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DREXEL UNIVERSIY
LeBow College of Business
The Global Economy and the US Markets
PRESENTED BY
GEORGE TSETSEKOS
Dean Emeritus and Francis Professor of Finance
March 26, 2014
“Linked” Markets…Amplify Crisis
US
Subprime
Crisis
EZ
Sovereign
Debt
Crisis
Global Crisis
Global and U.S. GDP Growth 2000-16
Annual %
Transition: From Crisis to Stability
Crisis in US  Global Amplification
Policy
Responses
Stability
Transition
Challenges during the transition
Normalize monetary conditions
Handle risk/volatility
Transition in USA:
From Crisis to Stability
Crisis in US  Financial Crisis  Low Growth and Unemployment
Policy Responses
Monetary Easing
Stability
Transition
Home Prices Rise,
Helped by Low Inventory
Auto Sales on the Rise
Core Inflation Remains Contained
Net Worth Climbs
as Debt Burden Plummets
S&P Index Performance 2013
Overall Market Performance
Unemployment is Declining
Slow Recovery in USA
Spending Levels still Low
Stalled Velocity of Money
Supports Low Inflation Outlook
US Monetary transition and global impact
Possible Risks with the reduction of the Fed’s
buying program in the near term:




Long-term rates could overshoot
Sharp increases in Bond yields
Volatility
Higher rates may impact investment vehicles
Transition: From Crisis to Stability
EU response
Crisis in US  Banking Crisis in EU  Sovereign CrisisAusterity
Policy
Responses
Stability
Transition
Common Currency
EuroZone 17 Countries
Transitional Issues in the EZ
1. Core Countries vs. Periphery
2. Excessive Corporate Debt
3. Developing Institutions/Architecture of EU
EU: High Unemployment
is problematic
Unemployment and domestic demand
in the periphery
Unemployment Rate (%)
Domestic Demand (volume)
Key Concerns for the Corporate Sector
• Capital flight to safer Euro-zone countries
• Private capital has been replaced by public
sector flows
• Liquidity in the core is not recycled in the
periphery
• Funding asymmetries (corporate costs are very
high)
• Current account imbalances
Flows in Euro Zone Area
Cumulative from 2009Q4 in % of GDP
Challenges for the
Corporate Sector in the Eurozone
•
•
•
•
High Corporate Leverage
Credit Tightening
Revenue and profits contraction
Global Competitiveness
Corporate Debt
Debt - 2002Q1=100
Debt as % of GDP
Corporate Fundamentals
Real Long-term Rates
are still high in the EZ
Real Progress in the Euro Zone?
» Tail risk of break-up/FRAGEMTATION appears very low
» Euro zone recovery VERY SLOW in light of persistently high unemployment and
structural imbalances
» Greece is moving into recovery, encouraging market optimism and foreign
investment
CONSOLIDATED PRIVATE DEBT, % OF GDP
EUROSTAT MACROECONOMICS IMBALANCE PROCEDURE SCOREBOARD
•GREECE’S ANNUAL GDP GROWTH
FORECAST
•Source: GK Research, “Ideas,” September 20, 2013 , World Bank and European Commission (Greece GDP)
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Euro Area
Increases in interest rates in US
• Credit is hindered by financial fragmentation
• Corporate debt is owned by firms with weak
debt servicing capacity; debt overhang
• Banking system will experience loan losses
• Need for Bank Re-Capitalization
• Weak corporate and bank balance sheets
• Asymmetric impact
Emerging Markets and China
Interest Rates and
Capital Flows to EM
Volatility and EM Capital Flows
High Volatility
Low Volatility
EM Growth has decelerated
Growth Forecast for China
Average 7% in next 5 years
China Exports Have NOT Recovered
China’s Consumption is lower
than BRICs/EM
Leverage is Concentrated in
a Few Sectors in China
Emerging Markets
Potential Risks
•
•
•
•
Bond outflows will place at risk corporate borrowing
Financial stability concerns
Economic growth is slowing
Market liquidity is at risk
The Japanese experiment (Abenomics)
• Japan has enacted its stimulus/QE
• Fiscal and structural reforms
• The risk of deflation is persistent
JAPAN: Money Supply and GDP
Global Outlook: Cautiously Optimistic
US: Economic Recovery Poised to Continue at Moderate Pace
» A number of important metrics beat expectations last week
•
Strength in job growth, GDP, auto sales, manufacturing while unemployment fell below 7.0%
» FOMC has decided to begin tapering
» Grand rotation may have begun; money flowing out of bonds and into equities – RISK ON!
» A resilient consumer is well positioned to support recovery
Euro zone: GDP Growth Improving, More Work Ahead
» Promising strides for EU, structural imbalances remain
» Valuations in Europe compelling; pointing toward economic improvement
EMs: Still a Source of Global Growth
» Near-term growth has slowed, but secular stories remain intact
» Growth of EM middle class important long-term theme
Global: Dominant Theme of Synchronized Global Expansion
» Global manufacturing numbers improved significantly
» Recent positive data for Eurozone, Spain, UK, Japan, Indonesia, India, Canada, Australia, Malaysia and Taiwan
» Global economic growth; good for the U.S.!
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US Equity Market Performance
Rising rates Led to Sideways Market
Sector Allocation Considerations for
Rising Interest Rate Environments
•During Periods of Rising
Interest Rates…
•Cyclical sectors
•historically outperform
defensive sectors
•Past performance is no guarantee of future results. Source: Wells Capital “Confidence Runs Through Stock Market. Sectors shown have material differences and represent
segments of the S&P 500. Daily fluctuations in specific market sectors are often more extreme than fluctuations in the overall market.
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Cointegrated Global Markets
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DREXEL UNIVERSITY’S LEBOW COLLEGE OF BUSINESS