Transcript European Central Bank

The Great Divergence: Investing
in a desynchronised world
Gonzalo Rengifo
Managing Director, Pictet Asset Management
April 2015
Asofondos, Cartagena
Pictet Asset Management | Investing in a desynchronised world
Global review & outlook
Pictet Asset Management | Investing in a desynchronised world
2
Central Banks decisions in 2015 (so far)
•
Jan 15th, the Swiss National Bank removed its 1.2 floor against the Euro
•
Jan 17th, the European Central Bank announced the implementation of its QE and lowers deposit rates by 25 bps to -0.5%
•
In the following 3 weeks, the Danish Central Bank lowered 4 times its deposit rates to protect its peg
•
Jan 21st, the Canadian Central Bank lowered its overnight loan rate from 1% to 0.75%
•
Jan 28th, the Singapore Monetary Authority slowed the pace at which it lets is currency appreciate, mentioning the lower
than expected inflation
•
Feb 3rd, the Australian Central Bank lowered its cash target rate from 2.5 to 2.25%
•
Feb 4th, the Chinese Central Bank lowered its Reserve Requirement Ratio for large banks
•
Feb 12th, the Swedisk Riskbank cut its repo rate from 0% to -0.1% and buys SEK 10 bil on 1 to 5 years gvt. bonds. (QE)
•
March, Indian Central Bank lowered 0,25% & Brazilian CB increased 0,50%
Pictet Asset Management | Investing in a desynchronised world
3
Monetary policies: ECB + BoJ balance sheets expansion should offset the FED’s
Euro area: loans to private sector vs real GDP
% y-o-y
ECB, Fed and BoJ balance sheet expansion
% y-o-y
Real GDPgrowth
6
16'000
USDbn
16
Loans to privatesector (Rhs)
12
14'000
4
8
Balance sheet
expansion (in bn
USD***)
2013
2014
2015 (e)
2016 (e)
2017 (e)
BOJ*
340
290
670
670
670
ECB**
-800
-480
740
660
320
FED
1020
450
0
0
0
Total
560
260
1410
1330
990
0
1.40
1.35
12'000
2
4
1.45
1.30
10'000
1.25
0
8'000
1.20
-4
-2
ECB + FED+ BOJ
6'000
Global money velocity
-8
-4
4'000
1.10
2'000
1.05
-12
-6
-16
02
04
06
08
10
12
14
Source: Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
1.15
05
07
09
11
13
15
17
* BoJ's official forecasts
** Based on ECB's official communication and AA&MR's projections
Source: Pictet WM - AA&MR, Datastream
***December fx rate for forecasts
4
US-Treasuries: inflation expectations and monetary policy put downward pressure on long-term interest rates
US 5-year forward 5-year breakeven inflation rate*
%
3.7
10-year government bonds interest rates
* Fed data: corrected for inflation risk premium and TIPSilliquidity
3.5
%
4.5
4.0
3.3
3.5
3.1
'Taper'
pre-announced
3.0
2.9
2.5
2.7
2.0
Average
2005-2013
2.5
Germany
1.5
2.3
1.0
QE3
launched
2.1
US
QE2 pre-announcement
(JacksonHole)
1.9
QE1 announced
0.5
Operation Twist
announced
Switzerland
0.0
-0.5
1.7
08
09
10
11
12
13
14
Source: Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
08
09
10
11
12
13
14
15
Source: Pictet WM - AA&MR, Datastream
5
Where we come from?
Source: International New York Times
Pictet Asset Management | Investing in a desynchronised world
6
The mirage of global deleveraging – global total debt to GDP
Total debt (% GDP): Developed, World and EMs
300
%GDP
260
276.7
DM total debt*
World total debt
EM total debt**
235.9
220
180
158.3
140
100
60
88
90
92
94
96
98
00
02
04
06
08
10
12
14
*Weighted average of 20 DM & ; **
Weighted average of 15 EM
Source: Pictet Asset Management, CEIC, Datastream
Pictet Asset Management | Investing in a desynchronised world
7
Balance sheet recession (BSR): Spain
SPAIN: Financial surplus/deficit by sector as % of GDP ( four quarter rolling average)
% of GDP
Financial surplus
8
Households
4
0
-4
Domestic businesses
(financial andnonfinancial corporations)
-8
Government
Financial deficit
-12
95
97
99
01
03
05
07
09
11
13
15
Source: Pictet WM - AA&MR, Datastream, BdE
Pictet Asset Management | Investing in a desynchronised world
8
The Great Divergence
Source: International New York Times
Pictet Asset Management | Investing in a desynchronised world
9
The global economy viewed through the lens of the three GDs: desynchronised and complex
Public debt
GREAT
DIVERGEN
CE
GREAT
DEMONETISATIO
N
Fed
Balance
sheet
Growth
Europe:
State indebtedness
GDP
growth
Changing
growth
regime
United States:
Recovery through
investment
Emerging Markets:
Growth through domestic
demand
Credit
revival
New
economi
c model
Austerit
y and/or
tax
increas
e
Publi
c
defici
t
GREAT
DYNAMICS
Employm
ent
Investment
New
cycle
Wages
Source: Pictet WM - AA&MR
Pictet Asset Management | Investing in a desynchronised world
10
Consumers decade
Producers
Win
Pictet Asset Management | Investing in a desynchronised world
Consumers
Win
11
Where we are today? Markets rise to record highs
Source: InternationalHerald Tribune
Pictet Asset Management | Investing in a desynchronised world
12
An unusual market and business cycle
Evolution of US industrial production, bond yields, corporate earnings and equity prices relative to average
recovery* since 1925
175
Industrial production
Bond yields
S&P 500
Earnings
149.9
100 = Average cycle
150
125
112.6
100
87.2
75
50
54.9
25
0
5
10
15
20
25
30
35
40
45
50
55
60
65
Months from recession-end
*we use NBER recession-end dates for recoveries with a duration of at least five years (a total of 11 since 1925)
Pictet Asset Management | Investing in a desynchronised world
Source: Datastream, Federal Reserve, Robert Shiller, as of 4Q 2014
13
One of the slowest recoveries but one of best times ever for investors
Real return of a global balanced portfolio over
previous 5 years*
Asset class return p.a. over past 5 years (in USD)
16
Developed Equities (MSCI)
10.8%
14
EM bonds HC
7.6%
50/50 global balanced portfolio - 5Y rolling return
p.a., adjusted for inflation
Average
12
HY Bonds (EMU)
6.9%
2.6%
IG Bonds (EMU)
2.5%
Global Bonds (JPM GBI)
2.1%
EM Equities (MSCI)
2.1%
OECD inflation rate
2.0%
Gold
1.6%
10
8
6
4
2
0
Global Cash
-1.7%
-2
Oil
-4
-6.3%
-10%
-5%
0%
5%
10%
15%
Jun-90
Aug-91
Oct-92
Dec-93
Feb-95
Apr-96
Jun-97
Aug-98
Oct-99
Dec-00
Feb-02
Apr-03
Jun-04
Aug-05
Oct-06
Dec-07
Feb-09
Apr-10
Jun-11
Aug-12
Oct-13
EM bonds LC
Source: Datastream, as of 31 Dec 2014
Pictet Asset Management | Investing in a desynchronised world
14
DM Equities: valuation for the US and Europe in the upper band
12-month forward PE for the S&P 500
12-month forward PE for the Stoxx Europe 600
18
18
16
16
long term
average: 13.5
14
14
12
long term
average 12.0
12
12-month forward PES&P
500 last figure 15.6
10
10
average May 03 Oct 07 :
14.3
8
12-month forward PE
Stoxx Europe 600 last
figure 13.6
average May 03 Oct 07 :
12.9
8
average May 10 May 11 :
10.8
average May 10 May 11 :
12.6
6
6
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
02
03
04
05
06
07
08
09
10
11
12
13
14
Source: Pictet WM - AA&MR, Datastream
15
US: fall in oil price creates an additional boost to real private income and sustains consumption
Commercial banks - loans & leasing: growth rate
annualised
%
15
Past 3 months over previous 3 months*
Real private non-farm labour income: growth rate,
annualised
%
Last 3 months over preceding 3 months*
+6.7%
6
4
10
2
5
0
0
-2
-5
-4
-10
-15
-6
* Last point = past 2 months
over previous 3 months
-8
*Last point = past 2 months over preceding 3 months
-10
-20
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
09
10
11
12
13
14
15
Source: Pictet WM - AA&MR, Datastream
US equities: fall in oil price dramatically hurts 2015 US earnings growth estimates
2015(e) earnings growth
2015(e) earnings growth
15%
13%
14%
12%
13%
11%
12%
10%
11%
Oil
impact
10%
9%
9%
8%
8%
7%
S&P500 excluding Oil
6%
S&P500
7%
6%
5%
2015 earnings growth Stoxx Europe 600
2015 earnings growth TOPIX
5%
2015 earnings growth S&P500
4%
4%
3%
Jun 14
3%
Jun 14
Aug 14
Oct 14
Dec 14
Source : Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
Aug 14
Oct 14
Dec 14
Source : Pictet WM - AA&MR, Datastream
Periphery sovereign spreads: at record lows
EURO AREA: 10Y sovereign bond spread vs. Bund
Source: Pictet WM - AA&MR, Bloomberg
Pictet Asset Management | Investing in a desynchronised world
18
Net flow of EZ bank loans to non-financial sectors
Pictet Asset Management | Investing in a desynchronised world
19
European margins are depressed but seem to be bottoming out
12-month forward EBIT margin S&P 500
12-month forward EBIT margin Stoxx Europe 600
17%
17%
16%
16%
15%
15%
14%
14%
13%
13%
12%
12%
11%
11%
10%
10%
9%
9%
00
02
04
06
08
10
12
14
Source: Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
From mid 2012 to
2014, the tradeweighted €
strengthened by
14%.
00
02
04
06
08
10
12
14
Source: Pictet WM - AA&MR, Datastream
20
Spanish economy: exports and domestic demand are driving the recovery
Spain, Euro area and US: GDP level (index 100 = peak of
previous cycle)
110
Index 100 = previous cycle peak
+ 8.8%
Spain, Euro area and US: Real GDP growth
%
8
Spain: GDP(y-o-y)
fcst
Euroarea: GDP(y-o-y)
US: GDP(y-o-y)
6
105
4
100
- 2.0%
95
2
0
- 5.3 %
90
-2
Spain
Euroarea
-4
US
85
-6
-8
80
02
04
06
08
10
12
14
Source: Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
Spain: Real GDPgrowthforecasts
%
2014 2015F 2016F
PCo:
1.4 2.0
1.8
Consensus:
2.2
2.2
IMF:
2.0
1.8
ECcommision:
2.3
2.5
00
02
04
06
08
10
12
14
Source: Pictet WM - AA&MR, Datastream
21
Japan: inflation stopped rising and the BoJ boosted the size of its QE
ECB, Fed and BoJ balance sheet
expansion
Japanese nominal GDP level and BoJ balance sheet
%
BoJnet purchases:
JPY80tr ($700bn) per year
= 16% of GDPin 2015
80
75
14'000
1.40
12'000
Global money velocity
1.35
65
104
10'000
60
55
ECB + FED+ BOJ
108
106
70
1.45
USDbn
1.30
102
Nominal GDP
(2007=100)
100
50
45
8'000
1.25
98
1.20
6'000
40
35
Government
target
30
96
94
1.15
4'000
1.10
25
20
BoJbalance sheet
(% of GDP)
92
2'000
15
90
1.05
05
06
07
08
09
10
11
12
13
14
15
16
17
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Source: Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
Source: Pictet WM - AA&MR, Datastream
22
China: PBoC and government likely to pursue a ‘stop & go’ economic policy
Growth y-o-y: credit outstanding and nominal GDP
Consumer price index: % change
%
%
34
8
Credit outstanding
(total social financing)
32
7
30
28
6
26
5
24
4
22
20
3
18
16
2
1.6%
1
14
12
0
10
8
-1
Nominal GDP
6
-2
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
4
03
04
05
06
07
08
09
10
11
12
13
14
15
Source: Pictet WM - AA&MR, Datastream
23
Brazil: Economic growth has collapsed
BRAZIL: Real GDP
Source: Pictet WM - AA&MR, Datastream
Pictet Asset Management | Investing in a desynchronised world
24
Brazil: Currency in free fall despite tighter monetary policy
BRAZIL: Official interest rates and FX
%
3.1
21
BRL / USD
19
2.9
17
2.7
15
2.5
SELIC Target Rate
13
2.3
11
2.1
9
1.9
7
1.7
1.5
5
05
06
07
08
09
10
11
12
13
14
15
Source: Pictet WM - AA&MR , Datastream
Pictet Asset Management | Investing in a desynchronised world
25
In EM it is all about differentiation – EM equity scorecard
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
•
•
•
•
•
•
Country
Colombia
Taiwan
Hungary
India
Poland
China
Czech Rep
Russia
Egypt
Peru
Chile
Philippines
Malaysia
Mexico
Brazil
Korea
Thailand
Indonesia
Turkey
South Africa
Valuation
1.02
0.69
1.44
-0.98
0.64
0.99
0.35
2.21
-0.18
-0.41
0.29
-1.56
0.10
-1.18
0.36
-0.25
-0.48
-1.17
-0.55
-1.34
Growth
0.56
-0.28
-0.88
1.67
-0.15
-1.02
-0.99
-0.87
1.30
1.70
0.25
0.87
-0.96
0.95
-0.02
-1.13
-0.82
0.94
-0.50
-1.49
FX
2.60
2.17
2.04
1.56
1.21
1.71
2.05
2.31
1.15
0.17
0.76
1.82
1.54
0.78
0.33
0.94
1.05
0.02
0.78
1.17
Risk
-0.11
0.57
-0.24
-0.17
0.82
0.57
0.95
-3.81
-1.07
0.22
0.51
0.53
0.22
0.39
-0.58
0.92
0.40
-0.15
-0.25
-0.40
Total
1.03
0.71
0.62
0.54
0.53
0.49
0.47
0.44
0.43
0.39
0.39
0.35
0.20
0.19
0.09
0.01
-0.01
-0.07
-0.10
-0.47
Valuation: price to book, price to cash flow, price to sales, DY and 12m PE - relative to average
Growth: GDP and EPS growth over next five years (level and acceleration), adjusted for current level of private leverage
FX: deviation from fair value according to our economics team's model (undervaluation is a positive)
Sovereign risk: inverse of 5Y sovereign CDS
Total: un-weighted average of the four components (half weight for sovereign risk). All in standard deviations from average.
Oversold: inverse of deviation from LT trend of relative performance in USD
Pictet Asset Management | Investing in a desynchronised world
Oversold
2.10
0.02
-0.18
-1.65
0.07
-0.62
-0.16
1.10
-1.28
1.02
1.64
0.62
0.87
1.33
0.89
0.58
0.30
0.47
0.08
0.52
Source: Datastream, Bloomberg
26
Main takeaways
›
DM and EM economic cycles, monetary and fiscal/budgetary policies are desynchronised.
This desynchronisation is a source of shock and of volatility in financial markets, and in
foreign markets especially.
›
Hope for global growth are concentrated in the US. The massive and unexpected fall in oil
prices creates additional GDP growth potential in the US (and more marginally in the
eurozone). Leading indicators, the credit cycle and lower oil prices point to a selfsustained growth at 3.4% in 2015 in the US .
›
Growth in the euro area should accelerate to 1.1% from around 0.9% in 2014. Its economy
benefits from lower oil prices and from a weakening euro, in the wake of the ECB’s
quantitative easing.
›
The election results in Greece causes a resurgence of the systemic risk in the euro area
and a new test of the Monetary Union, through the renegotiation of agreements with the
Troika.
›
Pictet Asset Management | Investing in a desynchronised world
EM economies are suffering from the fall in commodity prices and a slowdown in their
27
The Black Swans
Pictet Asset Management | Investing in a desynchronised world
28
The Ukrainian problem
Source: International New York Times
Pictet Asset Management | Investing in a desynchronised world
29
Never ending?
Source: International New York Times
Pictet Asset Management | Investing in a desynchronised world
30
Greek tragedy
Source: International New York Times
Pictet Asset Management | Investing in a desynchronised world
31
Fed’s patience
Source: Forbes
Pictet Asset Management | Investing in a desynchronised world
32
Europe
“We all know what to do, we just don’t
know how to get re-elected after we have
done it”
2015
European Commission president
J.-C. Junker
Pictet Asset Management | Investing in a desynchronised world
33
Conclusions
Pictet Asset Management | Investing in a desynchronised world
34
Secular Outlook – key conclusions
 Austerity = weak growth & rich valuation = Low return environment
 No cheap asset classes, no clear growth drivers, policy-driven markets
 Absolute return, relative value strategies, structural growth as investment theme
 Inflation to rise above recent range
 Financial repression – QE, low real rates for longer – higher central banks’ tolerance towards
inflation
 “Currency wars” – loose monetary policy imported everywhere
 China’s labor force contraction – end of global wage deflation
 Bear market in DM government bonds
 Macro-prudential measures limit rate upside risks, however market expectations still too sanguine
 Corporate bonds increasingly vulnerable – higher issuance, lower credit rating, changed liquidity
regime
 Less business-friendly policies
 Taxation&regulation … corporate margins to decline
 Less favorable growth/inflation mix
 Rising risk of de-globalization and fragmentation
 EM assets to outperform
Pictet Asset Management | Investing in a desynchronised world
35
Investment advice
›
Increase allocation to:
 EM assets
 Absolute return / low duration. Relative value
 Alternatives
 Secular growth themes
Pictet Asset Management | Investing in a desynchronised world
36
Thank you very much for your attention
For more information,
Pictet & Cie (Europe) S.A.
Calle Hermosilla n°11
28001 Madrid – Spain
+34 91 538 25 00
Gonzalo Rengifo
Managing Director Iberia & Latam
www.pictet.com
www.pictetfunds.com
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| For
professional
investors
only
37
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