Global macro & market update 3 themes shaping the investment landscape

Transcription

1 For Professionals Only* Global macro & market update 3 themes shaping the investment landscape The NAM strategic outlook Oct * Investing for their own account according to MiFID definition.

2 The NAM strategic outlook Three macro themes to dominate markets 1. Business cycle turning in a low growth environment macro risks rising 2. Diminishing returns to monetary policy 3. Politisation of economy and markets

3 The economy moves in cycles, so do markets The question to ask: Where are we in the business cycle? 3

4 US: The business cycle is maturing macro risks rising When the cycle gets older, investors like to see Higher margins/profits (through leverage) And/or higher dividends Both seems unlikely, as 1. Margin squeeze likely to continue due to dismal productivity 2. Credit cycle turning 4

5 The profit cycle has turned Bull markets do not die of old age, but mostly because Profit cycle turns Credit cycle turns/monetary conditions tighten Status: Negative profit growth for 5 quarters, normally implying recession Credit conditions tightening Profit recession is not only about the USD 5

6 The profit cycle: Margins under pressure US profit recession a function of low productivity AND stronger US dollar 6

7 Productivity: Not a pure academic problem 7

8 What margin pressure means for the growth outlook Strong labour market & weak productivity is a toxic cocktail for profits and naturally bad for investments (CAPEX) Investments typically the main swing factor in the business cycle The current dynamic in investments increases recession risks Positive: Investment growth never running high to begin with 8

9 US growth firing on one cylinder GDP excl. consumption has been falling 3 quarters in a row unprecedented outside recessionary periods 9

10 The credit cycle has turned Credit conditions tightening, defaults rising, credit bubble in China 10

11 and it s not only an oil story 11

12 Corporate debt is high, but low interest payments help 12

13 What about Europe? Passed the peak Remarkably stable growth so far, despite rising political uncertainty Positive: Credit conditions less tight than in the US.but spill-over potential from banking sector is a real risk 13

14 The ever-lasting story: Banking trouble in Europe 14

15 The long term picture: Productivity trends front and center DEMAND SIDE - Debt overhang - Credit constraints - Policy uncertainty - Risk aversion structural high desire to save Low growth environment SUPPLY SIDE - Demographics - Low investments low productivity - Lack of technological progress - Less educated labour force 15

16 Long term picture: Why downside to core rates is limited and the upside to equities as well Low growth environment here to stay core message: Rates will stay low because the world can t cope with higher rates Equities: Low growth means low earnings growth. Problem: The global financial sector cannot cope with prolonged low rates (pension funds, banks) Ageing Dismal productivity Low pot. growth Low rates 16

17 The NAM strategic outlook Three macro themes to dominate markets 1. Business cycle turning in a low growth environment macro risks rising 2. Diminishing returns to monetary policy 3. Politisation of economy and markets

18 Monetary policy at a cross-roads Monetary transmission mechanisms have never been better (Draghi) Ineffectiveness: If rates are really lower for longer, why then bring forward consumption & investments? Case in point: Negative policy rates (NIRP) Income effect dominates substitution effect: NIRP backfire in current account surplus countries Japanese, European equities underperformed in H Based on shadow rates, we already have seen >200BP of tightening in the US If more stimulus is needed, more of the same seems no real solution - what will be the next steps? 18

19 Fed cycle on hold: Caught in the Fed market feedback loop Financial markets move the Fed needle 19

20 Monetary policy: Helicopter money to the rescue? Increasing two-way risk around central bank action Helicopter means permanent increase of monetary base Helicopter financed fiscal expansion: Central banks ultimately lose their independency (or what s left of it) Who will land the helicopter? Less central bank independency means less credibility We see an adverse relationship between central bank credibility and market volatility Policy mix Effect on monetary base Effect on interest rate Debt financed fiscal deficit unchanged Higher Q/E Debt financed fiscal deficit combined with Q/E Central bank financed fiscal deficit (helicopter) Temporary increase Temporary increase Permanent increase Lower Unchanged Lower 20

21 The NAM strategic outlook Three macro themes to dominate markets 1. Business cycle turning in a low growth environment macro risks rising 2. Diminishing returns to monetary policy 3. Politisation of economy and markets

22 Root cause for politisation: Low productivity and inequality Example globalisation: Headwinds to yesterdays winners 2015 median US real hhld. income lower than in 2007 Protectionist measures on the rise according to WTO NOVUM: Chinese leadership agenda focus shifts away form economics over to politics Beggar-thy-neighbour: Central banks focus on FX depreciation Will controlled national capitalism replace global capitalism? 22

23 Policy uncertainty can cause business cycle fluctuation Europe is extremely vulnerable since the Euro/debt crisis is a political crisis at it s core Positive: Limited contagion so far from Ita. referendum, Brexit, Deutsche Bank The ECB bought time, but politicians let it pass without significant action 23

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