Download In Focus: Markets as we see them China`s capital flight

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In Focus: Markets as we see them
China’s capital flight
12 February 2016
For EMEA distribution only
Inside (click to jump to sections)
Flight of prosperity As of January
2016, China’s FX reserves fell
USD99bn to USD3231bn, leaving
Chinese FX reserves at their lowest
level since 2012
Breaking down the outflows The
majority of capital outflows seen in
2015 can be accounted for by either
the flight of “hot money” or rational
decision making on the part of
domestic corporate entities
New year, new crisis? Given the
degree of state-control of the
domestic financial system, we think
China has the ability (and willingness)
to implement temporary capital
controls if needed
The cost of devaluation We struggle
to see how devaluation would
negatively impact the fundamentals
of the Chinese economy given its
relative lack of reliance on external
debt
Conclusion
Market calls – summary
Macro economy summary
Asset class summary
Latest market data
Foreign exchange forecasts
Contents of this document are for non-US residents only
“People flock to the rich, but scatter from the poor”
(Traditional Chinese proverb)
Flight of prosperity
This week, from the rustbelt factories of Liaoning, to the bustling megacities of
Guangdong, the world’s most populous nation has gone on holiday. China’s 1.3 billion
people ushered in the New Year earlier this week with extravagant firework displays
and, if anecdotes are to be believed, even greater displays of retail spending. For those
desperately trying to read China’s economic tea leaves, the resulting pre-New Year
data void is unhelpful. Extra attention is perhaps placed on one of the few data that
are released - China’s FX reserves. As of January 2016, China’s FX reserves fell $99
billion to $3231billion, leaving Chinese FX reserves at their lowest level since 2012
(Figure 1). Even more worryingly, the fall in reserves has accelerated in recent
months, further spooking already jittery capital markets (Figure 2).
Undoubtedly, the latest record fall in the PBoC’s (People’s Bank of China) coffers
would have sparked a further sell-off in the Chinese equity markets had they not been
closed for the New Year holidays. The key to these fears is not so much falling FX
reserves themselves, but what these falling reserves imply. Is it, as some suggest, a
massive exodus of capital from China as investors desperately attempt to pull their
money out of a sinking economy built on nothing but piles of debt. Or does it herald
an imminent devaluation of the yuan as the PBoC runs out of money needed to
defend the currency. For us, these theories may be both over-simplistic and
dangerously inaccurate. A deeper look into the data suggests a picture far more
Figure 1: Chinese FX reserves
4.5
Key macroeconomic projections
Markets in a nutshell…
Figure 2: Year-on-year change in Chinese FX reserves
PBoC FX Reserves ($ trillions)
50 Year on year
change (%)
4.0
40
3.5
30
3.0
20
2.5
10
2.0
0
1.5
1.0
03/2009
11/2010
Source: Datastream, Barclays
-10
07/2012
03/2014
11/2015
China foreign exchange reserves
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Source: Datastream, Barclays
Important Information: Please note that the contents of this document are intended for non-US residents only.
Figure 3: Chinese BoP – net errors and omissions
Figure 4: Estimated Chinese net capital outflows
60
China BoP - Net errors and omisssions ($, billions)
40
China BoP - Net errors and omisssions, 4qma ($, billions)
Est. capital outflows ($, billions)
200
100
20
0
0
-20
-100
-40
-200
-60
-80
11/2001
03/2005
Source: Datastream, Barclays
07/2008
11/2011
03/2015
-300
02/2001
10/2005
Source: Datastream, Barclays
06/2010
02/2015
nuanced than many pundits seem prepared to admit.
Breaking down the outflows
Theoretically, from an economic accounting point of view, an economy’s official capital
outflows can be determined with the following equation:
Official net capital outflows = -[net reserve assets + net capital account + net current account]
In reality however, there are inevitably some omissions and measurement error with the BoP
(Balance of Payments) statistics. As such, a fourth component - “net errors and omissions”,
is used to bring the BoP into balance. If we assume most of the “net errors and omissions”
component consists of unofficial/illegal capital outflows, then total capital outflows from
China could then be determined by the modified equation:
Est. net capital outflows = -[net reserve assets + net capital account + net current account + net errors and omissions]
Indeed, the “net errors and omissions” component has turned negative over the previous
quarters, suggesting that at least some of the story may be explained by hidden capital
outflows (Figure 3). In total, net capital outflows out of China were estimated to be roughly $
400 billion throughout Q1-Q3 2015 (Figure 4), about 4% of total GDP. However, it is
important to note that by construction, capital outflow estimates will be overstated, as they
do not account for currency valuation effects from the recent yuan depreciation, as well as
measurement error with regards to the “net errors and omissions” figure.
Figure 5: Breakdown of Chinese net capital outflows
200.00
100.00
Official net capital outflows - Financial derivatives ($, billions)
Official net capital outflows - Portfolio investments ($, billions)
Official net capital outflows - Other investments ($, billions)
Official net capital outflows - Direct investments ($, billions)
Official net capital outflows - Total ($, billions)
0.00
-100.00
-200.00
02/2001
11/2002
08/2004
05/2006
02/2008
11/2009
08/2011
05/2013
02/2015
Source: Datastream, Barclays
In Focus 12 February 2016
2
Figure 6: Breakdown of Chinese financial account – other investments
150.00
100.00
Other investments, ccy & deposits ($, billions)
Other investments, loans ($, billions)
Other investments, trade credit ($, billions)
Other investments, assets, acc receivables ($, billions)
Other investments, others ($, billions)
Other investments, ($, billions)
50.00
0.00
-50.00
-100.00
-150.00
-200.00
02/2011
12/2011
10/2012
08/2013
06/2014
04/2015
Source: Datastream, Barclays
Furthermore, a disaggregation of the BoP statistics yields several factors that are key drivers
of recent capital outflows.
China’s official net capital outflows can be divided into three main components – direct
investments (which tend to be long-term strategic investments needed to facilitate China’s
long-run growth potential), portfolio investments (which consist of equity and debt security
purchases by smaller investors), and other investments (Figure 5). We can see that most of
the recent capital outflows are explained by the third component – other investments.
Looking deeper, the recent plunge in “other investments” was driven by large falls in trade
credit and loans (Figure 6). This suggests that domestic Chinese corporate entities have
(sensibly) been paying down foreign denominated debts in anticipation of further yuan
depreciation, as well as increasing overseas lending. A second key component was the fall in
currency and deposits, suggesting that “hot money” is currently fleeing the country in fear of
yuan depreciation. Therefore, we can surmise that the majority of capital outflows seen in
2015 can be accounted for by either the flight of “hot money” or rational decision making on
the part of domestic corporate entities. Importantly neither of these suggest that long-term
investors, far more important to China’s growth story, are abandoning ship as many seem to
suggest. In fact, inward foreign direct investment into China remained positive throughout
2015 (Figure 7).
New year, new crisis?
Historically, capital outflows hurt an economy through two channels - currency depreciation
Figure 7: Inward FDI into China
120
Figure 8: Chinese external debt as % of GDP
External debt as a % of GDP for top MSCI emerging equity markets
Inward FDI into China ($, billions)
China
South Korea
100
Taiwan
80
India
South Africa
60
Brazil
40
Mexico
Malaysia
20
0
02/2001
10/2005
Source: Datastream, Barclays
In Focus 12 February 2016
Russia
Indonesia
06/2010
02/2015
0
10
20
Source: Datastream, Barclays
30
40
50
60
70
3
Figure 9: Chinese income convergence
14
12
Figure 10: Chinese investment per capita
US GDP per capita (logs, constant, 2005 $)
10
UK GDP per capita (logs, constant, 2005 $)
Gross fixed capital formation per capita
(thousands, constant, 2005 $)
8
China GDP per capita (logs, constant, 2005 $)
10
6
8
4
6
2
0
4
1970
1980
1990
2000
Source: Datastream, World Bank WDI, Barclays
S.Korea
2010
Japan
China
US
UK
Source: Datastream, World Bank WDI, Barclays
and external financing. Large capital outflows lead to currency depreciation, which can make
it harder for domestic firms to pay off their external debt and simultaneously decrease the
attraction of funding such firms for external investors. This leads to a self-perpetuating
feedback cycle, where a wave of domestic corporate defaults lowers confidence in the
economy, which leads to even greater capital outflows, and so forth... However, this
admittedly alarming prospect may not quite fit China. Firstly, China relies relatively little on
external financing, with external debt taking up only 10% of its GDP; far lower than any
major EM counterpart (Figure 8). Besides that, China’s still formidable FX reserves and
massive current account surplus make it less vulnerable to a repeat of a ’97 Asian Financial
Crisis. Finally, given the degree of state-control of the domestic financial system, we think
China has the ability (and willingness) to implement temporary capital controls if needed.
The cost of devaluation
Even if capital outflows are driven by domestic deleveraging of external debt and “hot
money” flight, pundits still fear that the size of these outflows will eventually overwhelm the
PBoC’s reserves, forcing it to devalue the yuan. Based on an IMF research paper1, many have
recently touted $2.7 trillion as the minimum amount of reserves required by the PBoC. At this
rate, the reserves would breach the threshold within a few months.
However, we would take these estimates with a pinch of salt. The authors themselves were
quick to point out that this estimation methodology was merely intended to provide
guidance at the most general level, something that has already been lost in translation in
related private sector research reports. Furthermore, the estimates were based on past data
that includes small/medium sized economies running large current account deficits, hardly
an appropriate comparison to the world’s second largest economy, with a $293 billion
current account surplus constituting 3% of GDP. Finally, the estimate figures vary widely
according to the assumptions one makes. For example, should China actually implement
temporary capital controls that effectively restrict most domestic capital flight (not
implausible for a state-owned financial system), the so-called threshold actually falls to less
than $700 billion.
In a worst–case scenario, while we acknowledge the considerable damage to market
sentiment devaluation might cause, we still struggle to see how this would negatively impact
the fundamentals of the Chinese economy given its relative lack of reliance on external debt.
One can talk about how a yuan devaluation might lead to deflation in the developed
economies, but if the yuan devaluation is a one-off, then unless China continues to devalue
the yuan at the same pace every year from now on (again, highly unlikely), the bout of
1
Assessing Reserve Adequacy, February 2011 - IMF
In Focus 12 February 2016
4
deflation will only be transitory simply due to base effects. Furthermore, we struggle to see
how supply driven deflation, particularly of the scale suggested here, would materially impact
the real economy in a negative manner. Central banks would most likely reduce the pace of
rate hikes, but it does not necessarily change our core view of moderate economic growth in
the medium term.
Conclusion
Of course, this does not mean that the Chinese authorities can afford to be complacent. The
biggest threat to the Chinese economy in our view, is not capital flight, but the slow pace of
economic reforms needed to improve capital allocation, reduce industrial overcapacity, and
rebalance the economy. In fact, the challenges that lie in implementing these reforms are
likely far greater than those posed by net capital outflows. What this does mean however, is
that fears regarding capital flight are likely overblown, and foreign investors have not
abandoned China en masse, yet. Despite its impressive economic record, China is still a long
way from achieving the levels of prosperity its people think it deserves (Figure 9), and should
continue to be an attractive destination for foreign investment in the decades to come
(Figure 10). The long run trajectory of capital flows into China is likely to be positive. For now,
the Chinese can afford to spend their New Year holidays in peace, with a cautiously
optimistic outlook for what the New Year would bring. As for our readers, an internationally
diversified portfolio across multiple assets still remains the best defence against fears
plaguing the market right now.
Hao Ran Wee
Research Analyst
[email protected]
In Focus 12 February 2016
5
Christian Theis, CFA +44 (0)20 3555 8409
[email protected]
Market calls – summary
Macro economy summary


Not much is expected of the world in terms of growth or
inflation as we look into 2016. Many worry that the next US
and global recession is imminent, with a turbulent start to
the year for capital markets helping to confirm such fears.
We believe such worries underestimate the ability of the US
consumer to shoulder much of the burden for continuing
global economic growth, particularly with the US job market
remaining solid, robust consumption and helpful fuel costs.
The US consumer is no longer shouldering that burden alone
either, with Europe looking increasingly ready to play its part.
Here too, unemployment and credit provision are moving in
the right direction.
Investment conclusions
1. Strategically: corporate securities preferred to
government, and stocks to bonds

There remain plenty of unfulfilled economic
opportunities to exploit for the corporate sector.
Bonds look expensive, with positive real returns likely
hard to achieve even if inflationary pressures remain
benign.
2. Tactically: we remain overweight developed equities

Continuing economic growth, as well as the reduced
influence of commodity earnings may see quoted
sector corporate earnings surprise market
expectations positively this year.

Of course, there is much to worry about around the world, there always is. China will continue to loom large in investor’s
imaginations while still plunging oil prices will no doubt claim more casualties yet.

However, we see the current economic cycle having further to travel and would continue to invest accordingly.
Total returns across key asset classes
0.1%
0.1%
Cash & Short-maturity Bonds
1.4%
Developed Government Bonds
2.8%
-0.2%
Investment Grade Bonds
0.6%
-4.3%
High Yield and Emerging Markets Bonds
-1.4%
-0.9%
Developed Markets Equities
-11.5%
-14.9%
Emerging Markets Equities
Commodities
-10.1%
-24.7%
-5.8%
-0.8%
Real Estate
-9.0%
-3.6%
Alternative Trading Strategies*
-4.4%
2015
2016 (through 11 February 2016)
*As of 10th February; Asset classes in USD and represented by indices as published in Compass February 2013. Source: FactSet, Barclays
In Focus 12 February 2016
6
Asset class summary
Fixed income
Some returning wage
inflation is central to our
current tactical posture
While the most recent US import price data suggest that we may be waiting a little longer for
the return of more durable inflation, we still see wage pressures picking up as the year
progresses, which may start to shape outer year forecasts a little more forcefully. Even if
inflationary pressures remain benign, we suspect that fixed income investors (particularly
those focusing on high quality government and corporate debt) will have to work very hard
from these levels to make positive real returns.
Of the big sovereign markets, we think the euro area can continue to relatively outperform in
what we still think will be a testing time for most bonds: we expect recent gains will
eventually be reversed.
Junk credit is one area of tactical interest at the moment, with yields in the ex energy space
now consistent with a rise in defaults that we see as unlikely in the context of our view of the
immediate prospects for the US economy. With oil prices still soft, and experts bidding for
the lowest revised forecast, pressure on energy credits is likely to increase from here.
Equities
Our preference for
Europe ex-UK equities
remains in place…
We still advise investors not to underestimate the US consumer, particularly with real
disposable income growing at such a healthy pace. This may surprise those again calling for
US profit margins to continue rolling over. Such forecasts may both understate the negative
effect of energy sector earnings over the last year and a half and overstate its future role
given the sector’s now much diminished contribution to quoted index earnings.
Our favoured developed equity regions remain for the moment the US and Europe ex-UK.
With regards to the US, earnings expectations look achievable and valuations unremarkable,
while the reduced influence of energy sector earnings should be helpful as noted above.
Within Emerging Market Equities, Asia remains our preferred region, with Korea, Taiwan and
China (Offshore) our highest conviction country bets on a strategic basis. The expected pick
up in global trade is central to this view.
Foreign exchange
We continue to favour USD and expect it to outperform most other G10 currencies in 2016
as monetary conditions in the US and Euro zone continue to diverge. Some caution is
warranted with regards to USD given market re-pricing of rate hike prospects. We remain
cautious on emerging markets FX and the EUR.
Commodities
Our tactical underweight remains in place with US monetary normalisation and a less
resource hungry China both expected to be headwinds for a while yet.
Investors are likely best served by tilting their commodity exposure towards oil and away
from gold where possible, with the latter still particularly vulnerable to impending US interest
rates. We see oil prices drifting higher over the coming 12 – 18 months as the market’s worst
fears on China fail to materialise and a smaller than suspected surplus is worked through.
In Focus 12 February 2016
7
Equities
MSCI indices
Yield
1 Week
YTD
5Yr Ann.
Global Market
Capitalisation
(%)
Developed markets
US
Europe ex UK
UK
Japan
Asia ex Japan
Emerging markets
2.7
2.3
3.3
4.4
2.1
2.9
3.0
-5.1
-4.7
-5.9
-6.9
-4.7
-2.5
-3.6
-11.5
-10.9
-13.2
-12.8
-12.3
-11.0
-10.1
4.0
8.0
0.0
-0.5
1.2
-1.4
-5.8
90.2
53.3
15.3
6.6
8.0
8.5
9.8
Total Return Performance
1
P/E ratio (x)
EPS growth (%)
2015
2016
2015
2016
LTM1
10 Year Ave.
LTM1
6.1
6.7
-2.9
-6.7
71.8
8.5
10.6
9.8
8.8
14.1
9.0
8.6
13.4
10.9
15.9
16.6
16.0
14.0
14.9
12.2
11.1
14.5
15.2
14.0
12.9
13.7
10.8
10.0
15.8
16.6
14.9
15.1
14.7
11.6
11.4
15.0
15.7
13.6
12.3
n/m
13.8
12.5
LTM = Last Twelve Months, i.e. trailing. Source: FactSet, Datastream, Barclays
Fixed income
Total Return Performance
Index
Global inv. grade
Financials
Industrials
Utilities
High yield global
US
Europe
US 10Y
Euro 10Y
UK 10Y
Yield
1 Week
YTD
5Yr Ann.
3.0
2.7
3.3
2.9
9.3
10.1
6.4
1.6
0.2
1.3
0.2
-0.3
0.4
0.9
-2.3
-2.8
-1.9
2.0
1.3
2.6
0.6
0.1
0.6
2.6
-4.0
-5.2
-3.5
5.9
5.1
6.3
4.7
5.1
4.4
5.6
4.7
3.3
6.9
6.5
8.5
8.1
Key Fixed Income Indices (31-Dec-14=100, USD Hedged)
105
100
95
31-Dec 28-Feb 30-Apr 30-Jun 31-Aug 31-Oct 31-Dec
US 10 Year Government
Global IG
Global high yield
Performance represents local currency/USD hedged returns.
Commodities
Total Return Performance
DJ-UBS
Price Level
1 Week
YTD
5Yr Ann.
-8.4
-21.4
-24.3
-12.4
-22.7
-22.6
-5.1
-4.2
-16.0
-5.9
-6.0
-16.1
7.4
16.8
-5.0
Energy
Brent crude
30.96 $/bbl
Industrial metals
Copper
4,454 $/tonne
Precious metals
Gold
1248.1 $/oz
Agriculture
Corn
3.54 $/bushel
Commodities
Key Commodity Indices (31-Dec-14=100, USD)
105
95
85
75
65
7.8
17.7
-2.2
55
-1.7
-3.0
-11.8
-2.3
0.4
-12.1
-2.9
-5.8
-14.5
45
31-Dec 28-Feb 30-Apr 30-Jun 31-Aug 31-Oct 31-Dec
Overall
Ener.
Ind. met.
Prec. met.
Agri.
Foreign exchange
Spot Price Performance
Forecasts
Forecasts vs. Forward
Cross
Spot
1 Week
YTD
5Yr Ann.
Q1 16
Q2 16
Q4 16
Q1 16
Q2 16
Q4 16
Spot at
forecast
EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD
1.13
112
1.44
0.97
1.40
0.71
0.67
1.6
-4.5
-1.0
-2.4
2.1
-2.1
-0.7
4.4
-7.0
-2.0
-2.8
0.6
-2.7
-2.5
-3.5
6.1
-2.0
0.0
7.2
-6.7
-2.6
1.07
123
1.47
1.04
1.36
0.68
0.63
1.03
123
1.43
1.09
1.37
0.66
0.61
0.95
120
1.42
1.20
1.40
0.63
0.59
-5.9%
10.3%
1.8%
7.3%
-2.7%
-3.5%
-5.1%
-9.7%
10.6%
-1.0%
13.0%
-1.9%
-6.0%
-7.6%
-17.3%
8.8%
-1.9%
25.8%
0.3%
-9.6%
-9.8%
1.09
121
1.44
1.02
1.40
0.71
0.65
EUR/JPY
EUR/GBP
EUR/CHF
EUR/SEK
EUR/NOK
127
0.79
1.10
9.49
9.72
-3.0
2.6
-0.9
1.0
2.5
-2.9
6.6
1.5
3.6
1.1
2.3
-1.5
-3.5
1.6
4.2
132
0.73
1.11
9.20
9.15
127
0.72
1.12
9.00
9.10
114
0.67
1.14
8.80
9.00
4.0%
-7.3%
0.7%
-3.0%
-6.2%
0.1%
-8.8%
1.8%
-5.0%
-7.0%
-10.0%
-15.6%
4.0%
-7.1%
-8.5%
132
0.76
1.11
9.16
9.63
GBP/JPY
GBP/AUD
GBP/NZD
GBP/CAD
GBP/CHF
162
2.04
2.16
2.02
1.41
-5.4
1.1
-0.3
1.1
-3.4
-8.9
0.7
0.5
-1.4
-4.8
3.9
5.0
0.6
5.0
-2.0
180
2.16
2.33
1.99
1.52
176
2.17
2.35
1.96
1.56
170
2.25
2.40
1.99
1.70
11.7%
5.4%
7.1%
-1.4%
8.6%
9.5%
5.4%
7.4%
-2.9%
11.9%
6.5%
8.4%
8.5%
-1.5%
23.1%
174
2.03
2.22
2.02
1.47
Latest forecasts published 2nd February 2016. Source for all figures on this page: FactSet, Datastream, Barclays.
All data as of close of business (COB) 11th February and in USD unless stated otherwise – see following page for more performance figures.
In Focus 12 February 2016
8
Performance
Total Return Performance
QTD
YTD
1 Year
2 Yr
Ann.
3 Yr
Ann.
5 Yr
Ann.
12m to
11.02.15
12m to
11.02.14
12m to
11.02.13
12m to
11.02.12
2015
2014
2013
2012
2011
-5.5
Equities
-11.5
-11.5
-13.0
-3.3
3.5
4.0
7.4
18.7
13.3
-3.2
-0.9
4.9
26.7
15.8
US
-10.9
-10.9
-11.0
1.2
7.7
8.0
15.2
22.0
14.7
2.7
0.7
12.7
31.8
15.3
1.4
Europe ex UK
-13.2
-13.2
-15.1
-10.3
-0.4
0.0
-5.3
22.8
15.6
-12.5
-0.6
-6.5
27.6
21.3
-15.3
UK
-12.8
-12.8
-20.7
-12.0
-3.6
-0.5
-2.3
15.6
11.2
-1.9
-7.6
-5.4
20.7
15.3
-2.6
Japan
-12.3
-12.3
-4.8
-1.3
4.3
1.2
2.3
16.6
5.3
-11.2
9.6
-4.0
27.2
8.2
-14.3
-11.0
-11.0
-21.1
-5.7
-4.7
-1.4
12.8
-2.6
8.8
-1.1
-9.2
4.8
3.1
22.4
-17.3
-10.1
-10.1
-24.0
-11.0
-10.2
-5.8
4.3
-8.5
4.3
-2.1
-14.9
-2.2
-2.6
18.2
-18.4
0.6
0.6
-1.0
3.1
2.8
4.7
7.3
2.3
7.6
7.8
-0.2
7.6
0.1
10.9
4.8
Financials
0.1
0.1
0.4
3.4
3.4
5.1
6.5
3.5
10.2
5.2
1.4
6.7
2.0
14.4
1.6
Industrials
0.6
0.6
-2.2
2.5
2.1
4.4
7.4
1.3
5.6
10.6
-1.4
7.8
-1.4
8.2
8.0
Utilities
2.6
2.6
-0.1
5.5
4.3
5.6
11.4
2.0
7.0
8.4
-0.6
11.3
-0.8
9.2
6.1
-4.0
-4.0
-5.9
-1.5
1.1
4.7
3.1
6.5
14.9
5.9
-0.7
2.6
6.5
19.2
3.6
US
-5.2
-5.2
-10.9
-4.3
-0.4
3.3
2.9
7.7
12.7
5.8
-4.5
2.5
7.4
15.8
5.0
Europe
-3.5
-3.5
-3.1
1.4
4.7
6.9
6.0
11.6
19.3
2.1
2.0
5.8
10.5
28.8
-2.5
US 10Y
5.9
5.9
5.3
7.4
3.6
6.5
9.6
-3.5
2.9
19.4
1.0
10.9
-7.6
4.3
16.9
Euro 10Y
5.1
5.1
3.2
9.1
6.9
8.5
15.3
2.5
6.1
16.1
0.2
16.7
-2.6
7.6
13.9
UK 10Y
6.3
6.3
6.2
9.7
6.0
8.1
13.4
-1.2
2.5
20.9
0.8
15.6
-6.1
3.8
18.4
-16.0
Developed markets
Asia ex Japan
Emerging markets
Fixed income
Total Return Performance
Investment grade
High yield global
Performance represents local currency/USD hedged returns.
Commodities
Total Return Performance
Energy
-21.4
-21.4
-50.2
-47.1
-33.3
-24.3
-43.8
5.9
-4.5
-12.3
-38.9
-39.3
5.2
-9.4
Brent crude
-22.7
-22.7
-55.0
-52.6
-39.6
-22.6
-50.1
-1.8
5.5
19.3
-45.6
-47.6
7.2
7.6
16.8
Industrial metals
-4.2
-4.2
-25.7
-17.4
-18.1
-16.0
-8.2
-19.3
-7.4
-18.0
-26.9
-6.9
-13.6
0.7
-24.2
Copper
-6.0
-6.0
-21.7
-21.2
-19.3
-16.1
-20.8
-15.3
-4.8
-16.8
-25.1
-16.6
-8.8
5.0
-24.4
Precious metals
16.8
16.8
-0.5
-4.7
-12.4
-5.0
-8.8
-25.8
-6.0
22.6
-11.5
-6.7
-30.8
6.3
4.6
Gold
17.7
17.7
1.9
-2.0
-9.2
-2.2
-5.7
-22.2
-5.2
26.1
-10.9
-1.7
-28.7
6.1
9.6
Agriculture
-3.0
-3.0
-15.1
-15.2
-13.8
-11.8
-15.2
-11.0
4.0
-20.1
-15.6
-9.2
-14.3
4.0
-14.4
Corn
0.4
0.4
-16.5
-18.0
-21.3
-12.1
-19.5
-27.4
22.6
-12.1
-19.2
-13.3
-30.3
19.0
1.1
Commodities
-5.8
-5.8
-27.2
-24.2
-19.2
-14.5
-21.1
-8.2
-2.9
-10.8
-24.7
-17.0
-9.5
-1.1
-13.3
EUR/USD
4.4
4.4
0.3
-8.9
-5.4
-3.5
-17.3
2.2
1.4
-2.7
-10.2
-12.2
4.5
1.6
-3.2
USD/JPY
-7.0
-7.0
-7.1
4.5
6.2
6.1
17.6
9.6
20.3
-6.9
0.3
14.1
21.6
12.4
-5.1
GBP/USD
-2.0
-2.0
-5.4
-6.4
-2.7
-2.0
-7.4
5.2
-0.6
-1.6
-5.5
-5.9
1.9
4.6
-0.7
USD/CHF
-2.8
-2.8
5.0
4.3
1.9
0.0
3.6
-2.7
0.2
-5.6
0.7
11.7
-2.8
-2.1
0.3
USD/CAD
0.6
0.6
10.5
12.5
11.6
7.2
14.6
9.7
0.6
1.2
19.9
9.0
6.7
-2.2
2.5
AUD/USD
-2.7
-2.7
-8.2
-11.5
-11.7
-6.7
-14.6
-12.1
-3.8
6.6
-11.1
-8.5
-13.8
1.3
0.0
NZD/USD
-2.5
-2.5
-9.6
-10.4
-7.2
-2.6
-11.3
-0.4
0.9
8.9
-12.4
-5.0
-0.2
5.8
-0.1
EUR/JPY
-2.9
-2.9
-6.7
-4.8
0.5
2.3
-2.8
12.0
22.1
-9.4
-9.9
0.2
27.0
14.1
-8.2
EUR/GBP
6.6
6.6
6.1
-2.7
-2.7
-1.5
-10.8
-2.9
2.0
-1.1
-5.0
-6.7
2.6
-2.9
-2.5
EUR/CHF
1.5
1.5
5.4
-5.0
-3.5
-3.5
-14.4
-0.5
1.7
-8.2
-9.6
-1.9
1.5
-0.6
-2.9
EUR/SEK
3.6
3.6
0.0
3.9
3.5
1.6
8.0
2.6
-2.7
0.3
-3.3
7.0
3.2
-3.6
-1.3
EUR/NOK
1.1
1.1
12.5
7.8
9.6
4.2
3.4
13.3
-2.9
-4.2
6.0
8.5
13.9
-5.3
-0.6
GBP/JPY
-8.9
-8.9
-12.1
-2.2
3.3
3.9
8.9
15.3
19.7
-8.3
-5.2
7.4
23.9
17.5
-5.8
GBP/AUD
0.7
0.7
3.0
5.7
10.2
5.0
8.4
19.7
3.4
-7.7
6.3
2.9
18.2
3.3
-0.8
GBP/NZD
0.5
0.5
4.6
4.5
4.9
0.6
4.4
5.7
-1.4
-9.6
7.9
-0.9
2.1
-1.1
-0.6
GBP/CAD
-1.4
-1.4
4.5
5.3
8.6
5.0
6.1
15.4
0.0
-0.4
13.4
2.6
8.7
2.3
1.7
GBP/CHF
-4.8
-4.8
-0.7
-2.4
-0.8
-2.0
-4.1
2.4
-0.3
-7.1
-4.8
5.2
-1.0
2.4
-0.4
Foreign exchange
Spot Price Performance
Source for all figures on this page: FactSet, Datastream, Barclays.
All data as of close of business (COB) 11th February and in USD unless stated otherwise.
In Focus 12 February 2016
9
Barclays key macroeconomic projections
Figure 1: Real GDP and consumer prices (% y-o-y)
Real GDP
Consumer prices
2015F
2016F
2017F
2015F
2016F
2017F
Global
3.1
3.3
3.7
2.1
2.4
2.6
Advanced
1.8
1.8
2.0
0.2
0.6
1.8
Emerging
4.1
4.3
4.9
5.0
5.0
3.7
United States
2.4
2.2
2.5
0.1
0.9
2.2
Euro area
1.5
1.6
1.8
0.0
0.1
1.3
Japan
0.6
0.5
1.1
0.5
0.0
1.6
United Kingdom
2.2
1.9
1.6
0.0
0.9
1.7
China
6.9
6.0
5.8
1.4
1.6
1.8
Brazil
-3.8
-2.8
0.6
9.0
8.2
5.5
India
7.4
7.9
8.2
4.9
5.2
5.1
Russia
-3.7
-1.0
15.5
8.5
↓
↓
1.5
↓
↑
6.8
Source: Barclays Research, Global Economics Weekly, 5 February 2016
Note: Arrows appear next to numbers if current forecasts differ from previous week by 0.2pp or more. Weights used for real GDP are based on
IMF PPP-based GDP (5yr centred moving averages). Weights used for consumer prices are based on IMF nominal GDP (5yr centred moving
averages). There can be no guarantees that these projections will be achieved.
Figure 2: Central bank policy rates (%)
Forecasts as at end of
Official rate
% per annum (unless stated)
Current
Q1 16
Q2 16
Q3 16
Q4 16
Fed funds rate
0.25-0.5
0.25-0.5
0.5-0.75
0.5-0.75
0.75-1.0
ECB main refinancing rate
0.05
0.05
0.05
0.05
0.05
Bank of Japan overnight rate
0.10
-0.10-0.10
-0.10-0.10
-0.10-0.10
-0.10-0.10
Bank of England bank rate
0.50
0.50
0.50
0.50
0.75
China: 1y bench. lending rate
4.35
4.10
3.85
3.85
3.85
Brazil: SELIC rate
14.25
14.25
14.25
14.00
13.00
India: Repo rate
6.75
6.75
6.25
6.25
6.25
Russia: One-week repo rate
11.00
10.50
9.50
9.00
9.00
Source: Barclays Research, Global Economics Weekly, 5 February 2016
Note: Rates as of COB 5 February 2016.There can be no guarantees that these projections will be achieved.
In Focus 12 February 2016
10
Markets in a nutshell
Global real GDP
140 Real GDP (Index of logarithm, 1960=100)

Growth is the norm, not the
exception.

Most years, world output grows
because of the simple interaction of
new technology and the learning
curve.

The inference is that you have to find
good reasons for betting against that
trend and not with it, as has been the
prevailing wisdom in the aftermath of
the great financial crisis.

The future is of course unknowable.
However, in addition to being able to
suggest that it is more likely that the
world will grow than not, we can also
point to historic performance of the
major asset classes relative to cash
and both nominal and real GDP as an
argument for both diversification and
being invested in the first place.

As our colleagues in Behavioural
Finance are regularly at pains to point
out, it is not so much about timing
the market but time in the market.
YoY (%) -100 
The close positive correlation
between oil prices and equity
markets suggests that falling oil
prices are viewed as both an indicator
of weak aggregate demand and a
harbinger of cycle ending distress.
130
120
Global
110
100
1970-'79
1980-'89
1990-'99
2000-'09
Source: Datastream, Barclays
Growth of global GDP and asset classes
180
Index (USD, logarithm,1973=100)
160
Real GDP
Nominal GDP
Equities
140
Bonds
Cash
120
100
80
1970-'79
1980-'89
1990-'99
2000-'09
Source: Datastream, Barclays
Lower oil prices are a positive for global economy
5 YoY (%)
G7 real GDP (lagged 6 quarters)
4
Brent crude oil (rhs)
-50
3
0
2
We disagree. We suspect that lower
oil prices will eventually be viewed as
a significant positive for the world
economy.

The relationship shown here between
inverted oil prices and lagged G7 real
GDP suggests we may be on the
cusp of seeing the benefits more
visibly.
50
1
0
100
-1
-2

150
1990-'94
1995-'99
2000-'04
2005-'09
2010-'14
Source: Datastream, Barclays
In Focus 12 February 2016
11
How long until US consumers start to spend their increased income again?
6
Year on year growth (%)
4
2

The consumer is the primary
beneficiary of lower oil prices.

Falling oil prices are akin to a free
fiscal transfer to the population,
leading to higher disposable incomes.

While this boost to US incomes has
yet to show up more forcefully in
consumption, we do not think we will
be waiting long, suggesting that
many investors are turning negative
on the prospects for US and global
economic growth at just the wrong
moment.

Similarly, those calling for an
imminent collapse in the Chinese
economy may be wide of the mark.

Historically, the growth rate of
narrow money supply (M1) has been
a reliable indicator of turning points
in major economies, with M1 growth
usually falling close to zero before a
recession.

This does not seem to be the case
with China as shown here, reinforcing
our view that a hard landing for the
Chinese economy is not around the
corner.
0
-2
US real disposable personal income
-4
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
Source: Datastream, Barclays
Monetary data suggests that turning point is not imminent
Year on
year (%)
30
China money supply - M1
20
10
0
'09
'10
'11
'12
'13
'14
'15
Source: Datastream, Barclays
In Focus 12 February 2016
12
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In Focus 12 February 2016
13