The Macro-Economic Outlook and the Challenges for the World

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1 The Macro-Economic Outlook and the Challenges for the World Invest Save and Impact Seminar Singapore February 27, 2013 Brian Fabbri President Fabbri Global Economics Visiting Research Fellow, CAMRI, NUS Business school

2 The Financial Fallout from Global Political Turmoil 1. Its risk on as investor confidence is rising faster than economic growth. 2. A few bright spots are appearing in the developed economies, but their growth will be well below normal. 3. The emerging economies will lead world growth again in 2013, by the same pace than in Political turmoil will increase uncertainty and asset price volatility, lessen global economic growth and create an investment tail risk. 5. Globalization s effect on the business cycle is increasing equity synchronization. 6. Some key long term investment themes.

3 Risk Has Fallen to its lowest level in 5 Years ViX S&P 500, Chicago Board of Trade; logarithmic scale

4 US: Equities Still Look Cheap S&P P/E average 18.1 P/E Operating Earnings Jun-88 Jun-89 Jun-90 Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

5 Real Rates Turned Negative Real 10 yr. Treasury real money market rates

6 US: Debt and Equity Relative to GDP Dot com bubble Credit fueled bubble debt/ngdp S&P/ngdp q1 1961q2 1962q3 1963q4 1965q1 1966q2 1967q3 1968q4 1970q1 1971q2 1972q3 1973q4 1975q1 1976q2 1977q3 1978q4 1980q1 1981q2 1982q3 1983q4 1985q1 1986q2 1987q3 1988q4 1990q1 1991q2 1992q3 1993q4 1995q1 1996q2 1997q3 1998q4 2000q1 2001q2 2002q3 2003q4 2005q1 2006q2 2007q3 2008q4 2010q1 2011q2

7 Global Growth in 2013 Led by Emerging Economies Blue 2011 Red 2012 Green 2013 Forecasts world adv US EU Japan UK emerging asia china india asian latin am -2

8 US: Bank Loans to Consumers and RE Stagnate only Business Borrows (Seasonally adjusted annual rates) Real Estate Commercial Consumer

9 US: New Housing Starts Adding to GDP Growth 2,500 2,000 1,500 1,000 Historical average Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

10 US: Employment Increases Averaging 200k per month but UR Still too high month MA UR right side Monthly payroll employment

11 US: Profit s Percent of National Income Rises to New Peak Labor compensation right Profit left Proprietorships left I 1982 I 1988 I 1994 I 2000 I 2006 I

12 US: Corporate Cash Flow Exceeds Capital Expenditure (bn $) Capital Expenditure Cash Flow Q1 1973Q1 1974Q1 1975Q1 1976Q1 1977Q1 1978Q1 1979Q1 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1

13 EU: Region In Recession Only Two Countries Have Positive GDP Y/Y

14 EU: UR at Socially Unacceptable Levels

15 EU: Sovereign Rates are still too High Greece Portugal Spain Italy France UK Netherlands Germany

16 Central Bank s Lowered Rates to near Zero Fed funds ECB B of J

17 Japan: December Tankan Survey Weak

18 Japan: Weak Yen Strong Equity Market Yen right S&P Japan left

19 China: Manufacturing PMI index is Improving

20 Asean: Per Capita Income in Asian Economies in 2011($) India ASEAN 5 China NIEs Japan ASEAN 5 Indonesia, Malaysia, Philippines, Thailand, Vietnam

21

22 Asean: Developing Economies Should Keep Growing Rapidly

23 US: Improvement in Consumer Confidence Slumped at Year-end

24 US: Fiscal Cliff vs CBO Alternative Fiscal cliff ,000-1,200 CBO Alternative -1,400-1,600

25 EU: Budget Deficits Improve in % -5.00% % % Blue 2011, Red % % % % Ireland Greece Spain UK France Netherlands Portugal Italy Belgium

26 EU: Current Borrowing Rates Are Greater than Present Growth Rates Borrowing rates (red) Estimated 2013 GDP Growth (blue) -10 Greece Spain UK France Netherlands Portugal Italy Belgium Germany

27 EU: Countries with Debt/GDP ratio above 100% are Vulnerable Debt/GDP ratio Danger Line Ireland Greece Spain UK France Netherlands Portugal Italy Belgium Germany

28 Japan and China Potential Conflict

29 For Chinese 2013 is the year of the Snake According to the Chinese mythology the year of the snake implies opportunity and caution for investors. Therefore, volatility should rise and create some interesting and potentially risky investment opportunities in 2013.

30 Interconnectedness: US and Asian Stock markets Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov Asia 50 (red) US S&P 500 (Blue) Stock Performance Indexed to 100 in 2007

31 Some Differentiation: US vs EU Returns US S&P EU Stock Index /8/ 20 1/8/2 3/8/2 5/8/2 7/8/2 9/8/2 11/8/ 1/8/2 3/8/2 5/8/2 7/8/2 9/8/2 11/8/ 1/8/2 3/8/2 5/8/2 7/8/2 9/8/2 11/8/ 1/8/2 3/8/2 5/8/2 7/8/2 9/8/2 11/8/ 1/8/2 3/8/2 5/8/2 7/8/2 9/8/2 11/8/ Stock Performance Indexed to 100 in 2007

32 The World s Population is Aging Rapidly

33 The Old are overtaking the young

34 Conclusion 1. Investors are confident and are choosing risk, pouring funds into equities and away from bonds. 2. Central banks are creating liquidity, keeping borrowing rates at minimum levels, and pursuing aggressive monetary ease. 3. Economic forecasts for 2013 are less sanguine than equity market performance is: Emerging markets should grow faster than developed ones. The US economy is vibrant but faces more political fiscal hurdles. The EU, UK and Japan are in recession and only Japan seems to be stimulating its economy. China, India and Asean should grow about as fast as last year with more internal demand developing. 4. There are 4 political risks that could lead to a large tail risk for investors. 5. There are 4 powerful investment themes that provide long term opportunities for investors.

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