> Economic risk and implications for financial markets Investment Strategy and Economics Multi Asset Group March 212
Outlook for the year ahead > Budget cutbacks in Europe and US, but global monetary easing, including in Aust > Global growth of 3% - ranging from mild recession in Europe to 8% growth in China > Expect 3% growth in Australia, but a slight rise in unemployment > Europe, oil, etc will result in a volatile ride, but expect stronger share markets helped by attractive valuations, continuing global recovery and monetary easing > Bonds are poor value > The $A is likely to remain volatile but strong Source: AMP Capital Investors // 2
The macro worry list of risks remains long but has faded a bit Risk assessment European debt medium/high US debt medium US fiscal drag medium/high China hard landing low Oil prices medium Extreme monetary settings in US, Europe and Japan low Near record low bond yields high Australian two speed economy low Australian house prices medium/high Source: AMP Capital Investors
Budget Deficit, % GDP Public debt problems remain 12 1 8 6 4 2 211 data NZ Australia Low risk Emerging Avg China Spain UK Portugal Euro Area Ireland US Germany OECD Avg Iceland Italy Greece High risk Japan 25 5 75 1 125 15 175 2 225 25 Gross Public Debt, % GDP Source: OECD, IMF, Eurostat, AMP Capital Investors // 4
Europe is probably already in recession, but recent economic indicators suggest it is mild 6 4 Annual % change European GDP growth LHS) 65 6 2 55 5 45-2 PMI - business conditions (RHS) 4-4 35-6 2 4 6 8 1 12 3 Source: Bloomberg, AMP Capital Investors // 5
and ECB support for banks and bond buying suggest the risk of a meltdown has receded 6% 5% 1 year bond yields, spread to German Italy 4% 3% 2% Spain 1% France % 9 1 11 12 Source: Bloomberg, AMP Capital Investors // 6
Global business conditions indicators generally have stabilised or improved suggesting less risk of global recession 7 6 US ISM (LHS) 1 9 5 8 4 3 European PMI (LHS) India PMI (RHS) Japan PMI (LHS) 7 6 2 1 China PMI (RHS) Brazil PMI (RHS) 1 2 3 4 5 6 7 8 9 1 11 12 5 4 3 Source: Bloomberg, AMP Capital Investors // 7
The US has avoided the much feared double dip recession GDP Growth 1 8 Annualised % change 6 US GDP SAAR 4 2-2 -4-6 -8-1 9 92 94 96 98 2 4 6 8 1 12 Retail Sales 15 Annual % change 1 5-5 US Retail Sales -1-15 92 94 96 98 2 4 6 8 1 12 Source: Datastream, AMP Capital Investors // 8
Positive signs for the US from a longer term perspective > Housing bottoming > Manufacturing renaissance Maserati, Honda, Whirlpool, Caterpillar, Intel, Caterpillar all setting up plants in the US > US (shale) oil production rising strongly 25 2 15 1 5 The US housing sector looks to be bottoming National Assoc of Home Builders' conditions index (RHS) US Housing Starts, ' (LHS) 86 88 9 92 94 96 98 2 4 6 8 1 12 8 7 6 5 4 3 2 1 Source: Bloomberg, AMP Capital Investors // 9
There is no sign of a hard landing in China and authorities are starting to ease up on the policy brake 14 13 12 11 1 9 8 7 Growth slowing not collapsing Annual % change Chinese PMI manufacturing conditions index (RHS) Chinese Real GDP growth (LHS) 7 65 6 55 5 45 4 1 8 6 4 2-2 Cooling Inflation = room to ease Annual % change Headline CPI inflation Inflation ex food 6 5 6 7 8 9 1 11 12 Source: 1 Thomson Reuters, AMP Capital Investors 35-4 1 2 3 4 5 6 7 8 9 1 11 12 // 1
Emerging countries are the dominant driver of global growth will support growth & volatility Contribution to global growth 1% 3 year moving average 9% 8% 7% 6% Others - mainly emerging countries 5% 4% 3% 2% 1% % 2 21 22 23 24 25 26 27 28 29 21 211 China Japan Europe The US Source: IMF, AMP Capital Investors // 11
Oil prices are not at a choke point - yet 1% 5% % -5% -1% -15% US GDP, % year on year (LHS) Crude oil price, % year on year (RHS) 71 76 81 86 91 96 1 6 11 5% 4% 3% 2% 1% % -1% Source: Thomson Reuters, AMP Capital Investors
Interest rates are likely to remain low globally. Australian and European interest rates to fall further 8 7 6 5 4 Interest Rates % Australia 8 7 6 5 4 3 2 1 Europe Japan US 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 3 2 1 Source: Datastream, AMP Capital Investors // 13
Global growth watch list for 212 > Italian bond yields > US ISM manufacturing conditions index > Chinese money supply growth > $A > Oil price > December 21, when Mayan calendar ends! Source: AMP Capital Investors // 14
The Aust economy is recording soft growth but is multi speed The mining boom is driving an investment boom 4% 3% Fin year, % change Estimate 2 18 But building approvals are soft (dwelling, monthly 's) 2% 1% % -1% -2% 9 92 94 96 98 2 4 6 8 1 12 16 14 12 1 8 9 92 94 96 98 2 4 6 8 1 12 15% retail sales are weak and the labour market is soft 1% Retail Sales % yoy 5% % -5% 9 92 94 96 98 2 4 6 8 1 12 Source: Thomson Financial, AMP Capital Investors 15 // 15
House prices caught between constrained supply and falling affordability $6, $5, $4, $3, $2, National average house price (LHS) 33 28 23 $1, $ -$1, -$2, CBA/HIA Housing Affordability Index (RHS) Poor affordability Good affordability 8 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 18 13 8 Source: 16 Commonwealth Bank/HIA, REIA, AMP Capital Investors // 16
High house prices, which have gone hand in hand with high household debt levels, are Australia s Achilles heel 16 8 Real house prices indexed to 1926=1 Real house prices 4 2 1 Long term trend Aust house prices are 25% above their long term trend 1926 1936 1946 1956 1966 1976 1986 1996 26 Source: ABS, AMP Capital Investors
Australian house prices are high relative to incomes 6% 5% 4% 3% 2% 1% % -1% -2% -3% -4% -5% New Zealand House price to income ratio % deviation from long term average Netherlands Spain Australia Denmark Canada Sweden France UK Italy Norway Ireland US Finland Switzerland Germany Japan Korea Source: OECD, AMP Capital Investors
Share market valuations are cheap Share market valuation indicators Australia 4 Expensive 3 2 1-1 -2-3 Cheap -4 89 91 93 95 97 99 1 3 5 7 9 11 USA -4 Expensive -3-2 -1 1 2 3 Cheap 4 95 97 99 1 3 5 7 9 11 Europe -4 Expensive -3-2 -1 1 2 3 Cheap 4 91 93 95 97 99 1 3 5 7 9 11 Japan -4 Expensive -3-2 -1 1 2 3 Cheap 4 89 91 93 95 97 99 1 3 5 7 9 11 Source: Thomson Reuters, AMP Capital Investors 19 // 19
There is plenty of scepticism regarding shares and plenty of cash still on the sidelines 6 5 4 3 % response Wisest place for savings Real estate Shares Bank deposits or pay debt 16 14 12 1 8 Superannuation Funds cash weightings Cash 2 6 1 Superannuation 4 92 94 96 98 2 4 6 8 1 2 88 9 92 94 96 98 2 4 6 8 1 // 2
Chinese shares are historically cheap expect a recovery this year as policy eases 5 16 4 3 2 Citic 3 share price index (LHS) 1 Average PE PE (RHS) 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 14 12 1 8 6 4 2 21 Source: Thomson Reuters, AMP Capital Investors // 21
Very low bond yields will mean low returns from bonds over the next 5-1 years 16 14 12 1 8 6 4 2 US 1 year bond yields at their lowest level ever 1 year bond yield, percent 186 188 19 192 194 196 198 2 2 18 16 14 12 1 8 6 4 2 Australian 1 year bond yields at their lowest since 1951 1 year bond yield, percent 191 1921 1941 1961 1981 21 Source: AMP Capital Investors
Commodity prices still in a long term uptrend, which is good while it lasts but also a risk for Australia 25 S&P Goldman Sachs Commodity Index*, real $US 2 15 Secular bear market from mid 197s to late 199s Long term bull market 1 5 * Includes energy, precious metals, base metals and foodstuffs 7 75 8 85 9 95 5 1 15 Source: Thomson Financial, AMP Capital Investors 23 // 23
Huge catch-up potential in China, along with other emerging countries, will drive commodity demand Chinese level per person as % of US level per person Road network 14 Rail network 6 Telephone lines 43 Living space 35 Passenger cars 5 Source: AMP Capital Investors // 24
Expect the $A to remain relatively strong 3. $US per $A, at June each year 2.5 2. 1.5 1982 Latest 1..5. 19 191 192 193 194 195 196 197 198 199 2 21 Source: RBA, Thomson Financial, AMP Capital Investors // 25
Outlook for the year ahead > Budget cutbacks in Europe & US, but global monetary easing, including in Aust > Global growth of 3% - ranging from mild recession in Europe to 8% growth in China > Expect 3% growth in Australia, but a slight rise in unemployment > Europe, oil, etc will result in a volatile ride, but expect stronger share markets helped by attractive valuations, continuing global recovery and monetary easing > Bonds are poor value > The $A is likely to remain volatile but strong Source: AMP Capital Investors // 26
The macro worry list of risks remains long but has faded a bit Risk assessment European debt medium/high US debt medium US fiscal drag medium/high China hard landing low Oil prices medium Extreme monetary settings in US, Europe & Japan low Near record low bond yields high Australian two speed economy low Australian house prices medium/high
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