Presentation 2017 macro themes
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Transcript of Presentation 2017 macro themes
Bank of Tokyo-Mitsubishi UFJ A member of MUFG, a global financial group
Global – Seven Themes to Watch in 2017
Amir KhanEconomic Research | London Desk
February 2017*Data sourced from Macrobond & IMF/World Bank unless otherwise stated
Coverage
► Recap of 2016
► Outline of 2017 Themes
► Key risks/take-aways
2 Global – Seven Themes to Watch in 2017 | February 2017
3 Global – Seven Themes to Watch in 2017 | February 2017
Recap of 2016
2016 – All about surprises
► 2016 was a year that populism & political risk came to haunt the developed market economies, capped by the Brexit vote & the election of Donald Trump.
► Economic growth – rather than accelerating – relapsed somewhat, with overall growth falling below the post-crisis average of around 3.2%.
► Markets continued to charge ahead with the rally in risk assets broadening out to other assets classes e.g. commodities.
4 Global – Seven Themes to Watch in 2017 | February 2017
5 Global – Seven Themes to Watch in 2017 | February 2017
2017 Themes
Setting the scene – 2017 – Winds of change…
Change is sweeping through politics, economics and markets & this threatens to bring with it a new direction for the global economy & financial markets. The underlying drivers behind this include the following:
► Rising populism
► Increasing headwinds to globalisation
► Transition in the policy landscape
6 Global – Seven Themes to Watch in 2017 | February 2017
…Which has helped to determine our choice of themes for this year
7 Global – Seven Themes to Watch in 2017 | February 2017
1. • Tepid growth but momentum set to pick up
2. • Markets likely to remain in thrall to Donald Trump
3. • Commodity markets set to see further light at the end of the tunnel
4. • A pivot from monetary to fiscal policy
5. • Emerging Markets under the spotlight
6. • Political uncertainties in Europe set to rise
7. • Banks back in vogue
Theme #1: Tepid growth but momentum set to pick up…
► Although we expect growth through the course of 2017 to pick up slightly from last year’s subdued level ofaround 3.1%, at under 3.5%, our sense is that it will remain broadly in line with the average figure that wehave seen since the financial crisis.
8 Global – Seven Themes to Watch in 2017 | February 2017
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Figure 1: Global GDP growth has undergone a structural slowdown
Pre-financial crisis average2000-07 (4.5%)
Post crisis average2008-16 (3.2%)
(%, y/y)
2017 consensusmarket estimate (3.2%)
Theme #1 cont.:…If forward-looking surveys are anything to go by
► Since the latter half of last year, PMI surveys appears to suggest that growth momentum is showingmeaningful signs of improvement.
► Supportive of this is the fact that with new orders outpacing inventory build-up this will provide the basis foran upturn in the investment cycle.
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Figure 2: PMI surveys point to a synchronised uptick in growth...
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(Reading >50 denotes expansion)
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Figure 3:...A trend which appears to confirmed by a favourable evolution of the new orders/inventories ratio
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(Ratio)
Theme #1 cont: At the country level, the spotlight will fall on the US
► With the Chinese authorities having managed to stabilise the country’s growth through the course of last year, attention has shifted to the US & whether it can do any better with the arrival of a new president.
► While hopes are high – borne out by sentiment & real economic data – the scope for disappointment is no less significant especially if Trump’s policies fuel a move towards greater trade protectionism.
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Figure 5:...And this will be supported by a rebound in corporate sentiment as well as real economic activity
US Corp. confidence Index (RHS) US Econ. Surprise Index (LHS)
Pre-crises Post-crises Change 2000-07 2008-16 2014 2015 2016 2017f 2017 vs. 2016*
US 2.7 1.3 2.4 2.6 1.6 2.3 0.7UK 2.9 1.0 3.1 2.2 2.0 1.2 -0.8Euro Area 2.2 0.4 1.1 2.0 1.6 1.5 -0.1Japan 1.5 0.2 0.0 0.5 1.0 1.0 0.0China 10.5 8.4 7.3 6.9 6.7 6.5 -0.2World 3.3 3.2 3.4 3.2 3.1 3.2 0.1
among the major economies (%, y/y)…Figure 4: Consensus figures appear to suggest that the US will lead global growth
Theme #2: Markets likely to remain in thrall to Donald Trump…
► The convincing electoral victory of Donald Trump over Hillary Clinton late last year, while unexpected, was well received by the markets.
► While this rally – dubbed the “Trumpflation trade” – has lost some momentum recently, our sense is that it has further to run, especially if Trump embarks on implementing his pro-growth fiscal stimulus.
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Figure 6: The market's inflation expectations have spiked upwards in the belief that a Trump presidency will serve to
boost growth...(%, y/y)Trump electoral victory
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Figure 7:...And this, in turn, has served as a leg-up for US Equity markets & the dollar
Dollar index
S&P 500
(Rebased, 8 Nov = 100)
Theme #2 Cont.:…But this will be subject to a number of caveats…
► If the arrival of Trump causes an unsustainable move upwards in the USD it could undermine the prospectsof S&P500 companies, which have a high reliance on foreign currency earnings.
► A rising USD may undermine commodity prices, most of which tend to be denominated in the US currency.
► The low level of market volatility & high correlations across different asset classes – which havecharacterised the markets in recent years – may be set to change going forward.
► While the likelihood of an activist fiscal policy under a Trump administration has been much touted, it’simportant to note that fiscal policy works with inherent time lags.
12 Global – Seven Themes to Watch in 2017 | February 2017
Theme #2 Cont.:…Suggesting that markets will become more discerning going forward
► Since the election of Donald Trump, there has been a sharp divergence between the internationally focused S&P 500 vs the more domestically focused Russell 2000 Index.
► Beyond this, divergences across different industry sector have also come to the fore.
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Figure 9: S&P 500 has lagged the Russell 2000 Index since the election of Trump...
S&P500 Index Russell 2000 Index
(Index rebased, 8 Nov = 100)
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Figure 10: ...While banks & other domestically focused sectors have outperformed their peers
Banks Construction & engineering Telecoms Energy Pharma
(Index rebased, 8 Nov = 100)
Theme #3: Commodity markets set to see further light at the end of the tunnel…
►With continued progress being made to reduce the overhang of excess supply across a number of commodity markets, e.g. oil, we expect the prospects for the commodity markets as a whole to undergo further improvements this year.
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Figure 11: Oil prices continue to hover above key technical levels...
Brent crude 200 MA 50 MA
(US$/barrel)
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Figure 12:...But despite this prevailing prices remain shy of the levels required to balance OPEC members fiscal & external balances
Fiscal breakeven 2017
External breakeven 2017
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Theme #3 Cont.:…But with some pull-back cannot be ruled out
► On the downside, of note here is that with metals prices, such as iron ore, already experiencing a substantial run-up in prices in 2016 – in excess of 90% in the case of iron ore – some pull-back in prices cannot be ruled out 2017.
15 Global – Seven Themes to Watch in 2017 | February 2017
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Figure 13: Commodity markets have seen a pretty broad-based improvement, led by the energy segment
Energy Industrial Metals Precious Metals Overall Index
(Index rebased, Jan-16=100)
Theme #4: A pivot away from monetary policy…
► Central banks have done most of the heavy lifting in terms of propping up growth & financial markets around the globe, but this overreliance has caused a number of unintended side-effects. Result Æ push-back against such policies.
16 Global – Seven Themes to Watch in 2017 | February 2017
Theme #4:…Towards greater fiscal support
► With monetary policy increasingly out of favour, attention has shifted towards fiscal policy & not just in the US.
17 Global – Seven Themes to Watch in 2017 | February 2017
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Figure 15: Change in cyclically adjusted primary balance (% of GDP), 2015-18
2014 2015 2016 2017
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Theme #5: Emerging Markets under the spotlight
► Although EMs have so far avoided a “taper tantrum” style sell-off seen in 2013, our sense, however, is that markets may become more discriminating going forward.
► This is based on two factors: i) the Fed that is looking to normalise its policy settings at more rapid pace than previously anticipated; and ii) markets have greater policy uncertainty to deal with under Trump.
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Figure 16: With market expectations of the Fed funds rate having risen in the aftermath of Trump's election...
Latest
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Theme #6: Political uncertainties in Europe set to rise…
► While concerns over Brexit & the electoral victory of Trump continue to hog the limelight for the time being, this doesn’t preclude the fact that populist tendencies are also sweeping across a range of other European countries as well.
19 Global – Seven Themes to Watch in 2017 | February 2017
(Source) YouGov/BuzzFeed, BTMU Economic Research Office
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Figure 18: Number of Europeans espousing authoritarian/populist views (%, total)
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Theme #6 Cont.:… As a number of EU countries are set to go the polls
Key election/political events ahead in 2017
Low/moderate Moderate High
Italy: With the former PM Renzi resigning following an unsuccessful referendum vote on constitutional reforms on 4 Dec, there is a risk that Italy may once again go the polls in 2017. This could see the Eurosceptic Five-Star Movementdo well.
Germany: Federal elections Sept/Oct 2017. Mainstream coalition govt likely to win, but the result of the far-right AfD needs to be closely monitored.
France: Presidential elections Apr/May 2017. Possible good result for National Front’s Marine Le Pen in the 1st round. Unlikely to win run-off, though outcome is rather uncertain.
Netherlands: Mar 2017 General election could see a strong result from Geert Wilder’s far-right PVV, but unlikely to be able to form a govt.
Global – Seven Themes to Watch in 2017 | February 2017
Theme #7: Banks back in vogue
After being faced with a litany of headwinds since the financial crisis, we’re of the view that 2017 could be the year that banks start to turn the corner. Some supporting factors include:
► Economic growth is set to improve somewhat, particularly among the developed market economies.
► Under the Trump administration, the regulatory burden on banks may be pared back somewhat.
► The problem of NPLs appears to have peaked, with the exception of some peripheral economies in the EU.
► With global interest rates set to rise going forward, led by the US, this will help to improve the net interestmargin (NIM) and, hence, profitability position of banks.
21 Global – Seven Themes to Watch in 2017 | February 2017
22 Global – Seven Themes to Watch in 2017 | February 2017
Key Risks/Take-aways
23 Global – Seven Themes to Watch in 2017 | February 2017
Q&A
24 Global – Seven Themes to Watch in 2017 | February 201724
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