The Global Landscape Focus on the U.S. and China

Transcription

1 The Global Landscape Focus on the U.S. and China Ronald Temple, CFA Managing Director, Portfolio Manager/Analyst September 214 This presentation and all research and materials enclosed are property of LLC. 214 LLC Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one s home market. The values of these securities may be affected by changes in currency rates, application of a country s specific tax laws, changes in government administration, and economic and monetary policy. Emerging market securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging market countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in emerging market countries. The securities and/or information referenced should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any of the referenced securities were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein.

2 Global Growth Is Expected to Improve this Year and Next 213 GDP in $ Billion and Expected Growth Russia: 2,118 14E:.5% 15E: 1.5% US: 16,8 14E: 2.% 15E: 3.% UK: 2,536 14E: 3.1% 15E: 2.6% Euro Zone: 12,716 14E: 1.% 15E: 1.5% Brazil: 2,243 14E: 1.% 15E: 1.6% India: 1,871 14E: 4.7% 15E: 5.4% Japan: 4,92 14E: 1.4% 15E: 1.2% China: 9,181 14E: 7.4% 15E: 7.2% Australia: 1,561 14E: 3.1% 15E: 3.% As of 26 August 214 Data for GDP in USD billion are based on 213 GDP from the IMF and national statistical offices. End-of-year exchange rates were used to convert to US dollars. Estimated or forecasted data are not a promise or guarantee of future results and are subject to change. Source: Bloomberg, IMF, Haver Analytics 2

3 The US Private Sector Has Deleveraged Substantially US Private Sector Debt/GDP (%) % of GDP 295% of GDP 239% of GDP 2 81% % Corporate Debt/GDP Consumer Debt/GDP Financial Debt/GDP As of March 214 GDP data prior to 1929 does not consider the comprehensive revision by the Bureau of Economic Analysis, which revised GDP numbers in July 213. All data reflect rounding. Source: US Federal Reserve, US Bureau of Economic Analysis, Morgan Stanley, US Treasury Department, Haver Analytics 3 81%

4 But Public Sector Debt Has Increased Almost as Much US Private Sector Debt/GDP (%) % of GDP 356% of GDP 33% of GDP 91% % % Corporate Debt/GDP Consumer Debt/GDP Financial Debt/GDP Govt Debt/GDP As of March 214 GDP data prior to 1929 does not consider the comprehensive revision by the Bureau of Economic Analysis, which revised GDP numbers in July 213. All data reflect rounding. Source: US Federal Reserve, US Bureau of Economic Analysis, Morgan Stanley, US Treasury Department, Haver Analytics 4 81%

5 Household Net Worth is 19% Above the Pre-crisis Record Net Worth ($ Billions) 9, 8, 7, 6, $81.8 trillion +$26.2 trillion 5, 4, 3, 2, 1, As of March 214 Source: Haver Analytics, Federal Reserve 5

6 Over 8% of the Increase in Net Worth is Financial Assets Household Financial Assets ($ Billions) 8, 7, $67.2 trillion 6, 5, +$21.4 trillion 4, 3, 2, 1, As of March 214 Source: Haver Analytics, Federal Reserve 6

7 Equity in Housing is Only 18% of the Increase in Net Worth Household Equity in Residential Real Estate ($ Billions) 16, 14, 12, $1.8 trillion 1, 8, +$4.7 trillion 6, 4, 2, As of March 214 Source: Haver Analytics, Federal Reserve 7

8 Housing Is Critical to Middle Class Balance Sheets 213 Financial Assets Business Assets Residential Assets Other Assets 25% 11% 2% 15% 23% 2% 14% 4% 16% 13% 45% 62% 6% 42% 5% 25% < 25 Percentile Percentile Percentile 9-1 Percentile Average Assets ($ s) $36 $18 $668 $4,265 Average Debt ($ s) $49 $73 $122 $24 Average Net Worth ($ s) -$13 $17 $546 $4,25 # of Households 3.6 million 61.3 million 18.4 million 12.3 million As of 213 Opinions as of September 214 and are subject to change. Source: Federal Reserve Survey of Consumer Finances 8

9 On the Surface, It Appears Employment Has Recovered Private Non-Farm Payroll, Job Gain/Loss (thousands) million jobs created million jobs lost As of July 214 Source: Bureau of Labor Statistics, Haver Analytics 9

10 But 11 Million US Jobs are Missing Employment-to-Population Ratio (%) %, Dec million jobs 59.%, current As of July 214 Source: Bureau of Labor Statistics, US Census Bureau, Haver Analytics, Lazard 1

11 Demographics Complicate Labor Analyses Civilian Employment by Age Group Change 29 to 214 (million) Employment Labor Force Population 16 to to to to to and Over Total As of July 214 Figures may not sum due to rounding. Source: Bureau of Labor Statistics, Haver Analytics 11

12 The US Growth Forecast: Partly Cloudy but Comfortable US growth is constrained by: De-leveraging Re-regulation Widening gaps in society The balance sheet recovery is neither broad nor deep Substantial slack remains in labor markets Lack of inflationary pressure gives the Fed room to maneuver Differentiating between winners and losers increasingly important Opinions as of September 214 and are subject to change. 12

13 Putting China s Growth in Context The Law of Large Numbers China s Growth in Approximate Terms of Other Countries 213 GDP GDP ($B) 16, CAGR 1.2% Nominal* 14, 12, 5,747 1, 8, 6, 4, 2, 4,661 2, E x South Africa 1.3x Brazil Russia + Mexico + Korea Germany + Italy As of April 214 * 1.2% nominal GDP assumes 7.% real GDP growth combined with 3.% inflation rate from 214 to 218. Actual consensus GDP estimates exceed these levels from 214 to 216. Comparisons are illustrated against the actual USD GDP of referenced countries as of 213. Estimated or forecasted data are not a promise or guarantee of future results and are subject to change. Source: IMF, Lazard 13

14 China s Labor has Become Less Competitive Average Wages 1 USD/month China, East Region China Mexico Thailand Phillipines Vietnam Indonesia CAGR % 17% 3% 8% 8% 15% 1% As of August Data are as of 213 Source: HSBC, International Labour Organization, CEIC, Haver Analytics, IMF 14

15 Moving Jobs to China s Interior Is Not a Sufficient Strategy Average Wages 1 USD/month Range of China s 31 Provinces 1, Max Eastern Western Central Northeast Min Thailand Philippines Indonesia As of August Data are as of 213. Wages for each Chinese region are calculated as the average wage of all provinces in the region. Max and Min refer to the highest and lowest wages in China s 31 provinces. Source: HSBC, International Labour Organization, CEIC, Haver Analytics, IMF 15

16 Demographics Are Working Against China Working Age Population is Declining and the Dependency Ratio Is Worsening (%) (%) % % % -1. Working Age Population (5-year Average Growth Rate) [RHS] Dependency Ratio [LHS] Data are as of January 214 for dependency ratio and as of July 213 for working age population. The total dependency ratio used in these figures is the population age 65 and over plus population age -14, divided by population age Estimated data starts in 211. Estimated or forecasted data are not a promise or guarantee of future results and are subject to change. Source: United Nations, Haver Analytics 16

17 Leverage Has Increased as Real Advantages Decrease Debt as Share of GDP by Category 1,2 (%) Household Small Business Mid/Large Corporate Local Government Central Government As of July Data refers to only domestic debt, with the exception of central government debt. 2 China debt includes non-loan sources of credit (i.e., total social financing). Source: CEIC, Morgan Stanley, Haver Analytics 17

18 China s Growth Forecast: Overcast with a Chance of Storms Key historical competitive advantages are fading Demographics are a headwind to growth Leverage is accumulating fast The next 5-1 years are likely to feature: Much slower growth De-leveraging Substantial stress in the system Critical to invest very selectively within China and across EM Opinions as of September 214 and are subject to change. 18

19 This presentation and all research and materials enclosed are property of LLC 214 LLC. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. This presentation is for informational purposes only. It is not intended to, and does not constitute, an offer to enter into any contract or investment agreement in respect of any product offered by and shall not be considered as an offer or solicitation with respect to any product, security or service in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or unauthorized or otherwise restricted or prohibited. All opinions expressed herein are as of the date of this presentation and are subject to change. An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one s home market. The values of these securities may be affected by changes in currency rates, application of a country s specific tax laws, changes in government administration, and economic and monetary policy. Emerging market securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging market countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in emerging market countries. The securities and/or information referenced should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any of the referenced securities were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. Certain information included herein is derived by Lazard in part from an MSCI index or indices (the Index Data ). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom. The MSCI Index Data may not be further redistributed or used as a basis for other indices or any securities or financial products. This presentation is for informational purposes only. It is not intended to, and does not constitute financial advice, fund management services, an offer of financial products or to enter into any contract or investment agreement in respect of any product offered by and shall not be considered as an offer or solicitation with respect to any product, security or service in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or unauthorized or otherwise restricted or prohibited. Disclosures Australia: FOR WHOLESALE INVESTORS ONLY. Issued by Pacific Co., ABN , AFS License , Level 39 Gateway, 1 Macquarie Place, Sydney NSW 2. Germany: Issued by (Deutschland) GmbH, Neue Mainzer Strasse 75, D-6311 Frankfurt am Main. Japan: Issued by Lazard Japan Asset Management K.K., ATT Annex 7th Floor, Akasaka, Minato-ku, Tokyo Korea: Issued by Lazard Korea Asset Management Co. Ltd., 1F Seoul Finance Center, 136 Sejong-daero, Jung-gu, Seoul, United Kingdom: FOR PROFESSIONAL INVESTORS ONLY. Issued by Ltd., 5 Stratton Street, London W1J 8LL. Registered in England Number Authorised and regulated by the Financial Conduct Authority (FCA). Singapore: Issued by (Singapore) Pte. Ltd., 1 Raffles Place, #15-2 One Raffles Place Tower 1, Singapore Company Registration Number W. This document is for institutional investors or accredited investors as defined under the Securities and Futures Act, Chapter 289 of Singapore and may not be distributed to any other person. United 19 States: Issued by Lazard Asset Management LLC, 3 Rockefeller Plaza, New York, NY 1112.