Living in interesting times Brian Parker, CFA Chief Economist
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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
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
Economics
Unspectacular world growth, but enough to bring unemployment rates down 14 Quarterly average (%) Unemployment rates 12 10 8 6 4 2 US Japan Eurozone UK 0 Q1 2006 Q1 2008 Q1 2010 Q1 2012 Q1 2014 Q1 2016 Source: Datastream
Fiscal policy is much less restrictive Fewer countries in tightening* mode 35 No. of countries 5 5 30 25 20 15 29 25 16 3 4 26 14 3 10 5 13 4 15 5 17 8 13 10 14 Easing Neutral Tightening 10 5 0 3 16 18 20 18 15 16 3 12 10 7 3 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F Source: Sunsuper, IMF Fiscal Monitor, October 2016. *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.
Demographics trends point clearly to lower long-term potential growth Working age (15-64) Population Growth Trends 2001-2015 2015-2035 Change Australia 1.4 0.7-0.7 US 0.8 0.2-0.6 Japan -0.8-0.8 0.0 EU 0.1-0.5-0.6 UK 0.6 0.1-0.5 Korea 0.6-0.8-1.4 China 1.0-0.5-1.5 India 2.0 1.1-0.9 Indonesia 1.6 0.9-0.7 Brazil 1.5 0.4-1.1 Mexico 2.0 1.0-1.0 South Africa 2.0 1.2-0.8 World 1.5 0.8-0.7 Source: World Bank
Income inequality Income share of the top 1% has risen almost everywhere 25 % 20 latest Mid-1980s 15 10 5 0 US Canada Singapore Germany UK Korea China Japan Italy Australia Spain France Norway Denmark Neths Source: http://topincomes.g-mond.parisschoolofeconomics.eu
Wealth inequality Personal wealth share of the top 1% 80% 70% UK US France 60% 50% 40% 30% 20% 10% 0% 1900 1920 1940 1960 1980 2000 Source: http://topincomes.g-mond.parisschoolofeconomics.eu
Geopolitics
The geopolitical thermometer? 1950s - 1989 1990-2001 Now
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
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
Europe 1984
Europe 1984
Europe: austerity, recession, and modest recovery Level of real government consumption spending Level of real GDP 110 Q1 2010 equals 100 (3qtr moving average) Eurozone 110 Q1 2010 equals 100 Eurozone 105 105 100 Spain 100 Spain 95 90 Italy 95 90 Italy 85 Portugal 85 Portugal 80 75 Greece 80 75 Greece 70 Q1 2010 Q1 2012 Q1 2014 Q1 2016 70 Q1 2010 Q1 2012 Q1 2014 Q1 2016 Source: Datastream, Sunsuper
with unemployment remaining way too high 30 Total unemployment rate (%) 70 Unemployment rate (%) - under 25s 60 25 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
and for what? Debt levels have mostly increased! 200 Gross general govt debt as % of GDP 180 160 2011 2016 140 120 100 80 60 40 20 0 Greece Italy Portugal Ireland France Germany Spain Neths Source: IMF World Economic Outlook Database
Europe 2016
Brexit implication
Brexit Implications 70 % 60 Wants an EU referendum Would vote to leave EU 50 40 30 20 10 0 Italy France Sweden Belgium Poland Germany Spain Hungary Source: IPSOS Global @dvisor. Survey of 6017 adults aged 16-64 across Belgium, France, Germany, Hungary, Italy, Poland, Spain, Sweden, March-April 2016
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!
You say Senkaku, I say Diaoyu
South China Sea Claims South China sea claim Source: USGS 2010, wwww.southchinasea.org, National Geographic Maps
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
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
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!
Even in a challenging geopolitical environment Life, business, and the economy (eventually) goes on US shares 1900 2016: Real return index* (log scale) 1000000 100000 10000 1000 100 10 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
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 2710. - BCA Research September 2016.
Questions