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
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 2012. 4. 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.
Risk Has Fallen to its lowest level in 5 Years ViX S&P 500, Chicago Board of Trade; logarithmic scale
US: Equities Still Look Cheap 1800.00 1600.00 1400.00 1200.00 S&P 500 1000.00 800.00 600.00 400.00 200.00 P/E average 18.1 P/E Operating Earnings 0.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 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
Real Rates Turned Negative 12.00 10.00 8.00 6.00 Real 10 yr. Treasury 4.00 2.00 0.00-2.00 real money market rates -4.00-6.00 1984-01 1984-09 1985-05 1986-01 1986-09 1987-05 1988-01 1988-09 1989-05 1990-01 1990-09 1991-05 1992-01 1992-09 1993-05 1994-01 1994-09 1995-05 1996-01 1996-09 1997-05 1998-01 1998-09 1999-05 2000-01 2000-09 2001-05 2002-01 2002-09 2003-05 2004-01 2004-09 2005-05 2006-01 2006-09 2007-05 2008-01 2008-09 2009-05 2010-01 2010-09 2011-05 2012-01 2012-09
US: Debt and Equity Relative to GDP 0.16 0.14 0.12 0.1 Dot com bubble 0.08 0.06 0.04 0.02 Credit fueled bubble debt/ngdp S&P/ngdp 0 2.800 2.600 2.400 2.200 2.000 1.800 1.600 1.400 1.200 1.000 1960q1 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
Global Growth in 2013 Led by Emerging Economies 10 8 6 Blue 2011 Red 2012 Green 2013 Forecasts 4 2 0 world adv US EU Japan UK emerging asia china india asian latin am -2
US: Bank Loans to Consumers and RE Stagnate only Business Borrows (Seasonally adjusted annual rates) 25.00 20.00 15.00 Real Estate Commercial 10.00 5.00 0.00-5.00 Consumer -10.00-15.00-20.00-25.00 2001-01 2001-04 2001-07 2001-10 2002-01 2002-04 2002-07 2002-10 2003-01 2003-04 2003-07 2003-10 2004-01 2004-04 2004-07 2004-10 2005-01 2005-04 2005-07 2005-10 2006-01 2006-04 2006-07 2006-10 2007-01 2007-04 2007-07 2007-10 2008-01 2008-04 2008-07 2008-10 2009-01 2009-04 2009-07 2009-10 2010-01 2010-04 2010-07 2010-10 2011-01 2011-04 2011-07 2011-10 2012-01 2012-04 2012-07 2012-10
US: New Housing Starts Adding to GDP Growth 2,500 2,000 1,500 1,000 Historical average 500 0 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
US: Employment Increases Averaging 200k per month but UR Still too high 600.0 11.0 400.0 3 month MA 10.0 200.0 9.0 0.0 8.0-200.0 7.0-400.0-600.0 UR right side Monthly payroll employment 6.0 5.0-800.0 4.0-1000.0 3.0
US: Profit s Percent of National Income Rises to New Peak 16 68 14 12 Labor compensation right Profit left 67 66 65 10 64 8 63 6 4 Proprietorships left 62 61 60 2 59 0 I 1982 I 1988 I 1994 I 2000 I 2006 I 2012 58
US: Corporate Cash Flow Exceeds Capital Expenditure (bn $) 1400 1200 1000 800 600 400 Capital Expenditure Cash Flow 200 0 1972Q1 1973Q1 1974Q1 1975Q1 1976Q1 1977Q1 1978Q1 1979Q1 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1
EU: Region In Recession Only Two Countries Have Positive GDP Y/Y 2 1 0-1 -2-3 -4-5 -6-7 -8
EU: UR at Socially Unacceptable Levels 30.00 25.00 20.00 15.00 10.00 5.00 0.00
EU: Sovereign Rates are still too High 12 10 8 6 4 2 0 Greece Portugal Spain Italy France UK Netherlands Germany
6 5 4 3 2 1 0 Central Bank s Lowered Rates to near Zero Fed funds ECB B of J 2012-11 2007-01 2007-03 2007-05 2007-07 2007-09 2007-11 2008-01 2008-03 2008-05 2008-07 2008-09 2008-11 2009-01 2009-03 2009-05 2009-07 2009-09 2009-11 2010-01 2010-03 2010-05 2010-07 2010-09 2010-11 2011-01 2011-03 2011-05 2011-07 2011-09 2011-11 2012-1 2012-3 2012-5 2012-7 2012-9
Japan: December Tankan Survey Weak
Japan: Weak Yen Strong Equity Market 1200 95 1100 90 1000 900 800 Yen right 85 80 700 S&P Japan left 75 600 70
China: Manufacturing PMI index is Improving
Asean: Per Capita Income in Asian Economies in 2011($) 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 India ASEAN 5 China NIEs Japan ASEAN 5 Indonesia, Malaysia, Philippines, Thailand, Vietnam
Asean: Developing Economies Should Keep Growing Rapidly
US: Improvement in Consumer Confidence Slumped at Year-end
US: Fiscal Cliff vs CBO Alternative 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022-200 -400-600 Fiscal cliff -800-1,000-1,200 CBO Alternative -1,400-1,600
EU: Budget Deficits Improve in 2011 0.00% -5.00% -10.00% -15.00% Blue 2011, Red 2010-20.00% -25.00% -30.00% -35.00% Ireland Greece Spain UK France Netherlands Portugal Italy Belgium
EU: Current Borrowing Rates Are Greater than Present Growth Rates 20 15 10 Borrowing rates (red) 5 0-5 Estimated 2013 GDP Growth (blue) -10 Greece Spain UK France Netherlands Portugal Italy Belgium Germany
EU: Countries with Debt/GDP ratio above 100% are Vulnerable 180 160 140 Debt/GDP ratio 120 100 Danger Line 80 60 40 20 0 Ireland Greece Spain UK France Netherlands Portugal Italy Belgium Germany
Japan and China Potential Conflict
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.
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-12 120 110 100 Asia 50 (red) 90 80 70 60 US S&P 500 (Blue) 50 40 30 20 Stock Performance Indexed to 100 in 2007
Some Differentiation: US vs EU Returns 120 110 100 90 US S&P 80 70 60 50 EU Stock Index 40 30 11/8/ 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
The World s Population is Aging Rapidly
The Old are overtaking the young
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.