Living in interesting times Brian Parker, CFA Chief Economist

Transcription

1 Living in interesting times Brian Parker, CFA Chief Economist

2 Before we begin This presentation contains general advice and does not take into account the investment objectives, financial situation or needs of any particular individual. You should consider the appropriateness of the advice, having regard to your own particular objectives, financial situation and needs before acting on any advice. You need to apply the concepts to your own situation before making an investment decision. You should obtain and consider a copy of the Product Disclosure Statement (PDS) before making a decision to acquire or continue to hold the product. You can obtain a PDS by calling Sunsuper on or by visiting sunsuper.com.au. Presenters are either employees of the Sunsuper Group, who act as representatives of Sunsuper Financial Services Pty Ltd (ABN AFSL No , wholly owned by the Sunsuper Superannuation Fund) or financial planners on Sunsuper s National Advice Panel. Sunsuper Group employees may recommend Sunsuper superannuation products when they are appropriate and are remunerated by salary package, a portion of which is payable on achievement of key performance indicators. Further information is available in the Financial Services Guides for Sunsuper and Sunsuper Financial Services. Information about financial planners on Sunsuper s National Advice Panel, including the services they offer, remuneration, any potential conflicts of interest, and dispute resolution, are set out in their own Financial Services Guide(s). Sunsuper does not receive or pay any referral fees to these planners. The National Advice Panel planners are not employed by Sunsuper, and Sunsuper is not responsible for the advice provided by these planners.

3 Main messages - economics As good as it gets but at least it won t get much worse Despite the central banks best efforts, growth has been sub-par since GFC and there are good reasons for that, but...it isn t likely to get much better Even though governments are likely to spend more money Inflation does eventually rise (but getting inflation up is easier said than done) Investment implications Lower interest rates for longer (but not forever) Hard to find value in publicly traded markets (especially fixed income)......but emerging markets look genuinely cheap Unlisted assets still offer best return potential, but......even here potential returns have been compressed

4 Main messages - geopolitics As good as it gets but it can (will?) get worse Geopolitical risk is not new Multi-polar world inherently unstable The grown-ups have largely exited populism rules? Globalisation stalling but does it reverse? Global solutions to a range of global crises are that much harder to achieve Crisis management trumps forward planning? Investment implications Geopolitical environment adds to volatility Will the next financial crisis be that much harder to deal with? Over time, investors still get rewarded for risk the world hasn t changed that much

5 Economics

6 Unspectacular world growth, but enough to bring unemployment rates down 14 Quarterly average (%) Unemployment rates US Japan Eurozone UK 0 Q Q Q Q Q Q Source: Datastream

7 Fiscal policy is much less restrictive Fewer countries in tightening* mode 35 No. of countries Easing Neutral Tightening F 2017F 2018F Source: Sunsuper, IMF Fiscal Monitor, October *Based on changes in cyclically adjusted primary budget balances. Neutral policy implies an absolute change of less than 0.1% of potential GDP in the cyclically adjusted primary balance.

8 Demographics trends point clearly to lower long-term potential growth Working age (15-64) Population Growth Trends Change Australia US Japan EU UK Korea China India Indonesia Brazil Mexico South Africa World Source: World Bank

9 Income inequality Income share of the top 1% has risen almost everywhere 25 % 20 latest Mid-1980s US Canada Singapore Germany UK Korea China Japan Italy Australia Spain France Norway Denmark Neths Source:

10 Wealth inequality Personal wealth share of the top 1% 80% 70% UK US France 60% 50% 40% 30% 20% 10% 0% Source:

11 Geopolitics

12 The geopolitical thermometer? 1950s Now

13 What the world should have been more worried about in the 1990s? Post Cold-War Russian resentment The fundamental fragility of the European experiment The rise of extremism Climate change Income inequality Financial stability and regulation

14 Geopolitical implications of economic performance Addressing a range of global crises Is easier with global co-operation, and respect for international law inevitably imposes costs but those costs are often harder to bear in difficult economic conditions Examples are reasonably obvious Climate Change European migrant crisis Terrorism Financial crises Border disputes

15 Europe 1984

16 Europe 1984

17 Europe: austerity, recession, and modest recovery Level of real government consumption spending Level of real GDP 110 Q equals 100 (3qtr moving average) Eurozone 110 Q equals 100 Eurozone Spain 100 Spain Italy Italy 85 Portugal 85 Portugal Greece Greece 70 Q Q Q Q Q Q Q Q Source: Datastream, Sunsuper

18 with unemployment remaining way too high 30 Total unemployment rate (%) 70 Unemployment rate (%) - under 25s Greece 50 Greece 20 Spain 40 Spain 15 Italy 30 Italy 10 Portugal 20 Portugal 5 Eurozone 10 Eurozone 0 Mar-99 Mar-04 Mar-09 Mar-14 0 Mar-99 Mar-04 Mar-09 Mar-14 Source: Datastream, Sunsuper

19 and for what? Debt levels have mostly increased! 200 Gross general govt debt as % of GDP Greece Italy Portugal Ireland France Germany Spain Neths Source: IMF World Economic Outlook Database

20 Europe 2016

21 Brexit implication

22 Brexit Implications 70 % 60 Wants an EU referendum Would vote to leave EU Italy France Sweden Belgium Poland Germany Spain Hungary Source: IPSOS Survey of 6017 adults aged across Belgium, France, Germany, Hungary, Italy, Poland, Spain, Sweden, March-April 2016

23 Trump Economics Markets have been way too optimistic about odds of stronger growth Fiscal boost likely to be more limited and less effective than some think and economy doesn t NEED as much of a fiscal boost right now! Trade policy - there is a heap of damage a President can do especially to trade-dependent emerging economies Higher inflation, wider budget deficit, more aggressive Fed? Geopolitics Numerous potential flashpoints South China Sea Japan/China North Korea Iran Iraq/Syria/Turkey Baltic States It IS as bad as feared!

24 You say Senkaku, I say Diaoyu

25 South China Sea Claims South China sea claim Source: USGS 2010, wwww.southchinasea.org, National Geographic Maps

26 Is Trump right about one thing? 3.5% NATO Military spending as % of GDP 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: Stockholm International Peace Research Institute

27 Is Trump right about one thing? 3.5% NATO Military spending as % of GDP 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: Stockholm International Peace Research Institute

28 Investment implications and prospects In publicly traded markets, finding genuine value is tough Emerging market equities one of the few asset classes that look genuinely cheap... BUT they are subject to a number of Trump-related (and other) risks Sovereign bonds still look lousy even after recent sell-off. Unlisted assets attractive but even here return potential has been compressed Even in difficult and volatile times, life, the economy, and business goes on!

29 Even in a challenging geopolitical environment Life, business, and the economy (eventually) goes on US shares : Real return index* (log scale) Jan-00 Jan-20 Jan-40 Jan-60 Jan-80 Jan-00 Source: Stock Market Data Used in "Irrational Exuberance" Princeton University Press, 2000, 2005, 2015, updated. *Total returns adjusted for US CPI inflation

30 Could be worse The complete annihilation of all human life represents the mother of all tail risks. We estimate that there is a 50% chance that doomsday will occur by 2290 and a 95% chance that it will occur by BCA Research September 2016.

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