Transcript No boom, no bust

No boom, no bust
Global Economic & Market Outlook
Riga May 15, 2015
Harald Magnus Andreassen
+47 23 23 82 60
[email protected]
The global economy: Growth is normal
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OK, growth in rich countries sligthly below normal
… but faster growing EMs are getting larger, lifting the global average to normal
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Unemployment is soon down to a normal level
However: Potential growth has come down:
Actual growth is below average, still unemployment is declining
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And guess what: Inflation is normal as well!
(ex the one off impact of a 50% decline in the oil price, which is now strengthening global growth)
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Wage inflation (not far below) normal
And is most likely slowly accelerating.
(Wal Mart, US, UK minimum wage, IG Metall, Toyota etc)
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Even corporate earnings are normal!
Rate of return on equity
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Equity prices at ATH, pricing is still quite normal
… on average. The US is probably expensive, Europe & many EM neutral
4096
MSCI World vs. CAPE bands
CAPE 27
2048
1024
MSCI The World Index
512
CAPE 12
256
128
64
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80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
CAPE: The Cyclical Adjusted PE ratio, the ‘Siller’ PE
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Credit spreads are normal
'No' bankrupcies, normal credit spreads. Will narrow
Source:
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So, is everything normal then?
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No, everything is not normal!
Global Short & long-term interest rates
Haldane, Bank of England
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Should you be afraid of the big (bad) bond bull?
The ’only’ important question for investors today:
What do bond yields say about the future?
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Bond yields now vs. growth next 5 years
Not that impressive?
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Bond yields now vs. growth previous 5 years
A far better correlation!
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IF the world does not fall apart. Where should you invest?
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Suddenly, long bond yields rose 50 bps…
Without any real trigger – yields were too low?
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Secular stagnation ahead?
Some arguments are OK, but how serious will it be?
• Productivity – growth has declined!
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Technology (too little of it, the end of history)
Technology (too much of it, ’automatisation’ -> long term, structural unemployment)
Too low investments, private & public (infrastructure) after the financial crisis
• Demographics/human capital – growth is declining
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Working age population growth slowing & more old, less productive workers
– Education (peak/declining)
– Inequality (social capital, conflicts)
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Productivity: Was 2. Is 1. And will stay there?
May be. Investments probably the clue
Are we measuring output correct (smartphones etc)?
By the way: Can you spot Japan’s two lost decades?
Sweden has slowed more than others, but the history was
nice
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Debt is being paid back
(most places, that is)
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You know it is possible!
Ready for a new try?
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House prices are in check
(most places)
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Is the Eurozone doomed?
New structural problems? Suddenly, in 2011/12?
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Other, ’cyclical’ explanations?
EMU vs. the US
- Higher interest rates
- No QE
- A stronger F/X
- More fiscal austerity
- No bank cleanup
- No shale revolution
- Ukraine nearby
… as is Russia
.. & Greece is a member
And everything has changed
now? Most of it
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Two players. Just one left
..but he is a hard player . Still, the game has become (too) expensive for him?
However, there are risks left..
Russian exports to EMU: 15% of GDP
European exports to Russia: 1% of GDP
.. Now down 40%, has cut GDP by 0.5%
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Even for the largest sinners, there is hope, in the end
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The credit tide has turned, even in the EMU
It took long to clean up the European banks
Because they didn’t want to…
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You will not get this offer everywhere, of course
But the average EMU lending rates are now below 2.5%, and falling
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F/x: I think the EUR is weak enough
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European consumers upbeat
EMU retail sales rose the fastest in 10 years in Q4/Q1
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European consumers upbeat, even more than the Americans!
EMU retail sales rose the fastest in 10 years in Q4/Q1!
Norwegians are not as happy as usual, of course
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The Euro zone: Picking up speed? Seems so
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Look to Spain! And even Italy
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Growth almost everywhere in Europe
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Some are flying higher!
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CEE: Ok, ex Russia (& Hungary in April)
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The BRICs not that solid anymore
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USA: ”Mid-cycle”, no excesses. Low inflation
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The global economy now: No signs of breakdown
Companies have reported decent growth in activity (but April a tad weaker)
The decline in the oil price supports growth, most places
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China: A very special growth story
What if…
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Can China do the ”credit trick” once again? We doubt
Thus: There are some downside risks….
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China: Something has happened
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China: Decline in demand for steel & cement
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It’s hard to make predictions, especially about the future
Here are the IEA’s forecasts
Source: Glenn Stangeland @gstangeland ., IEA predictions
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It’s hard to make predictions, especially about the future
Our best guesses:
Above 80: Too much supply, too little demand. Below 50: Too little supply, too much dem.
Source: Glenn Stangeland @gstangeland ., IEA predictions
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The Saudi problem: Shale in US + Iran + Iraq + Mexico +++
Falling market share, the outlook was not attractive
Now: A dramatic decline in oil investments in US (shale). Rig count -50%
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Other energy prices had fallen a long time ago
A Supercycle in reverse.
And some alternatives are turning up (og rather falling sharply)
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Another Supercycle
Oversupply, much more than lack of demand – in all markets
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Energy is becoming Technology
Solar is not a supply driven resource, but an improving technology – reducing cost and prices
Energy price developmen (USD/mmbtu), Solar vs. Coal, LNG and Oil
Source: Bernstein
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The oil price:Some high
budget break-evens!
Where is Norway?
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Norway is here!!”
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Norway
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Norway saves all oil revenues in the Petroleum Fund
Oil price down: No short term impact on fiscal spending
NOK 7.000.000.000.000
EUR 171.000 per person
2.8 x Non oil GDP
All government oil revenues
Invested directly in the
´Petroleum´ fund abroad
The budget rule: Transfer 4% of the fund to
finance current spending
(4% equals the long term expected real return)
Now less than 2.4% of the Fund is spent
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Norway: Oil investments have been a growth engine – no more
Contribution to GDP growth 2003 – 2013: 0.3 – 0.4 pp per year, now the tide has
turned. In addition, oil related exports are exposed as well
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The NOK ’collapse’: A huge reduction in the cost level
Down 10%, 8 years extra Norwegian wage inflation reversed!
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The Times They Are A-changin'
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Immigration is slowing, sharply
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Look to Sweden: What a strange land!
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Growth is OK
Unemployment is falling – because participation rates are increasing, from ATH
Inflation is quite normal
The SEK f/x is quite weak
House prices are soaring, debt growth accelerating
Construction on the way up (but still low)
• And the central bank signal rate is -0,25%
- the bank is buying some government bonds too
• We think the outlook is OK (but imbalances might be building up)
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Household demand (consumption & housing) on the way up
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Only one country is still investing more than normal
The upside is in Sweden, Spain, probably US as well
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Norway was OK. Sweden is OK. Finland was and is a laggard
And – the Baltics have the largest potensials?
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Where to sell & where to invest
• The Eurozone is not dead
• The US is mid cycle,not mature
• China has peaked, raw materials still exposed
• Norway has peaked too but will not collapse
• Sweden on the way up, Finland not
• Buy the EUR, SEK, equities & corporate bonds
• Sell the USD, government bonds
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Good luck! And don’t blame the others!
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No boom, no bust
Riga May 15, 2015
Harald Magnus Andreassen
+47 23 23 82 60
[email protected]