON, Ph.D. SENIOR ECONOMIST PRINCIPAL GLOBAL INVESTORS June 2015 All expressions of opinion and predictions in this report are subject to change without notice. This report is not intended to be, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. All opinions expressed are those of Principal Global Investors.

2 Outline Secular Trends The end of the EM credit cycle The end of the commodity super-cycle U.S. consumers are back in the driver s seat Near-term Outlook Investment Themes 2

3 Outline Secular Trends The end of the EM credit cycle The end of the commodity super-cycle U.S. consumers are back in the driver s seat Near-term Outlook Investment Themes 3

4 Key Economic Driver of the Last 20 Years GDP Growth Rate with 10-year moving average Source: World Bank DataBank, IMF World Economic Outlook, October 2013, IMF forecasts

5 Creates Winners Huge benefit to U.S. consumers Chinese manufacturers undercut competition Developing countries Losers first: Asian Currency Crisis Then, winners in 2000s boom Fabulous economic growth Huge money inflows Spectacular equity outperformance Unprecedented commodity super-cycle Credit boomed 5

6 External Debt to GDP 40% Select Emerging Markets 35% Total External Debt Private Nonguanranteed 30% 25% 20% 15% 10% 5% 0% Sources: World Bank, International Debt Statistics, World Bank National Accounts Data and OECD National Accounts File Notes: GDP Weighted Average for Argentina, Brazil, China, Colombia, Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Philippines, South Africa, Thailand, Turkey, Ukraine, and Venezuela. 6

7 China s Debt to GDP Second Quarter, Financials Non-financial Corporates Households Government 34% of that 55% comes from local governments! Sources: Debt and (not much) Deleveraging, Chapter 4, Exhibit 33, McKinsey & Company, February 2015, local government statistics estimated from the National Audit Office as of June 2014 (originally cited by Asia Credit Perspectives, PIMCO, March 2015) 7

8 The End of EM Credit Cycle Rapid growth in EM was fueled by a credit boom EM debt growth explained 47% of global debt growth since 2007 Low interest rates in U.S. made EM debt attractive Now, growth is slowing in EM Chinese growth could slow to the 5.5% to 6.5% range this year Demographics, slowing productivity, structural imbalances, and declining competitiveness contribute to slower EM growth EM debt is at risk as the Fed moves to raise rates EM has not had a crisis since

9 The End of the Commodity Supercycle Broad Commodity Price Average Commodity Prices Rose 270% in the 2000s Source: Bloomberg

10 The Drop in Oil Prices is Significant $140 Crude Oil Prices $120 US dollars per barrel $100 $80 $60 $40 $20 $ $ money of the day 2014 Dollars Source: BP, 2014 dollars calculated using the CPI 10

11 U.S. Consumers Back in the Driver s Seat Manufacturing returning to the U.S. All about unit labor costs Chinese companies opening up shop in the U.S. Labor s share of income is bottoming The unemployment rate is dropping fast Wage growth is coming Lower commodity prices boost real incomes Consumer confidence rebounding 11

12 Manufacturing Jobs Are Back, but Different 20 Productivity-driven losses Manufacturing Jobs (in Millions) Lost over 6 million jobs! Gained 866,000 jobs gained Source: Bureau of Labor Statistics, FRED 12

13 Outline Secular Trends The end of the EM Credit cycle The end of the commodity super-cycle U.S. consumers back in the driver s seat Near-term Outlook Investment Themes 13

14 Europe, Japan Rebounding Europe s upside surprise Structural reforms are happening The banking system is healing Lower oil prices, devalued euro are tailwinds Populist risks Japan recovering from tax-hike induced recession Other tax hikes being delayed Growth okay this year Structural reforms are happening 14

15 U.S. Consumer Nation Back Chugging along at 2 to 2.5% this year Drags from stronger dollar and cuts to oil cap-ex Consumer confidence is decent Residential spending may surprise to the upside Job growth should range from upper 100s to low 200s Just enough for the Fed to start raising rates Global growth should rebound With DM growth decent, EM should be okay 15

16 Inflation and Rates Lowflation Excess capacity in China Declining commodity prices Structural adjustments in Europe Low rates Directly from low inflation But also, Lack of supply, lots of savings, QE in Europe in Japan Fed hikes, but not by much 16

17 Outline Secular Trends The end of the EM credit cycle The end of the commodity super-cycle U.S. consumers are back in the driver s seat Near-term Outlook Investment Themes 17

18 Investment Themes Fed exit Risks tilted towards EM The dollar has reached a new, stronger level Stocks okay this year Stocks are expensive, but bonds are more expensive Profit growth will be key Little recession risk in the U.S. 18

19 Conclusion Credit growth in EM is slowing Drop in oil prices is part of the unwind of the commodity super-cycle The global economy should expand this year Low inflation, rates to stay low Investment options are hard to find, everything is expensive 19

20 Disclosures The information in this document has been derived from sources believed to be accurate as of June Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. The information in this document contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor's investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions in this document. All figures shown in this document are in U.S. dollars unless otherwise noted. This document is issued in The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission. 20