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.
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
The US Private Sector Has Deleveraged Substantially US Private Sector Debt/GDP (%) 35 3 25 23% of GDP 295% of GDP 239% of GDP 2 81% 15 1 77% 5 192 1924 1928 1932 1936 194 1944 1948 1952 1956 196 1964 1968 1972 1976 198 1984 1988 1992 1996 2 24 28 212 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%
But Public Sector Debt Has Increased Almost as Much US Private Sector Debt/GDP (%) 4 35 3 294% of GDP 356% of GDP 33% of GDP 91% 25 2 81% 15 1 77% 5 192 1924 1928 1932 1936 194 1944 1948 1952 1956 196 1964 1968 1972 1976 198 1984 1988 1992 1996 2 24 28 212 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%
Household Net Worth is 19% Above the Pre-crisis Record Net Worth ($ Billions) 9, 8, 7, 6, $81.8 trillion +$26.2 trillion 5, 4, 3, 2, 1, 1992 1994 1996 1998 2 22 24 26 28 21 212 214 As of March 214 Source: Haver Analytics, Federal Reserve 5
Over 8% of the Increase in Net Worth is Financial Assets Household Financial Assets ($ Billions) 8, 7, $67.2 trillion 6, 5, +$21.4 trillion 4, 3, 2, 1, 1992 1994 1996 1998 2 22 24 26 28 21 212 214 As of March 214 Source: Haver Analytics, Federal Reserve 6
Equity in Housing is Only 18% of the Increase in Net Worth Household Equity in Residential Real Estate ($ Billions) 16, 14, 12, $1.8 trillion 1, 8, +$4.7 trillion 6, 4, 2, 1992 1994 1996 1998 2 22 24 26 28 21 212 214 As of March 214 Source: Haver Analytics, Federal Reserve 7
Housing Is Critical to Middle Class Balance Sheets 213 Financial Assets Business Assets Residential Assets Other Assets 25% 11% 2% 15% 23% 2% 14% 4% 16% 13% 45% 62% 6% 42% 5% 25% < 25 Percentile 25-74.9 Percentile 75-89.9 Percentile 9-1 Percentile Average Assets ($ s) $36 $18 $668 $4,265 Average Debt ($ s) $49 $73 $122 $24 Average Net Worth ($ s) -$13 $17 $546 $4,25 # of Households 3.6 million 61.3 million 18.4 million 12.3 million As of 213 Opinions as of September 214 and are subject to change. Source: Federal Reserve Survey of Consumer Finances 8
On the Surface, It Appears Employment Has Recovered Private Non-Farm Payroll, Job Gain/Loss (thousands) 4 2-2 -4 9.9 million jobs created -6 8.8 million jobs lost -8-1 24 25 26 27 28 29 21 211 212 213 214 As of July 214 Source: Bureau of Labor Statistics, Haver Analytics 9
But 11 Million US Jobs are Missing Employment-to-Population Ratio (%) 66 63.4%, Dec-26 62 58 11 million jobs 59.%, current 54 1948 1954 196 1966 1972 1978 1984 199 1996 22 28 214 As of July 214 Source: Bureau of Labor Statistics, US Census Bureau, Haver Analytics, Lazard 1
Demographics Complicate Labor Analyses Civilian Employment by Age Group Change 29 to 214 (million) Employment Labor Force Population 16 to 19 +.1 -.4 -.3 2 to 24 +1.5 +1. +1.5 25 to 34 +2.1 +1. +1.7 35 to 44 +.1-1.3-1.1 45 to 54 -.7-2. -1.7 55 and Over +5.2 +4.6 +11.1 Total +8.3 +2.9 +11.1 As of July 214 Figures may not sum due to rounding. Source: Bureau of Labor Statistics, Haver Analytics 11
The US Growth Forecast: Partly Cloudy but Comfortable US growth is constrained by: De-leveraging Re-regulation Widening gaps in society The balance sheet recovery is neither broad nor deep Substantial slack remains in labor markets Lack of inflationary pressure gives the Fed room to maneuver Differentiating between winners and losers increasingly important Opinions as of September 214 and are subject to change. 12
Putting China s Growth in Context The Law of Large Numbers China s Growth in Approximate Terms of Other Countries 213 GDP GDP ($B) 16, CAGR 1.2% Nominal* 14, 12, 5,747 1, 8, 6, 4, 2, 4,661 2,879 621 1998 23 28 213 218E 1998 23 23 28 28 213 213 218 2x 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
China s Labor has Become Less Competitive Average Wages 1 USD/month 9 75 6 45 3 15 21 22 23 24 25 26 27 28 29 21 211 212 213 China, East Region China Mexico Thailand Phillipines Vietnam Indonesia CAGR 1-13 16% 17% 3% 8% 8% 15% 1% As of August 214 1 Data are as of 213 Source: HSBC, International Labour Organization, CEIC, Haver Analytics, IMF 14
Moving Jobs to China s Interior Is Not a Sufficient Strategy Average Wages 1 USD/month Range of China s 31 Provinces 1,3 975 65 325 Max Eastern Western Central Northeast Min Thailand Philippines Indonesia As of August 214 1 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
Demographics Are Working Against China Working Age Population is Declining and the Dependency Ratio Is Worsening (%) (%) 9 3. 81.% 75 2. 63.% 6 1. 45. 3 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 24 29 214 219 224 229 234 239 244 249 36.% -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 15-64. 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
Leverage Has Increased as Real Advantages Decrease Debt as Share of GDP by Category 1,2 (%) 25 2 15 1 5 155.3 11.9 34.9 71.9 182.4 16.2 4.1 197.9 197.9 18.7 18.8 53.3 53.1 79.5 8. 82.6 221.3 15.8 25. 25.3 24.5 25.9 28.4 2.8 21.6 2.6 18.9 18.6 19.4 28 29 21 211 212 213 2.1 57.7 99. 238.5 22.7 Household Small Business Mid/Large Corporate Local Government Central Government 62.1 15.9 As of July 214 1 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
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
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