Download Template August 2012

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
32
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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–
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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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•
•
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•
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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)
–
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]