Transcript Euro Area - CFA Society of the UK

Annual Forecasting 2013
Wednesday 16th January 2013
MODERATOR:
James Mackintosh, Investment Editor, Financial Times
SPEAKERS:
Michael Saunders, Head of West European economic research, Citigroup
Kevin Gardner, Managing Director and Head of investment strategy EMEA, Barclays Wealth & Investment Management
Thanos Papasavvas, Head of Investec Asset Management’s Currency Management team
Event sponsored by:
Will Goodhart
CEO
CFA Society of the UK
Event sponsored by:
FTSE 100
CBOE VIX
US 10y Treasuries
UK 10y Gilts
USD/EUR
ICE Brent Crude
London Spot Gold
Average Forecast
as per Annual CFA
UK survey
As at 15/01/2013
6093
6117.31
17.53
13.55
1.92
1.81
2.07
1.99
0.79
0.763
110.41
110.3
1744.99
1680.5
What will the FTSE
100 Index be at the
close on 31st Dec
2013?
7866 high
What will the CBOE
VIX Index be at the
close on 31st Dec
2013?
80 high
What will the US 10
year treasury yield
be at the close
on 31st Dec 2013?
4 high
What will the UK 10
year Gilt yield be at
close on 31st Dec
2013?
6 high
What will the US
Dollar/Euro
exchange rate be on
31st Dec 2013?
1.09 high
What will the ICE
Brent Crude $ be at
close of 31st Dec
2013?
400 high
What will the London
Gold Spot Price (US$
per troy ounce) be at
close on 31st Dec
2013?
2687 high
0.79 average
and median
6105 median
6093 average
17.53 average
16.5 median
4400 low
10 low
1.92 average
1.90 median
1750 median
1744.99 average
2.07 average
2 median
111 median
110.41 average
0.95 low
1.1 low
0.54 low
65 low
500 low
Michael Saunders,
Head of West European Economic
Research, Citigroup
Event sponsored by:
Global and European Economic Outlook
European Economics
Michael Saunders
Managing Director
[email protected]
+44 (0)20 7986 32299
Global
Economic Forecasts Overview 2012-14F
GDP Growth (%)
7
CPI Inflation (%)
2012
2013
2014
2012
2013
2014
Global
2.5
2.6
3.1
2.9
2.8
3. 0
US
2.2
1.6
3.0
1.8
1.9
2.0
Japan
1.6
0.7
0.7
0.0
-0.3
1.6
Euro Area
-0.4
-0.7
-0.4
2.6
2.0
1.5
 Germany
0.9
0.5
0.3
2.0
1.9
2.5
 France
0.1
-0.2
0.2
2.3
1.5
1.8
 Italy
-2.1
-1.2
-1.5
3.3
1.8
1.2
 Spain
-1.5
-2.4
-1.9
2.4
1.9
0.4
 Greece
-7.2
-7.4
-11.8
1.0
0.3
16.7
 Ireland
0.5
0.7
1.0
1.7
1.2
1.4
 Portugal
-3.3
-4.6
-2.4
2.8
1.7
0.9
 Netherlands
-1.1
-0.9
0.2
2.6
2.8
1.7
UK
0.1
0.4
0.7
2.8
2.6
2.2
Switzerland
1.1
0.9
0.6
-0.7
-1.4
-0.9
Sweden
1.0
1.6
2.3
0.9
0.6
1.7
Emerging Markets
4.7
5.3
5.5
4.4
4.6
4.7
China
7.7
7.8
7.3
2.7
2.8
3.6
India
5.4
6.2
6.9
7.5
7.0
6.0
Source: Citi Research
Global
Market Forecasts
Current
Mid-13
End-13
Avge
2014
US Fed Funds
0.25
0.25
0.25
0.25
1.10
2.10
ECB Refi Rate
0.75
0.25
0.25
0.25
0.25
0.31
Japan Call Money
0.10
0.10
0.10
0.10
0.10
0.27
UK Base Rate
0.50
0.50
0.50
0.50
0.50
0.50
UK QE Target
375
400
450
450
450
450
10 Yr US Treasury
1.82
1.95
2.50
2.80
3.25
3.50
10 Yr Euro (Bund)
1.53
1.75
1.50
1.44
1.50
2.00
10 Yr BTP-Bund (bp)
275
350
400
350
400
300
10 Yr OAT-Bund (bp)
62
90
120
120
150
80
10 Yr JGB
0.83
1.00
1.10
1.13
1.50
1.75
10 Yr Gilt
2.05
1.95
1.80
1.75
1.75
2.50
USD/EUR
1.33
1.22
1.20
1.20
1.24
1.31
YEN/USD
88
86
84
83
82
82
EUR/GBP
0.83
0.79
0.79
0.79
0.79
0.79
USD/GBP
1.61
1.54
1.52
1.51
1.57
1.66
8
Source: Citi Research
Avge
2015
Avge
2016
US, Euro Area, Japan,
UK
Private Sector Debt/GDP Ratios
240
%
220
200
180
160
140
120
100
80
60
1980
1985
Euro Area
9
Source: Citi Research
1990
UK
1995
2000
US
2005
Japan
2010
Spain
Change in Private Debt/GDP Ratios In This Crisis
Compared to Historical Experience
US, Euro Area, UK
Sources: BIS, Datastream and Citi Research
100
%
US
80
60
40
EMU
UK
Average +/- one
standard deviation
We date start of
current crisis for
EMU, US, UK as Q408
20
0
Average in 12 Countries With Systemic Banking Crisis (Chile 1981, Finland
1991, Indonesia 1997, Japan 1997, Malaysia 1997, Mexico 1994, Nicaragua 2000,
Norway 1991, Philippines 1997, Sweden 1991, Thailand 1997, Uruguay 2002)
-20
-9
10
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
Distance in Years from First Year of Crisis
4
5
6
7
8
UK
Structural Fiscal Deficit as Pct of GDP
10
%
9
US
8
UK
7
IMF Estimate
EMU
6
5
4
3
2
US has been far more Keynesian than
Europe
1
0
2006
11
2007
Sources: IMF and Citi Research
2008
2009
2010
2011
2012
2013
2014
2015
US and
Europe
Deleveraging By Default
Total Banking Sector Margins and
Loan-Loss Provisions (Pct of
Assets)
4500
4000
3000
Sources: CIRA, BIS, ECB
US
UK
Germany
Austria
Average Insolvency Rate
in 2009-11:
Ireland 6, Spain 21
(per million people)
France
US
Austria
0
Spain
0.0
Italy
500
Australia
0.5
Canada
1000
UK
1.0
France
1500
Sweden
1.5
Neths
2000
Japan
2.0
Germany
2500
Swiss
2.5
12
Annual Average for
2009-11
Neths
3.0
3500
Sweden
Loan-Loss
Provisions (Sum for
2008-11)
3.5
2006
Swiss
4.0
Net Interest Margin
(Average 2008-11)
Finland
4.5
5000
Spain
%
Ireland
5.0
Personal Insolvency Rate
(Insolvencies Per Million People)
US, Euro Area, UK
Change in Real GDP Per Head After Banking Crises
10
8
%
EMU (2007+)
6
US (2007+)
4
UK (2007+)
2
Japan (1997-2007)
0
-2
-4
-6
-8
13
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sources: MF and Citi Research
Housing Recovery Now Underway
US
US
90
20
80
16
70
%
%
12
8
60
4
50
0
40
-4
30
-8
20
-12
10
-16
0
-20
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Michigan Survey -- Net Balance of Consumers Believing Buying Conditions for Houses are Good/Bad (left)
NAHB Index of Number of Prospective Home Buyers (left)
14
House Prices YoY, Median Single Family (right)
180
160
140
120
100
80
60
40
20
0
-20
-40
-60
-80
UKRAINE
ROMANIA
PARAGUAY
BULGARIA
MACEDONIA (FYR)
MOLDOVA
GUATEMALA
GUATEMALA
PERU
DOMINICAN REP
GUATEMALA
GABON
BOSNIA AND HERZ.
DOMINICAN REP
IRAQ
PARAGUAY
HONDURAS
ECUADOR
GEORGIA
MACEDONIA (FYR)
DOMINICAN REP
PERU
COLOMBIA
HONDURAS
ETHIOPIA
ROMANIA
COSTA RICA
CROATIA
UKRAINE
GEORGIA
ROMANIA
CROATIA
UKRAINE
COLOMBIA
BELARUS
ARMENIA
LATVIA
TURKEY
MALAWI
GABON
BOSNIA AND HERZ
EL SALVADOR
EL SALVADOR
SERBIA
KYRGYZ REPUBLIC
SERBIA
BOLIVIA
SERBIA AND MONT.
MOROCCO
PAKISTAN
URUGUAY
BRAZIL
ARGENTINA
URUGUAY
SEYCHELLES
MALDIVES
HUNGARY
DOMINICA
SEYCHELLES
JORDAN
ICELAND
IRAQ
IRELAND (to 2013)
IRAQ
PORTUGAL (to 2014)
ST. KITTS AND
GREECE (to 2016)
Global
Govt Debt/GDP Ratio for Countries in Last Year of IMF GRA
Programmes Since 2002
Greece on new Troika plan to 2016
%
Level At End of IMF Programme
15
Sources: IMF and Citi Research
Portugal in 2014 on IMF forecast
Ireland in 2013 on IMF
Forecast
Change from Year
Germany
Austria
Slovenia
Belgium
Korea
EMU
Finland
Italy
France
Slovakia
Romania
Czech
Bulgaria
US
Poland
Sweden
Latvia
Norway
Portugal
Lithuani
Canada
NZ
Hungary
UK
Australia
Spain
Neths
Denmark
Greece
Estonia
Cyprus
Ireland
Global
Household Debt/GDP Ratio
80
70
60
50
40
%
Change Since 2006-10 Peak
Change From 2001 To 2006-10 Peak
Total Change Since 2001
30
20
10
0
-10
-20
16
Sources: Eurostat and Citi Research
Euro Area
Change in Real GDP Per Head Since 2007
5
0
%
-5
-10
-15
-20
-25
-30
-35
Iceland
Ireland
Italy
Greece
Spain
Portugal
Cyprus
-40
17
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sources: MF and Citi Research
Ireland
Ireland Population YoY
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
%
Q2-2000 to Q2-04
Q2-2004 to Q2-08
Q2-2008 to Q2-12
15 to 20 to 25 to 30 to 35 to 40 to 45 to 50 to 50 to 60 to 65 to 65+
19
24
29
34
39
44
49
54
59
64
69
Age in Years
18
Source: Eurostat
Euro Area
General Govt Debt/GDP Ratios
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
%
1995
19
1997
Spain
Italy
Portugal
Ireland
1999 2001
Sources: Eurostat and Citi Research
2003
Greece
2005 2007
2009
2011 2013
2015
2017
What Will the New Europe Look Like?
EMU Mark 1:
EMU Mark 2:
Minimalist euro area institutional structure
Bigger euro area structure, erosion of power
at national governments – and perhaps also
at EU-27 level?
between reasonably well-developed
structures at national government and EU-27
level.
EU27: Single Market and “four freedoms”;
limited role in common foreign policy and
justice; limited fiscal transfer (EU Budget
only approx 1% of EU GDP); EU Parliament,
limited role in fiscal supervision
Euro Area: fixed exchange rates, single
ECB policy rate, limited role in fiscal
supervision
National Govts: fiscal policy, supply side
framework, bank regulation, foreign policy,
justice etc. Same for EMU and non-EMU
countries.
This structure for the euro area failed
20
to achieve stability and prosperity
EU27: Probably as in EMU Mk 1. Over time,
role in foreign policy and justice likely to
grow. But, will the single market stay intact
for countries outside more closely integrated
core?
Euro Area (and “pre-ins”): as in EMU Mk 1 +
bank regulation + close fiscal supervision
+supply side framework + ESM rescue body
for strained sovereigns + limited EMU fiscal
transfer budget (perhaps 1% of EMU GDP) +
joint bank recap budget
National Govts: reduced powers among
EMU members
US, Euro Area, Japan, UK
GDP Per Head as Pct of US Level
120
110
%
100
90
80
70
60
50
40
30
20
10
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Japan
Korea
Singapore
Taiwan
Ireland
India
China
Avge of Germany, Fr, It, Sp
21
Source: US Conference Board
Global
Sustained Medium-Term EM Demand Outperformance
Nominal Consumer Spending By Region
(USD in 000bn)
18
16
10
Nominal Investment Spending By
Region (USD in 000bn)
2012
2012
8
14
2015F
2015F
12
2020F
10
6
2020F
8
4
6
4
2
2
0
0
US
22
Europe Other
AEs
Sources: IMF, Citi Research
China
Other
EM
EM
EM Asia CEEMEA LATAM
US
Europe Other
AEs
China
Other
EM
EM
EM Asia CEEMEA LATAM
Selected Countries
Exports of Goods to Emerging Markets as Pct of GDP
%
2000
2006
2012
2000
2006
2012
2000
2006
2012
2000
2006
2012
2000
2006
2012
2000
2006
2012
2000
2006
2012
2000
2006
2012
2000
2006
2012
2000
2006
2012
2000
2006
2012
2000
2006
2012
12
11
10
9
8
7
6
5
4
3
2
1
0
UK
US
Ireland Spain France Greece Portugal Japan Sweden
Exports to Asia
Exports to Mid East
Exports to Lat Am
23
Sources: IMF and Citi Research
Italy
Swiss Germany
Exports to Africa
Exports to Emerging Europe
MPC Forecasts for Level of Real GDP (Indexed to Q1-2005 =
100)
UK
118
Nov 08
IR
116
Nov 09
IR
Nov 10
IR 11
Nov
IR
114
112
Nov 12
IR
110
108
106
104
Actual
and Citi
Forecast
102
100
2005
2006
24
Source: Citi Research
2007
2008
2009
2010
2011
2012
2013
2014
2015
US and EU
Total Growth in Export Volumes From Q1-07 to Q3-12
25
Source: Citi Research
Iceland
US
Germany
Spain
Neths
Portugal
EMU
Ireland
Swiss
Sweden
Belgium
France
UK
Austria
Denmark
Italy
%
Finland
40
35
30
25
20
15
10
5
0
-5
-10
UK
Weaknesses in High-Tech and Medium-High Tech Manufacturing
Exports of High-Tech and MediumHigh Tech Goods as Pct GDP
18
%
EU15 Average
16
UK
14
12
10
Change in Manufacturing Output 2005-12
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
%
UK
EU15 Average
High
Tech
8
1990 1993 1996 1999 2002 2005 2008 2011
Medium- MediumHigh
Low
Tech
Tech
26
Sources: ONS and Citi Research
Low
Tech
UK
Structural Weaknesses in Exports and Manufacturing
100
Split of Imports of Manufactured
Goods
%
Gross Rate of Return on Capital
24
Services-Manufacturing Gap
22
90
80
70
60
50
40
Low
Tech
20
Rate of Return in Manufacturing Sector
18
Rate of Return In Service Sector
MediumLow
Tech
16
MediumHigh
Tech
12
High
Tech
30
%
14
10
8
6
20
4
10
2
0
World
AEs
All EMs
China
0
1988
27
Sources: ONS and Citi Research
1992
1996
2000
2004
2008
2012
UK General Government Debt/GDP Ratio
UK
110
%
100
90
80
70
June 2010 Budget Forecast
Nov 2010 Autumn Statement Forecast
60
Mar 2011 Budget Forecast
Nov 2011 Autumn Statement Forecast
50
Mar 2012 Budget Forecast
Dec 2012 Autumn Statement Forecast
40
Actual and Citi Forecast
30
2006
28
2007
2008
Sources: OBR and Citi Research
2009
2010
2011
2012
2013
2014
2015
2016
2017
UK
Bank Lending (FLS Definition) To Households and Businesses
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
FLS Begins
Mom (£bn)
YoY (Pct)
2004
29
Sources: BoE and Citi Research
2006
2008
2010
2012
UK
How Might Rate Guidance Work?
 Advantage: helps anchor rate expectations, lower forward rate path.
 King (2007) rejected rate guidance: said it would confuse people, MPC might not
agree on it, and might be wrongly interpreted as a promise.
 Many inflation targeting central banks do give rate guidance.
 Option 1. Permanent rate guidance: central bank publishes its own interest rate
forecast as part of economic forecast. Among 26 inflation targeting central banks,
5 publish forecasts using constant rates, 4 use market rates (including UK), 13
use central bank’s own judgement for appropriate rate path and 4 use a policy
rule to generate the rate path. Probably requires the central bank rather than
MPC to generate forecast.
 Option 2. Occasional rate guidance: can use previous Fed- (and BoC) style
guidance: eg “with this outlook, the median view among MPC members currently
is that rates will be stable for the next two years or so”. Can be done if economic
forecast is still owned and produced by the MPC. Can be linked to forecasts for
key variables (inflation, unemployment).
30
UK
What Type of Inflation Target Do Countries Have?
18
16
14
12
10
8
6
4
2
Hungary
Iceland
Norway
Sweden
UK
0
Point Target (eg 2%)
31
Sources: BoE and Citi Research
Australia
Colombia
Israel
NZ
S Africa
Range Target (eg 1-3%)
Armenia
Brazil
Canada
Chile
Czech Rep
Ghana
Guatemala
Indonesia
Mexico
Peru
Philippines
Poland
Romania
Serbia
S Korea
Thailand
Turkey
Point+Range Target (eg
target is 1-3% band and aim
for centre)
UK
Targets for CPI Level of Nominal GDP Level Unlikely
Nominal GDP Level Target
475
CPI Index Level Target
130
£bn
450
425
Target for Nominal GDP
Level With 5% YoY Growth
125
Target for CPI Level With
2% YoY Growth
Actual Nominal GDP
120
Actual CPI
400
115
375
110
350
12%
undershoot
325
105
7% overshoot
100
300
275
2004
32
2006
2008
Sources: Citi Research, IMF
2010
2012
95
2004
2006
2008
2010
2012
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36
Kevin Gardiner,
Managing Director and Head of
investment strategy EMEA, Barclays
Wealth & Investment Management
Event sponsored by:
Capital markets in 2013
Kevin Gardiner
Head of Investment Strategy EMEA,
Barclays Wealth & Investment Management
CFA UK annual forecasting event, 16th January
2013
The views expressed here are the personal views of the author
Q: Who’s got the toughest job?
The Fed Chairman or the ECB President?
 Bernanke:
- Humphrey-Hawkins Act: two targets – inflation, employment
- One conventional tool: interest rates
- Two targets + one tool = an impossible ‘assignment’
 Draghi:
- One target: price stability
- One conventional tool: interest rates
- Complication: euro area politics
A: It’s a no-brainer
Draghi has the most difficult job.
Bernanke just has to do the impossible…
… but Draghi has to cope with European politicians.
The good news: he’s managing
2013 capital markets outlook
Source: Google Images, Barclays
41
“It ain’t what you don’t know that gets you
into trouble.
It’s what you know for sure that just ain’t so.”
Mark Twain
“We don’t make anything in the West”
“Services don’t add value”
“We can’t pay for our pensions”
“We live in dangerous times”
…
“The euro can’t survive”
“There’s too much debt”
“Things haven’t been this bad since the 1930s”
Spain, the ECB and OMT…
 Will Spain ask for a bail-out?
If the ECB’s promise is credible, it may not matter
A formal request determines who, not what
 After Greece’s default, why not Spain?
Budget and debt arithmetic is better
Economy is different & reforms more credible
The troika would try harder…
“One must imagine Sisyphus happy” –
Camus
44
ECB safety net at work
(%)
2.0
(%)
7
6
1.5
5
4
1.0
3
2
0.5
1
0.0
2007
2008
Euro interbank - OIS spread (lhs)
Source: Bloomberg, Barclays
45
2009
2010
2011
Germany-Spain 10 year bond spread (rhs)
2012
0
2013
The US: life after debt (I)
US consumer spending and unemployment
Dec 2005=100
000s per week
125
650
120
550
115
450
110
350
105
100
15/12/2005
250
15/12/2007
15/12/2009
15/12/2011
US household spending (nominal, index)
Unemployment claims (000, RHS)
Source: Datastream, Barclays
The US: life after debt (II)
Selected US assets and liabilities, $trillion
Government borrowing overseas
Total government debt
Consumer debt
Memo: GDP (annual flow)
All US international assets
All US international liabilities
Consumer financial assets
Consumer net worth
Consumer total assets
0
Source: Datastream, Federal Reserve, Barclays
10
20
30
40
50
60
70
80
The US: life after debt (III)
150
140
130
120
110
100
90
Q1 2003
Q1 2005
Q1 2007
Bank loans/nominal GDP
Source: Datastream, Barclays
Q1 2009
Nominal GDP
Q1 2011
Real GDP
Govt. borrowing (rolling 12 mths, % GDP)
12
10
8
6
4
2
0
-2
-4
-6
Q1 1994
Q1 1999
Q1 2004
US
Source: Datastream, Barclays Research
49
UK
Q1 2009
US growth: the ‘new normal’ is getting old
5.0
% per annum
4.5
4.0
3.5
3.0
2.5
2.0
1.5
Q11960
Q11970
Q11980
Q11990
US quarterly GDP growth, annualised, 10yr moving average
Source: Datastream, Barclays Research
50
Q12000
Q12010
Why global investors look to Asia
Asia’s weight in the world, %
60
50
40
30
20
10
0
Stocks now
Source: US Bureau of Census, MSCI, Barclays
51
Bonds now
Real GDP now
Population in 2041
GDP growth is not always enough…
Indices logged, Mar 1993 = 100
2.6
(logged)
2.4
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
China/US Real GDP
Source: Datastream, Barclays Research
52
China/US stock prices
Relative wages: China/US, 2002 = 100
450
+ 17% pa
400
350
300
+ 14% pa
250
200
150
100
50
2002
2003
2004
2005
2006
Local currencies
Source: Datastream, Barclays Research
53
2007
2008
2009
Common currency
2010
2011
S&P real earnings: balance sheets did the damage
135
Real, "As Reported" Earnings
125
115
105
95
85
75
'50
'55
'60
'65
Real S&P profits (logged, index)
Source: Datastream, S&P, Barclays
'70
'75
Fitted trend
'80
'85
'90
'95
'00
'05
'10
S&P nominal EPS – do analysts’ forecasts matter?
S&P 500 EPS $
1987
155
1988
1989
1990
1991
1992
135
2014
2010
1994
2013
1995
1996
2009
115
2012
1997
1998
1999
2008
95
2007
2011
2006
2001
2003
2004
2005
2005
2000
1992
35
15
2006
1999
55
2002
1994
1993
'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 '16
Source: Datastream, Barclays
55
2007
2008
2009
2010
1995
1990
1988
1989
1987
1991
2003
1998
1997
1996
2000
2001
2002
2004
75
1993
2011
2012
2013
2014
TMF EPS
Trend
Developed world profitability (real terms, %)
16
14
12
10
8
6
4
2
0
-2
Dec-74
Dec-79
Dec-84
Dec-89
Dec-94
inflation adjusted RoE
10 year moving average
Source: MSCI, Datastream, FactSet, Barclays
Dec-99
Dec-04
Dec-09
Global stock market valuations: price/book value
PB(x)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
World
USA
+/ - one standard deviation Current
Source: FactSet, Barclays
57
UK
Eu x UK
10 year average
Japan
Pac x JP
EM
Dislocated valuations: a message to CFOs
Yield (%)
8
7
6
5
4
3
2
1
0
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Developed Markets Equity Dividend Yield
Global Investment Grade Corporates Yield
Source: Factset, Barclays
58
Jan-11
Stock valuations: the CAPE debate
P/ E(x)
50
45
40
35
30
25
20
15
10
5
0
1881
1891
1901
Graham & Dodd PE
Source: Robert Shiller data, Barclays
59
1911
1921
1931
forecast with no earnings growth
1941
1951
1961
25 year moving average
1971
1981
1991
50 year moving average
2001
2011
100 year moving average
Stock valuations: PE / value-added?
Trailing PE / Corporate value-added
35
30
25
20
15
10
5
0
Dec-74
MSCI USA
Dec-84
10-year moving average
Source: MSCI, FactSet, Barclays
60
Dec-94
± one standard deviation
Dec-04
A subtle shift: New Fed guidance on rates
12
10
8
6
4
2
0
-2
-4
Dec-05
Dec-06
Dec-07
Unemployment rate (%)
Source: Bloomberg, Barclays
61
Dec-08
Dec-09
Threshold
Dec-10
Inflation (%)
Dec-11
Dec-12
Threshold
What a difference a year makes… US rates, spot & forward
4
3.5
3
2.5
2
1.5
1
0.5
Swap curve
Source: Bloomberg, Barclays
62
3-mths forwards
Swap Jan '12
ye
ar
s
10
ye
ar
s
9
ye
ar
s
8
ye
ar
s
7
ye
ar
s
6
ye
ar
s
5
ye
ar
s
4
ye
ar
s
3
ye
ar
s
2
ye
ar
1
3
m
on
th
s
0
Fwd Jan '12
VIX and US money market mutual funds
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
US Money Market Mutual Funds (as %of S&P market cap)
Implied S&P volatility (VIX, %)
Source: Datastream, Barclays Research
63
0
Jan-13
Precious metals losing their shine?
Index (15/12/1977=100)
800
700
600
500
400
300
200
100
0
'77
'80
'83
Silver/ US CPI
Source: Datastream, Barclays Research
64
'86
'89
'92
'95
Gold/US CPI
'98
'01
'04
'07
'10
Conclusion: risk assets preferred in 2013
1.
Barclays' SAA: asset class performance (%)
Corporate securities preferred to government
2.
- Business cycle & risk appetite matter more than QE
Cash & ST bonds
- Spreads flattered by GB yields: High Yield preferred
Developed govt bonds
Stocks preferred to bonds
- Valuations still favourable, despite rally
IG credit
HY credit & EM bonds
- US and EUX; neutral EM (Asia preferred)
- Within EUX: core and periphery
- Rotation: ‘Income’ & ‘Recovery’ into ‘Growth’…
3.
F/X: USD may become pro-cyclical…
- Conviction low: USD most favoured, JPY & CHF least
- Longer-term: Asian currencies strongly favoured
65
2012
2011
Developed stocks
Emerging stocks
Commodities
Real estate (est.)
ATS (est.)
-20
-10
0
10
20
Disclaimer
This document has been issued and approved by Barclays Bank PLC. Although information in this document has been obtained from sources believed to be
reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This document does not constitute a prospectus,
offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which
may be discussed in it. All estimates and opinions included in this document constitute our judgement as of the date of the document and may be subject to
change without notice. This document is not a personal recommendation and you should consider whether you can rely upon any opinion or statement contained
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PLC is registered in England and authorised and regulated by the Financial Services Authority. Registered number is 1026167 and its registered office is 1
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© Barclays Bank PLC 2012. All rights reserved. Issued for companies including Barclays Bank PLC (Reg. No. 1026167), Barclays Stockbrokers Limited (Reg. No.
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Thanos Papassavas,
Head of Investec Asset Management’s
Currency Management team
Event sponsored by:
Fixed Income and Currencies 2013
Thanos Papasavvas – Strategist
January 2013
Leading indicators point to pick up in G7 GDP in 2013
G7 Longer Leading Indicator
● Outlook for the G7 has remained for a modest improvement over the next four
quarters
● Chinese stabilisation continues
Source: Investec Asset Management
Page 69 | CONFIDENTIAL
10302
Markets had front-run modest uptick in data
● Markets continue to imply an uplift in macro data in the first part of 2013 – but not
as enthusiastically as before
● Data surprises in Developed Markets are rolling over, led by the US and Europe
Source: Investec Asset Management
Page 70 | CONFIDENTIAL
10302
Core government bond yields remain supressed
G2 Real Yield vs. Fair Value
Source: Investec Asset Management
●
●
●
●
Source: Merrill Lynch
Central bank manipulation continues to hold down yields
Some scope to normalise next year if global growth accelerates
Near-term growth risks suggest caution
Implied option volatility depressed making insurance cheap
Page 71 | CONFIDENTIAL
10302
Implied Treasury Market Volatility
Emerging Markets The strategic case and ways to invest
The attractions of emerging markets debt
● Strong emerging market fundamentals
– better placed than many developed
markets
● Significant and growing part of global
economy, with plenty of room for
productivity gains
● Growth accentuated by four
accelerator themes
− Favourable demographics
− Commodity richness
Emerging markets as percentage of world
Contribution to world GDP
36%
Contribution of emerging markets to aggregate
growth over the 3 year period Jun 2008 to Jun
2011
92%
Contribution to global trade
37%
Government bonds outstanding (includes both
domestic and international)
14%
Population
84%
Total land surface area
74%
Known oil reserves
86%
− History of fiscal and monetary
reforms
− Better fiscal situation
Convergence to developed markets will lead to outperformance of EM
assets
Source: IMF World Economic Outlook Database, June 2011; BIS (Bank for International Settlements), June 2011, CIA
World Fact book and EIA (US Energy Information Administration).
Page 73 | CONFIDENTIAL
10302
EM accelerator theme 1
Favourable demographics
Population growth
Working age % of population
Dependency ratios are improving in emerging markets
Source: UNStats, World Bank, IAM calculations
Page 74 | CONFIDENTIAL
10302
EM accelerator theme 2
Commodity riches
Percentage share of global commodity production
100%
Developed
Emerging
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Coal
Iron Ore
Gold
Oil
Copper
Rice
Wheat
Global natural resources are predominantly found in EM
Source: UN Stats, IAM calculations, December 2011
Page 75 | CONFIDENTIAL
10302
EM accelerator theme 3
Strong historic reforms
Adoption of fiscal rules in EM
Adoption of inflation targeting in EM
Much of EM applying global best practices in managing macroeconomic
stability
Source: IMF, Centre for Economic Policy Research
Page 76 | CONFIDENTIAL
10302
EM accelerator theme 4
Much better fiscal situation
● Emerging markets do not face the challenges that the developed world is facing
● Rising public debt in industrial countries poses fiscal challenges
Gross debt
% of GDP
% of GDP
Overall balance
Fiscal situation much stronger compared with developed markets
Source: IMF, June 2011
Page 77 | CONFIDENTIAL
10302
Accessing the emerging markets themes
Key drivers and relationships
Page 78 | CONFIDENTIAL
10302
Emerging debt markets compare very favourably with
other asset classes
December 2002 to June 2012 (USD)
(Return/correlation data since the start of JP Morgan GBI-EM Global Diversified
index, our preferred local currency comparative index)
Ann
Return
Standard
deviation
Sharpe
ratio
Correlation with
Local EM debt
EM equities
16.2%
24.7%
0.66
0.80
Local EMD
11.9%
12.2%
0.98
1.00
Blended EMD
11.3%
10.0%
1.13
0.96
Developed property
10.9%
22.6%
0.48
0.71
Dollar EMD
10.5%
9.0%
1.16
0.78
Global high yield
10.2%
11.6%
0.87
0.71
Corporate EMD
8.2%
8.9%
0.92
0.71
Global equities
7.5%
16.6%
0.45
0.77
EM Currencies
7.5%
8.2%
0.91
0.94
Hedge funds
6.9%
6.0%
1.14
0.66
S&P500
6.8%
15.1%
0.45
0.69
Global bonds
6.2%
7.3%
0.85
0.55
Global credit
6.0%
6.2%
0.96
0.64
US bonds
4.9%
4.8%
1.02
0.08
Data from 31 December 2002 – 30 June 2012, standard deviation and correlation of monthly
returns in USD, Local EMD = JP Morgan GBI EM Global Diversified.
Blended EMD=50% JP Morgan GBI-EM GD+50% JP Morgan EMBI GD; Dollar EMD=JPMorgan Emerging Markets bonds Index EMBI GD;
Developed Property = S&P/Citi Developed REIT Index TR; Hedge funds = CS/Tremont Hedge Fund Index; EM currencies =JPMorgan Emerging
Local Markets ELMI Plus Composite; Global high yield = Merrill Lynch Global High Yield Index (100% hedged to $); EM equities =MSCI Daily
Gross Returns USD EM; Global equities = MSCI Daily Gross TR USD World Indx; Global credit = Citigroup World Broad Investment-Grade Index;
Global bonds = Citigroup WGBI All Maturities USD; US bonds = Citigroup US GBI All Maturities USD; Commodities = S&P GSCI Total Return
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Latest Dynamic portfolio – active positions
Active duration positions
Active currency positions
Total: -0.38
Total: 5.32%
MYR
Russia
0.21
Malaysia
0.20
Czech
0.10
Hungary
0.09
4.87%
INR
4.03%
TRY
3.96%
IDR
3.85%
RUB
2.51%
Nigeria
0.05
MXN
1.76%
Brazil
0.05
BRL
1.56%
Romania
0.01
NGN
Philippines
0.00
KRW
0.03%
THB
0.02%
South Africa
0.00
Peru
0.00
Chile
0.00
Poland
-0.02
Indonesia
-0.16
Thailand
-0.20
Mexico
South Korea
-0.50
-0.22
-0.08%
HUF
-0.16%
PLN
-0.23%
-2.02%
PEN
-2.37%
CZK
-2.38%
CLP
-2.44%
PHP
-0.36
-4.00%
SGD
-0.30
-0.10
0.10
Source: Investec Asset Management, 30 November 2012
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10302
ZAR
COP
-0.13
Colombia
1.25%
0.30
-4.84%
-10.00%
-5.00%
Off-composite index positions
0.00%
5.00%
10.00%
Unconstrained Fixed Income -
Bond benchmarks do not reflect how the world has
changed
Country weights in the WGBI
A benchmark unconstrained approach makes increasing sense
Source: Citigroup World Government Bond Index
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10302
Fixed income opportunities can broadly be
characterised as either defensive or pro-risk
Time weighted correlation to broad market risk
Pro-risk
Defensiv
e
A diversified portfolio will have the best of both
Source: Investec Asset Management
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10302
Thank you
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please contact us.
The information discusses general market activity or industry trends and should not be construed as investment advice. The
economic and market forecasts presented herein reflect our judgment as at the date shown and are subject to change without
notice. These forecasts will be affected by changes in interest rates, general market conditions and other political, social and
economic developments. There can be no assurance that these forecasts will be achieved. Investors are not certain to make
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The information contained in this document is provided in good faith and has been obtained from sources believed to be
reliable. No warranty is provided as to its accuracy or completeness. Any opinions stated are honestly held but are not
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This communication is provided for general information only. It is not an invitation to make an investment nor does it constitute
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In the U.S., this communication should only be read by institutional investors, professional financial advisers and, at their
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In Australia, this document is provided for general information only to wholesale clients (as defined in the Corporations Act
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Issued by Investec Asset Management Limited, August 2011. Investec Asset Management Limited is authorised and regulated
by the Financial Services Authority.
Page 85 | CONFIDENTIAL
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