ECONOMY, MARKETS & SCENARIOS PRESENTATION TO SHARE 2015 BC PENSION CONFERENCE FEBRUARY 27, 2015 CHRIS LAWLESS, CHIEF ECONOMIST

Transcription

1 ECONOMY, MARKETS & SCENARIOS PRESENTATION TO SHARE 2015 BC PENSION CONFERENCE FEBRUARY 27, 2015 CHRIS LAWLESS, CHIEF ECONOMIST

2 Outline Review & outlook Impact of lower oil prices Risks Using scenarios 2

3 What we missed in the 2014 outlook 3

4 Economic outlook developed markets Real GDP growth (annual % chg) Canada U.S. Japan Eurozone Source: Consensus Forecasts, Feb

5 Economic outlook emerging markets Real GDP growth (annual % chg) China India Latin America E. Europe Source: Consensus Forecasts, Feb

6 Oil will push headline inflation lower 5 4 Year/year percent change in consumer prices US Canada Eurozone Japan Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: Haver Analytics 6

7 10-year government bond yields Percent 7

8 Equity markets January 2014 = MSCI equity indexes in $C, weekly U.S. Canada Japan Europe EM 90 Jan Apr Jul Oct Jan Source: MSCI via Haver Analytics 8

9 Commodity prices 9

10 Canadian dollar =100 CERI* CERI ex US$ Source: Bank of Canada *Cdn-Dollar Effective Exchange Rate 10

11 Oil prices US$/barrel, weekly $140 $120 $100 $80 $60 $40 $20 $0 West Texas Intermediate Brent Futures prices > Source: Bloomberg

12 Oil price vs. Canadian energy stocks July 4, 2014 = 100, in C$ terms TSX energy index Western Cda Select oil price July 2014 Jan Source: Bloomberg 12

13 Oil price winners & losers Winners: World U.S. Europe Japan China Losers: Canada Middle East Norway Russia Venezuela Indonesia 13

14 Impact of falling oil prices on Canada Energy ~10% of Canadian GDP (oil & gas extraction ~6%) U.S.: O&G extraction < 2% of GDP Canada: 20% of stock market cap is energy, far above its GDP share Impacts: ~ Terms of trade fall lowers export prices, O&G profits and national income ~ Cuts O&G investment spending ~ Lower oil prices benefit consumers and energy-using firms ~ More global greenhouse gas emissions 14

15 Canada s terms of trade will fall 115 Ratio of export prices to import prices Oil at $70 Oil at $ Source: Statistics Canada, Bank of Canada

16 Oil price decline will reduce profits 16

17 Energy investment will fall sharply Energy investment is important for economic growth, and is quite volatile 25-30% cut in energy capital spending in 2015 would reduce GDP growth by a bit more than 1% Falling C$ boosts costs of imported capital equipment O&G capital spending - % of GDP O&G services spending = ~0.3% of GDP 17

18 ...but there are some offsets Lower oil prices are like a tax cut for households and energyusing firms Households spend $45 bn annually on automotive fuels (~5% of spending) Gasoline sales $61 bn annually (~13% of retail sales) 35% price drop = about $15 billion in savings annually (~$1,000 per household) 18

19 Net impact of lower oil prices negative If oil averages $50... If oil averages $ Impact by end of 2016 vs. oil at $110 % Terms of trade* -5.8 Gross domestic income -1.8 Real GDP Impact by end of 2016 vs. oil at $110 % -7.0 Terms of trade* -3.3 Gross domestic income -1.0 Real GDP *ratio of export prices to import prices Source: Bank of Canada, Monetary Policy Report, January 2015

20 Real GDP by province oil impact in

21 Regional re-balancing 2015 forecast Real GDP growth B.C. Man. 21

22 Risks Eurozone the world is not ending China 7% is not 2%! Monetary normalization - or not? Asset bubbles yes, but not like 1999 or 2006 Secular stagnation back to 1946? Lower oil prices: good or bad? It depends... C$ - finding a bottom? U.S. acceleration - yet to see schadenfreude in Schenectady or smugness in Seattle 22

23 Using scenarios Lengthy history of what-if analysis mostly narrative 1970s - economic history & cliometrics Shell Oil scenario planning Greater computing power enabled quantitative modelling 23

24 Ebola scenarios * * Start refers to intervention - moving patients from home with no effective isolation to hospital or other places where risk of transmission is reduced. Forecasts are adjusted for under-reporting /identification of the infected. Source: Centers for Disease Control, Sept. 23,

25 25

26 Some alternative scenarios global impacts 5% 10% 10% 10% 15% 26

27 Risk-off scenario 27

28 Risk-off scenario Impact on annual Canadian economic growth LCU = local currency units 28

29 Risk-off scenario Impact on Canadian stock prices 2015 annual* impact: -24.6% -48.5% (maximum drawdown) *2015 Q4 shock vs Q4 baseline 29

30 Risk-off scenario Impact on Canadian long-term interest rates *2015 Q4 shock vs Q4 baseline 30

31 Risk-off scenario Impact on U.S. stock prices 2015 annual* impact: -8.5% -21.8% (maximum drawdown) *2015 Q4 shock vs Q4 baseline 31

32 Risk-off scenario Impact on Canadian exchange rate 32

33 XYZ defined-benefit pension plan Scenarios XYZ policy weight Baseline Weaker China Risk off Europe recession Russia US/EU upside World GDP 3.1% 3.0% 2.3% 3.0% 2.8% 3.4% Canadian inflation 1.9% 1.7% 0.6% 1.5% 1.7% 2.2% Fixed income 40% 2.1% 2.0% 1.9% 1.8% 1.9% 2.2% Equities 50% 7.7% 7.1% 7.1% 5.6% 7.3% 9.7% Real estate 5% 7.0% 6.8% 5.6% 6.6% 6.9% 7.7% Other private assets 5% 8.6% 7.9% 7.8% 5.6% 8.1% 10.4% Total portfolio 5-year expected return 5.5% 5.1% 5.0% 4.1% 5.2% 6.6% 33

34 Scenarios cumulative 5-year returns Percent Baseline 30.7 US/EU upside 37.6 Russia isolated 28.8 Eurozone recession 22.5 Risk off China investment standstill Source: Oxford Economics, bcimc assumptions & calculations 34

35 Scenarios impact on pension assets after 5 years Starting XYZ plan asset value of $10 billion Billions China investment standstill -$0.3 Risk off -$0.3 Eurozone recession -$0.8 Russia isolated -$0.2 US/EU upside $0.7 -$1.0 -$0.5 $0.0 $0.5 $1.0 Source: Oxford Economics, bcimc assumptions & calculations 35

36 Scenarios impact on pension funding after 5 years Assumes XYZ plan is 100% funded at outset, no impact on liability discount rate Assets as % of liabilities China investment standstill 98.1% Risk off 97.6% Eurozone recession 93.7% Russia isolated 98.5% US/EU upside 105.3% 90% 95% 100% 105% 110% Source: Oxford Economics, bcimc assumptions & calculations 36

37 Regimes What is a regime? Persistent, longer-term trend (10-15 years) that dominates the normal business cycle. ~ Stagflation in the 1970s ~ 2 decades of deflation & low growth in Japan ~ Secular stagnation Different than scenarios or shocks Regime shifts upset the apple cart: ~ result in markedly different growth, inflation and investment return assumptions than in baseline 37

38 Regime shift Economic growth...instead of this? What if we get this... Short-term cycles Year 1 Year 15 38

39 . 10 Base Low High Economic growth Equity returns 10-year bond yield 39

40 What to do? Monitor risks Tactical protect against the most significant downside risks Strategic ~ Be realistic about long-term return expectations ~ Take advantage of long time horizon Challenge unspoken assumptions about the future 40