Global perspective Economic Research Research Department ARC Research Team Tel: 966 11 211 9370, devassyp@alrajhi-capital.com Global economic data improves, but outlook remains uncertain Medium-term risks rise: The IMF s Global Financial Stability report stated that shortterm risks, like concerns over the economic decline in emerging economies such as China and low commodity prices, have reduced since its last review in April. However, mediumterm risks like profitability crunch faced by the European banking system, rising global debt and high leverage by companies in emerging economies have increased. Negative outlook on sovereign ratings: Moody s stated that the outlook for global sovereign ratings is negative possibly till 2018, owing to low economic growth prospects and higher public debt. While 35 out of 134 sovereigns have a negative outlook, only 12 sovereigns currently have a positive outlook. Rise in global oil production: IEA s monthly report indicated that the global oil glut would continue in 2017 unless the OPEC nations agree on an output cut deal. The IEA reported an 800,000 bpd rise in the global oil output in October, while OPEC output reached a record high of 33.83mbpd in October. Global manufacturing activity picks up: The JP Morgan Global Manufacturing PMI rose to a 2-year high of 52.0, from 51.0 in September owing to a rise in output, new orders and employment. US economy strengthens: US Q3 GDP (advance estimate) rose at its fastest pace in two years, while the ISM manufacturing PMI expanded for the second straight month. Economic growth in Eurozone stabilizes: The Eurozone Q3 2016 GDP (flash estimate) rose by 1.6% y-o-y, same as the previous quarter. Eurozone Composite PMI rose to its 9- month high, due to faster economic growth in Germany. Asian economy picks up: Japan s Q3 2016 GDP witnessed better-than-expected expansion, while China s Q3 2016 GDP grew at the same pace as the previous two quarters. US Fed hints at rate hike in December: The Fed kept its key interest rate unchanged, but hinted at a rate hike at its next meeting in December. Figure 1 Global Economic Data Country Particulars Period Actual Consensus Previous GDP (Advance estimate y-o-y) Q3 2.9% 2.5% 1.4% US ISM Manufacturing PMI October 51.9 51.7 51.5 CPI (y-o-y) October 1.6% 1.6% 1.5% GDP (Flash estimate y-o-y) Q3 1.6% 1.6% 1.6% Eurozone Composite PMI October 53.3 53.7 52.6 CPI (Flash estimate y-o-y) October 0.5% 0.5% 0.4% GDP (Preliminary estimate q-o-q) Q3 0.5% 0.3% 0.7% UK Manufacturing PMI October 54.3 54.5 55.5 CPI (y-o-y) October 0.9% 1.1% GDP (First Preliminary y-o-y) Q3 2.2% 0.9% 0.7% Japan Manufacturing PMI October 51.4 -.4 CPI (y-o-y) September -0.5% - -0.5% GDP (y-o-y) Q3 6.7% 6.7% 6.7% China Manufacturing PMI October 51.2.2.1 CPI (y-o-y) October 2.1% 2.1% 1.9% India Manufacturing PMI October 54.4-52.1 CPI (y-o-y) October 4.20% - 4.31% Source: FXstreet, Al Rajhi Capital Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
Figure 2 US ISM PMI Trend Manufacturing PMI was supported by rise in production and employment, while non-manufacturing PMI was impacted by slower rise in business activity and new orders. 60 59 58 57 56 55 54 53 52 51 49 48 Figure 3 Non-farm payrolls Lower than expected at 161,000 in October (consensus: 175,000), while September s data was revised up to 191,000 from 156,000 earlier. Thousand 400 3 300 2 200 1 100 0 Mfg ISM Non-Mfg ISM Non farm payroll Figure 4 US auto sales growth (y-o-y) Dropped at a faster pace of 5.7% y-o-y in October, as compared to a yearly fall of 0.5% in the previous month. Figure 5 US retail sales growth (y-o-y) Grew at the fastest rate in two years backed by a rise in online and clothing business. Meanwhile, September growth was revised higher to 3.2% y-o-y from 2.7% earlier. 2 6.0% 15.0% 1 5.0% -5.0% 5.0% 4.0% 3.0% -1 US Auto Sales Adjusted Retail & Food Services Sales Figure 6 Inflation trend Consumer inflation rose by its fastest pace in two years, at 1.6% y-o-y in October 2016 (+1.5% y-o-y in September 2016), owing to a rise in fuel costs and rents. 2.7% 2.2% 1.7% 1.2% 0.7% 0.2% -0.3% YoY Figure 6 10-year US treasury yield The US 10 year treasury yield grew by 23.1 bps in October 2016, versus a rise of 1.4 bps in September 2016. 3.5% 3.0% 2.5% 1.5% 0.5% US CPI US 10 year treasury yield Disclosures Please refer to the important disclosures at the back of this report. 2
Figure 7 Eurozone PMI trend Manufacturing PMI rose to a 33- month high of 53.5 in October (52.6 in September), backed by a rise in production, new orders and employment. Index 54 52 48 46 44 42 40 Figure 8 Eurozone Inflation Edged up to the highest level in 28 months on the back of a lower drop in energy prices in October as compared to the previous month. YoY 2.5% 1.5% 0.5% -0.5% - Mfg Service Composite CPI Figure 9 Japan and UK manufacturing PMI trend Japan s PMI continued to improve (51.4 in October), while UK s PMI slipped (54.3 in October) on higher input costs 60 58 56 54 52 48 46 44 42 40 Figure 10 Japan and UK CPI trend Japanese consumer prices continued to decline (-0.5% y-o-y in September), while UK inflation slipped to 0.9% in October 2016. YoY 4.0% 3.0% - UK Mfg PMI Japan Mfg PMI UK CPI Japan CPI. Japan CPI data for October not released yet Figure 11 India and China manufacturing PMI trend Both the countries reported acceleration in manufacturing activity on the back of higher new orders and output. China s PMI rose to 27-month high. 55 54 53 52 51 49 48 47 Figure 12 India and China CPI trend China s inflation rose to a 6- month high of 2.1% y-o-y in October, while India s inflation slipped on lower rise in food prices. YoY 1 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% India China India China Disclosures Please refer to the important disclosures at the back of this report. 3
Figure 13 China's oil import trend Figure 14 India's oil import trend 25 20 15 10 5 0 USD bn USD bn 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 China India Figure 15 10-year government yields Yields rose on expectations of a rate hike in December 2016. UK and German yields also rose in October. Figure 16 One year government yields German one-year bond yield dropped 3.2bps in October, while US and UK one-year yields rose by 7bps and 7.6bps respectively. 2.5% 1.5% 0.5% -0.5% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% -0.20% -0.40% -0.60% -0.80% -1.00% US Germany UK Japan US Germany UK Japan Figure 17 Crude oil prices Brent (December futures) dropped 3.8% in October on Iraq s unwillingness to join OPEC deal for limiting production. 70 65 60 55 45 40 35 30 25 20 US$/bbl Figure 18 Gas (Henry hub) prices trend Natural gas (Henry hub) prices gained 4.1% in October 2016 to US$3.026/mmbtu due to slower rise in inventory. US$/mmbtu 3.5 3 2.5 2 1.5 1 WTI Brent Arab Light Henry hub Disclosures Please refer to the important disclosures at the back of this report. 4
Figure 19 Gold price trend US$/Ounce 1,0 1,4 1,400 1,3 1,300 1,2 1,200 1,1 1,100 1,0 1,000 Figure 20 Silver price trend US$/Ounce 23 22 21 20 19 18 17 16 15 14 13 Source Bloomberg, Al Rajhi Capital Figure 21 MSCI Global Index Billion 90 80 70 60 40 30 20 10 0 Index 4 400 3 300 2 200 1 100 0 Figure 22 Benchmark Index Return mom 8.0% 6.0% 4.0% - -4.0% -6.0% Volume LHS Index RHS Figure 23 Forward P/E chart Figure 24 MSCI global P/E movement chart 20.0x 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 17.0x 16.0x 15.0x 14.0x 13.0x 12.0x 11.0x 10.0x Disclosures Please refer to the important disclosures at the back of this report. 5
Figure 25 MSCI global sector YTD performance Figure 26 MSCI regional YTD performance 140 130 120 110 100 90 80 70 60 125 120 115 110 105 100 95 90 85 80 75 70 Financials Industrials Energy Telecom Services Automobile US Europe Japan Emerging Figure 27 Euro/USD Figure 28 USD/CHF 1.25 1.2 1.15 1.1 1.05 1 1.04 1.02 1 0.98 0.96 0.94 0.92 0.9 Euro/USD USD/CHF Figure 29 USD/JPY Figure 30 GBP/USD 125.0 120.0 115.0 110.0 1.7 1.6 1.5 105.0 1.4 100.0 1.3 95.0 1.2 USD/JPY GBP/USD Source Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 6
Figure 31 Real GDP Growth Economies Q2 16 Q3 16 Q4 16E Q1 17E Q2 17E Q3 17E Q4 17E US 1.4% 2.9% 2.3% 2.2% 2.1% Europe 1.6% 1.6% 1.5% 1.3% 1.4% 1.4% 1.5% Japan 0.7% 2.2% 0.9% 1.1% 1.1% 0.9% 0.9% UK 2.1% 2.3% 1.8% 1.5% 0.9% 0.8% 0.9% India 7.1% 7.6% 7.8% 7.7% 7.7% 7.6% 7.6% China 6.7% 6.7% 6.6% 6.5% 6.4% 6.4% 6.4% Source: Company data, Al Rajhi Capital Figure 32 Inflation (CPI) Economies Q2 16 Q3 16 Q4 16E Q1 17E Q2 17E Q3 17E Q4 17E US 1.1% 1.6% 2.2% 2.1% 2.3% 2.2% Europe -0.1% 0.3% 0.7% 1.3% 1.1% 1.2% 1.3% Japan -0.4% -0.5% -0.2% 0.2% 0.5% 0.6% 0.7% UK 0.4% 0.7% 1.3% 2.4% 2.6% 2.7% India 6.2% 5.3% 4.5% 4.8% 4.7% 4.9% 5.2% China 2.1% 1.7% 2.2% 2.1% Source: Company data, Al Rajhi Capital The US Q3 2016 GDP (advance estimate) rose by 2.9% y-o-y, from the yearly gain of 1.4% in Q2 2016. The rise in GDP can be attributed to higher soybean exports, nonresidential structural spending and inventory investments. China s GDP grew by 6.7% y-o-y in Q3 2016, same as the previous two quarters. The economic growth in China seems to be stabilized well within the country s 2016 target of 6.5-7.0%. Disclosures Please refer to the important disclosures at the back of this report. 7
Figure 33 Economic Calendar Country Event Name Period Start Date Eurozone EU Financial Stability Review 23-Nov-2016 Eurozone Durable Goods Orders October 23-Nov-2016 US FOMC Minutes 23-Nov-2016 Japan Consumer Price Index (YoY) October 24-Nov-2016 Eurozone Q3 Gross Domestic Product (Preliminary) 25-Nov-2016 US Unemployment Rate October 28-Nov-2016 US Financial Stability Report 29-Nov-2016 Japan Q3 Gross Domestic Product (Preliminary) 29-Nov-2016 UK Consumer Price Index (YoY) (Preliminary) November 30-Nov-2016 Japan Official manufacturing and non-manufacturing PMI November 1-Dec-2016 UK ISM Manufacturing PMI and Prices Paid November 1-Dec-2016 US Non-Farm Payrolls November 2-Dec-2016 Eurozone Unemployment Rate November 2-Dec-2016 China ISM non-manufacturing PMI November 5-Dec-2016 US Q3 Gross Domestic Product 6-Dec-2016 US NIESR GDP Estimate November 7-Dec-2016 US Trade Balance November 8-Dec-2016 US ECB Interest Rate Decision 8-Dec-2016 Eurozone Consumer Inflation Expectations 9-Dec-2016 UK Consumer Price Index (YoY) November 13-Dec-2016 China Fed Interest Rate Decision 14-Dec-2016 Eurozone BoE Interest Rate Decision 15-Dec-2016 Eurozone Consumer Price Index (YoY) November 16-Dec-2016 US Housing Starts November 16-Dec-2016 Japan BoJ Interest Rate Decision 19-Dec-2016 Germany Producer Price Index (YoY) November 20-Dec-2016 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 8
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