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Macro research Ineichen Research & Management (“IR&M”) is an independent research firm focusing on investment themes related to absolute returns and risk management. Kieger Macro Update Executive summary Q1 2016 GDP growth is currently positive and was at around 1.7% y/y in Q2 as well as Q3 2015. This averaged global growth rate has been abnormally stable which we interpret as positive. World economic growth is expected to grow at a rate of around 3.3-3.5% from 2016 to 2017 based on current consensus forecasts. These forecasts seem quite optimistic. India and China are expected to grow this year at a rate of 7.4% and 6.5% respectively. Macro risks: The number of red flags from macroeconomic indicators is rising in general and in the United States in particular. The investment environment has changed over the past three months. Leading economic indicators (LEI) peaked in late 2013/early 2014 and have been falling ever since. The leading indicator for the United States has been falling since August 2014. Purchasing managers’ indices (PMI) are, on average, around 50 which is the border line between improvement and worsening of the manufacturing sector. The average PMI peaked at around 52 at the end of 2013 and has been falling very moderately to around 51 in December 2015. This change is abnormally minor, i.e., the situation suggests stability rather than overall decline. Consumer sentiment has peaked in February 2015 and has been falling, generally. Consumer sentiment in some European economies is high and rising. Inflation: In many industrialised and indebted economies, inflation remains low, or negative, and materially below the target of the monetary authorities. During 2015 the range of average inflation was from -0.04 in January to 0.31 in December. This means during 2015 consumer price inflation, on average, has risen, albeit only very modestly. Monetary policy: The normalisation has begun in the United States. Even if the Fed has started the tightening cycle, the reign of cheap money is not over. Notable: Switzerland is at the brink of recession. IR&M contact: Alexander Ineichen CFA, CAIA, FRM +41 41 511 2497 [email protected] www.ineichen-rm.com Kieger contact: Andre Konstantinow +41 44 444 1851 [email protected] www.kieger.com Provided compliments of: Important Disclosure: Kieger AG has paid Ineichen Research & Management (“IR&M”) for the preparation of this material and is providing it to you for general informational purposes only. IR&M is not affiliated with Kieger AG and has independently prepared this material and the views and opinions expressed herein. Kieger Macro Update Q1 2016 January 2016 Content The macro perspective ........................................................................................ 3 GDP growth: positive and stable ..................................................................... 3 Macro risks: red flags mounting ...................................................................... 5 Leading economic indicators: falling moderately............................................ 8 PMI: around 50 and stable .............................................................................. 9 Consumer sentiment: falling moderately ...................................................... 10 Inflation: very low but rising .......................................................................... 11 Monetary policy: normalisation begins ......................................................... 12 Outlook: consensus mildly positive ............................................................... 13 Exhibit of the quarter: Swiss industrial production ....................................... 14 About IR&M and Kieger AG ............................................................................... 15 Ineichen Research and Management Page 2 Kieger Macro Update Q1 2016 January 2016 The macro perspective “Policymakers who dismiss market moves as reflecting mere speculation often make a serious mistake. Markets understood the gravity of the 2008 crisis well before the Federal Reserve. They gasped the unsustainability of fixed exchange rates in Britain, the UK, Mexico and Brazil while the authorities were still in denial, and saw slowdown or recession well before forecasters in countless downturns.” —Lawrence Summers, Financial Times, 11 January 2016 GDP growth: positive and stable Average real GDP is positive and abnormally stable at around 1.7%. Table 1 shows real year-on-year GDP (seasonally adjusted) for a range of economies. We have colour-coded the data to show i. highs (green) and lows (red), ii. the correlation among economies, and iii. the past and current trend. The arrows show the direction of the latest move. The average for the world is equally weighted. Global economic growth is positive at around 1.7% and this growth rate is abnormally stable Table 1: Global real GDP, SAAR (seasonally adjusted annual rate) Q1 2006 to Q1 2015 Q2 15 Q3 15 Q4 15 r 1.7 1.7 1.7 Average 2.7 1.1 -3.0 2.1 1.2 -4.5 n.a. n.a. n.a. Americas USA Canada Brazil 2.3 0.9 1.6 1.6 1.1 0.6 3.2 2.1 0.8 1.6 1.7 1.1 0.8 3.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Europe UK Switzerland Eurozone Germany France Italy Spain 0.7 7.0 -4.6 7.0 1.9 2.2 2.0 1.6 6.9 -4.1 7.4 2.5 2.7 1.8 n.a. n.a. n.a. n.a. n.a. n.a. 2.0 Asia and RoW Japan China Russia India Australia South Korea Singapore Source: IR&M, Bloomberg. Ineichen Research and Management Page 3 Kieger Macro Update Q1 2016 An equally weighted average of the economies in Table 1 implies a real, average annual growth rate of around 1.7% for the global economy in Q2 and Q3 2015 with estimates for Q4 not yet fully available. The colour-coding reveals that this average is abnormally stable. This means when we average out the extremes such as for example the BRIC economies, the global economy is “tucking along nicely” with very low or no inflation. Brazil and Russia remain in recession. Japan was a couple of days in a technical recession (generally considered two consecutive quarters where quarter-onquarter growth is negative) but the estimates for Q3 got revised upwards into positive territory. (Table 1 shows GDP growth in a year-on-year format.) India has overtaken China as the fastest growing economy in Table 1. However, India’s statistics ministry in January 2015 radically revised its gross domestic product calculation methodology. Despite repeated attempts by the ministry to explain how it changed the method and why, many economists remain suspicious of the new calculations. The revised GDP is controversial as the new growth numbers do not fit with other indicators which suggest the Indian economy is doing reasonably well but not as well as implied by the new GDP figures. All quarterly growth rates for the Eurozone in Table 1 were unchanged or higher in Q3 than when compared to Q2 2015. Spain has abnormally high growth by European standards and has been accelerating uninterruptedly since Q4 2012. Spain is an example where structural economic reforms are actually not just talked about but executed successfully. (The reason the stock market is underperforming other European bourses is because of Spain’s corporate links to emerging Latin America.) Ineichen Research and Management January 2016 Page 4 Kieger Macro Update Q1 2016 January 2016 Macro risks: red flags mounting Low and falling economic growth is a risk to nearly all asset classes and forms of wealth. A red flag popped up during Q3 2015 which we discussed in our last update from October 2015. Although the “red flag” disappeared during the fourth quarter of 2015, it is back and is visualised in the graph below. Figure 1 shows the “path” of an economic indicator for the world economy (horizontal axis) vs an indicator for expectations thereof. Some points are marked in dark blue, including the last three observations. “Red flag zone” refers to H1 08 that should, if history rhymes, give investors ample time to fasten their seatbelts. “History does not repeat itself - at best it sometimes rhymes.” —Mark Twain (1835-1910), American author Figure 1: Global economy and expectations Source: IR&M, Bloomberg, Sentix. Notes: Based on Sentix Economic Indices Global Aggregate (Current Situation and Expectations). Full “path” since 2003 is shown. The latest movement of these two variables point towards the lower left hand corner of the exhibit, i.e., recession. The latest data point (“01-2016”) is quite close to the area we marked as “red flag zone”. This was the area in the Great Recession that would have warned investors ahead of time. History does not repeat, but only rhyme, as the famous quip goes. One other aspect is disturbing: We also measure the magnitude of change related to its own history, i.e., we measure the standard deviation of the latest move. The latest falls were -1.7 and -3.1 standard deviation from their mean. Our interpretation of this is that not only is the direction of the change a red flag; the vehemence of the change too is a warning that not all is well in the global economy. Figure 2 is an economic health check for the US economy. We selected different indicators related to different aspects/parts of the economy including, in the lower part of the table, earnings estimates and price momentum of the stock market; for many the ultimate leading economic indicator. Then we chose a red flag criterion that should function as a warning sign of the next recession. The months where the criterion is met are marked red. The top line counts the red flags. The criteria were chosen to pop a red flag prior to the recession. With some indicators, the red flag is up prior to the Great Recession but not during the recession, e.g., some indicators measuring consumer sentiment or housing. The reason for this is that we introduced a peak, i.e., we measure not the absolute fall Ineichen Research and Management “Those who do not learn from history are doomed to repeat its mistakes.” —George Santayana (1863-1952), Spanish-American philosopher Page 5 Kieger Macro Update Q1 2016 January 2016 of the indicator, but the fall from a certain (high) level. With other indicators the red flag goes up prior to the calamities of H2 2008 and stays up for a long time thereafter, e.g., the leading economic indicator (“LEI”) of the Conference Board (third line under “general economy”) or most indicators on the labour market. 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 Figure 2: Health check of US economy (as of 12 January 2015) Indicator 7 # Red flags General economy ISM PMI,Manuf. ISM PMI,Non-Manuf. LEI (Conf. Board) LEI (Conf. Board) Chicago (CFNAI) Philly Consumer Sent. (Conf. Board) Sent. (UoMichigan) Restaurant perform. Eating out Labour market NFP Jobless claims Unemployment Quit rate Temporary help Housing Housing starts NAHB Construction, non-res. Earnings estimates SPX EPS est. SPX Finan. EPS est. Markets S&P 500 Yield curve Red flag criteria <50 for 2 months and falling* <50 for 2 months and falling* Falling*** DD>5% and falling** <-0.7% for two months <-20 and falling* >93 (avg.) and falling** >85 (avg.) and falling** >100 (avg.) and falling*** Falling*** <0 and falling** >350k and rising* >4.5% and rising** Falling*** Falling*** >1500k and falling** >60 and falling*** >10% y/y and falling Falling*** Falling*** 50day < 200-day mov. avg. Inverted (2Y > 10Y yield) Source: IR&M, Bloomberg. The Restaurant Performance Index is from the National Restaurant Association. “Eating out” is from Bureau of Economic Analysis. Quite rate and Temporary Help are from Bureau of Labor Statistics. Construction is from US Census Bureau. DD=Drawdown from previous peak; CFNAI=Chicago Fed National Activity Index; Philly=Philadelphia Fed Business Outlook; NFP=Non-farm payrolls; NAHB=National Association of Home Builders Market Index; SPX=S&P 500 Index. * Based on three-month moving average. **Based on six-month moving average. *** Based on 12-month moving average. We do not want to sound alarmist, but the investment environment has been changing over the past three months. The number of red flags in this exhibit has risen from three in October to seven in January 2016. We believe with some degree of confidence that the US economy is in its’ second half of the current expansion. It can take many years from the onset of the Fed starting the tightening cycle until the official recession, which is always made public long after the fact, begins. But still, the onset of an expansion this is not. Stock markets around the world had an abnormally negative first trading week in 2016. The main reason was investors’ response to capital flight out of China that manifested itself via a continuous weak Renminbi and continuous or intensified worries about the state of the Chinese economy and its potential impact on the world economy. Some fear there is a credit crisis lurking as the degree of misallocation of capital in China is most likely unprecedented. Saudi Arabia closing its embassy in Teheran did not help to stimulate investors’ high spirits. “Beneath all of the financial turbulence there lurks, in my view, a credit crisis. I fear the worst now.“ —George Magnus, referring to China, Bloomberg, 12 January 2016 Many risk gauges have risen as a result of the difficult one and a half weeks of the new year. One such measure, the VIX that measures implied volatility of index options of the S&P 500 Index and is probably the most often referred to “fear gauge,” is shown in Figure 3 below. The large chart shows the VIX by year since 2008. The small inserted table in the graph shows the average level of VIX since 1990 with a colour-coding whereby the most volatile years are red. We have Ineichen Research and Management Page 6 Kieger Macro Update Q1 2016 January 2016 highlighted two five-year periods, the period from 2003 to 2007, the onset of the Great Recession, and from 2011 to 2015. Figure 3: VIX by year Source: IR&M, Bloomberg VIX rose at the beginning of 2016. The rise was not as extreme as the one in August of last year. However, the current path has a certain resemblance to 2008. The colour-coding of the two five-year periods in the inserted table show a certain resemblance too. Whether this pattern recognition has any merit, we don’t know. It implies that 2016 will be to 2015 what 2008 was to 2007. Ineichen Research and Management Page 7 Kieger Macro Update Q1 2016 January 2016 Leading economic indicators: falling moderately Table 2 shows a selection of leading economic indicators (LEI) for the past ten years. While these leading indicators are often lagging indicators, they do serve a purpose as they often trend continuously in one direction. This means these trending indicators are useful for confirming an existing economic trend, even if the turning points only become apparent slowly. Leading economic indicators peaked in late 2013/early 2014 and have been falling ever since Table 2: Selection of leading economic indicators Dec 2006 to Aug 2015 09-15 10-15 11-15 r 99.9 99.8 99.8 OECD Composite 99.3 99.5 99.2 99.2 99.5 99.3 99.1 United States 99.5 Canada 99.5 Brazil 100.5 99.9 100.7 100.8 101.5 99.5 99.4 100.6 99.9 100.8 100.9 101.5 99.3 99.5 100.6 99.9 100.9 100.9 101.5 99.1 99.6 Eurozone Germany France Italy Spain United Kingdom Switzerland 98.2 98.3 98.4 China 99.9 99.8 99.8 Japan 100.1 100.2 100.4 India 99.9 99.6 99.4 Russia 99.9 99.8 99.7 Australia 101.2 101.3 101.3 South Korea 98.4 98.3 98.3 Indonesia 99.4 99.3 99.1 South Africa 99.4 99.3 n.a. New Zealand Source: IR&M, Bloomberg, OECD. The leading indicator for the whole world, the OECD Composite has peaked at 100.4 in January 2014 and has been falling very moderately ever since. The colour-coding went from light green to light orange. This means the leading indicator for the whole World (first row in the table) went from moderately positive to moderately negative over the past two years. This makes the change comparable to 2011 but not to 2007. In 2007 the changes were much more abrupt. The leading indicator for the United States peaked in August of 2014 and has been in decline ever since. Our interpretation of this fact, together with the ISM Purchasing Manager Index (PMI) in manufacturing being below 50 (see next section), is that the US is further ahead in the business cycle than most other economies. This, together with the fact that the Fed has started to tighten, means that the US has passed the mid-point of this current business cycle. The arrows in the table mark the direction of the latest changes. From the 20 indicators shown, nine had a positive change while eight had a negative change. The biggest surprise is Brazil where the leading economic indicator has been rising from the lows of 99.0 in March 2015. A rising leading indicator in Brazil is somewhat inconsistent with the negative economic as well as political news flow coming out of Brazil. Both indicators in India and Spain have been rising due to, we believe, successfully implemented economic reforms. The leading indicator in Spain has now stopped rising. Ineichen Research and Management Page 8 Kieger Macro Update Q1 2016 January 2016 PMI: around 50 and stable Table 3 shows a selection of global Purchasing Manager Indices (PMI) for the manufacturing sector. The PMIs are diffusion indices and oscillate around 50 between 0 and 100. A reading of above 50 means that more survey participants observed an improvement, a figure below 50 means that there were more survey participants who reported a deterioration. A reading of exactly 50 implies neither positive nor negative change. A colour-coding is applied to show a rising or falling trend but also to distinguish regions with economic strength from those with economic weakness. On average the PMI indices are around 50 and have been falling moderately since early 2014 Table 3: PMI A key feature of the PMI surveys is that they ask only for factual information. They are not surveys of opinions, intentions or expectations and the data therefore represent the closest one can get to “hard data” without asking for actual figures from companies. 3-year High Low Nov Dec r 54.8 46.0 50.7 50.8 58.1 48.2 55.6 47.5 52.5 43.8 48.6 48.6 43.8 48.2 47.5 45.6 58.6 57.3 54.0 56.5 52.1 55.6 55.8 52.5 49.7 52.8 52.9 50.6 54.9 53.1 51.9 52.1 53.2 53.2 51.4 55.6 53.0 52.6 48.6 50.1 50.3 52.5 49.1 52.6 48.2 48.7 49.1 51.9 50.7 Jan 2013 to Oct 2015 47.9 47.3 46.7 48.1 43.9 44.5 44.2 56.6 48.5 51.7 47.2 52.0 47.6 54.5 48.5 53.2 36.7 52.6 46.1 Source: IR&M, Bloomberg. World average Americas USA (ISM) Canada (Markit) Brazil (Market) Europe UK (Markit) Switzerland (CS) Eurozone (Markit) Germany (Markit) France (Markit) Italy (Markit) Spain (Markit) Asia Pacific Japan (Markit/JMMA) China (Caixin) Russia (Markit) India (Markit) Australia (AIG) South Korea (Markit) The average PMI in Table 3 was 50.8. This compares to 50.4 in both June and October of last year. In other words the changes are minor on an average level. The most important PMI-related data point is the United States falling below 50 in November. This fall below 50 in combination with the Fed kicking off the tightening cycle is a clear indication that the US economy is now beyond the mid-point of the business cycle. The exact date of the start of the next recession is, of course, still anyone’s guess. The PMI falling below 50 is a very unreliable guide. The last recession of 2008/2009 started three and a half years after the first rate hike. While all shown PMIs in the Americas are below 50, all PMIs in Europe are above 50. Europe was much slower in recovering from the Great Recession and now could be at a point in the business cycle where the US was one or two years ago. Overall, six PMIs are below 50, same as in our update from three months ago. Italy has been rising strongly and its’ manufacturing PMI is now the highest in the table and is also the only indicator at a three-year high. Brazil is just off its three-year low. Ineichen Research and Management Page 9 Kieger Macro Update Q1 2016 January 2016 Consumer sentiment: falling moderately Table 4 shows a selection of consumer sentiment indicators for the past eight years. We show all figures in percentile terms. The period high is set to 100 and is shown green. The period low is set to 1 and is red. The table allows comparing a trend of a region or country separately (horizontal view) but also allows a comparison between different economic entities (vertical view). Consumer sentiment is falling Table 4: Consumer sentiment Jan 2008 to Oct 2015 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Nov Dec Jan r 62.2 57.4 57.4 World 77 41 2 82 n.a. 1 n.a. n.a. n.a. Americas USA Canada Brazil 85 59 93 94 62 100 98 90 n.a. 93 92 61 99 100 n.a. n.a. n.a. 93 n.a. n.a. n.a. Europe UK Switzerland Eurozone Germany France Italy Spain 64 n.a. 90 38 64 n.a. n.a. 86 36 43 n.a. n.a. n.a. n.a. n.a. Asia and RoW Japan China India Australia South Korea Source: IR&M, Bloomberg. Average consumer sentiment has peaked in February 2015 and has been falling only moderately since then. Note that we show consumer sentiment in percentile terms. This means a reading of 100 indicates that consumer sentiment is at an eight-year high. Italy and Spain, therefore, have been improving since the last leg of the Euro crisis and are currently at or very close to an eight-year high. When December consumer sentiment is compared to November or October, then consumer sentiment is falling slightly, partly due to a sharp fall in consumer sentiment in South Korea. The US consumer sentiment, arguably the most important, given the size of the US economy and its consumer base, rose nearly continuously from July 2014 to June 2015. The US consumer was in the 96th percentile (100th=best) in our update from June 2015, fell to the 65th in September and now is back to the 82nd percentile. A sharp fall of US consumer sentiment would be a red flag for nearly everything macro-economic. The manufacturing PMI falling below 50, as mentioned in the previous section, is a negative. However, the services PMI (not shown) is still comfortably above 50. Furthermore, consumer sentiment does not suggest that the important US consumer is in distress. This means the warning signs would be a lot worse if not just the manufacturing PMI was suggesting caution, but the services PMI and consumer sentiment too. Ineichen Research and Management Page 10 Kieger Macro Update Q1 2016 January 2016 Inflation: very low but rising In many industrialised and indebted economies, inflation is low, or negative, and materially below the target of the monetary authorities. Table 5 shows the current annual consumer price inflation for a selection of economies. The first row shows an equally weighted average excluding Brazil and Russia. Table 5: Consumer price inflation Jan 2008 to Oct 2015 11-15 12-15 r 0.30 0.31 Average ex. Brazil and Russia 0.50 n.a. United States 1.40 n.a. Canada 10.48 10.67 Brazil 0.10 -1.40 2.80 0.06 0.20 0.40 0.00 0.70 0.20 -0.30 0.64 -0.20 -0.74 n.a. -1.30 2.30 n.a. 0.20 0.30 n.a. 0.70 0.10 0.00 n.a. n.a. n.a. United Kingdom Switzerland Norway Sweden Eurozone Germany France Netherlands Italy Spain Portugal Ireland Greece 0.30 n.a. Japan 1.50 1.60 China 15.00 12.90 Russia 1.00 1.30 South Korea -0.80 n.a. Singapore Source: IR&M, Bloomberg. Many economies have inflation rates that are still way below their announced target rate or target range. The environment of “wanted consumer price inflation” has not changed. In some cases the inflation rate is negative. This means all the monetary expansion has not resulted in consumer price inflation but in asset price inflation, inflating nearly everything from equities to bonds and from real estate to farm land. Consumer price inflation, as measured in the table above, has been low and stable for quite some time. All the various quantitative easing (QE) efforts and expansion of central banks’ balance sheets have not resulted in a material rise in consumer price inflation. During 2015 the range of average inflation, as in the table above, was from -0.04 in January to 0.31 in December. This means during 2015 consumer price inflation, on average, has risen, albeit only very modestly. Ineichen Research and Management “If we are convinced that our medium term inflation target is at risk, we will take the necessary actions.” —Mario Draghi, Reuters, 1 November 2015 Page 11 Kieger Macro Update Q1 2016 January 2016 Monetary policy: normalisation begins The monetary policy event during the last quarter of 2015 was the Federal Reserve moving from monetary easing to monetary tightening by increasing the overnight rate from 0-0.25% to 0.25-0.5%. One reason for the rate hike was that core inflation had reached the “very-much-wished-for” 2% mark. Never, we believe, was a rate hike as transparently flagged in advance as this time. Ms. Yellen in a speech in Rhode Island on 22nd May: The market’s probability for a further rate hike in March 2016 was around 40% in early January 2016 If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term. The Fed is often criticised for being too late to start the tightening cycle. This time around was no exception. The Taylor Rule, an econometric model that implies where the Fed fund rate ought to be, would have justified a rate hike as early as in 2012 or 2013. However, the Fed looks at different measures. The previous Fed administration used non-farm payrolls, among other variables, as a rough guide as to when to start the tightening cycle. The rate hike of 2004 took place when nonfarm payrolls exceeded 200,000 for three consecutive months. This criterion was met multiple times in the period from 2012 to 2015. The latest three observations to December 2015 were too above the 200,000 threshold. The current rate hike, therefore, is reasonably consistent with the previous administration’s rate hike of 2004. 2015 rate hike consistent with 2004 rate hike Figure 4: Central bank assets Source: IR&M, Bloomberg. Even if the Fed has started the tightening cycle, the reign of cheap money is not over. One proxy for this reign is the total assets of the three largest central banks in the industrialised world, as shown in Figure 4. The Fed’s balance sheet has not been expanding since the end of 2014. However, “the baton of monetary easing” has been passed to the Bank of Japan and the ECB. The expansion of “money,” here broadly defined, continues. Ineichen Research and Management Reign of cheap money remains Page 12 Kieger Macro Update Q1 2016 January 2016 Outlook: consensus mildly positive World economic growth is expected to grow at an annual rate of around 3.1% in 2016 and 2017. Table 6 shows an economic outlook for a selection of countries for the years 2015-2017 including a measure as to how these consensus forecasts were revised over the last two quarters of 2015. We applied a colour-coding to both forecasts and revisions to highlight the extreme values. World economic growth is expected to grow at around 3% Table 6: GDP forecasts and revisions 2014 World Americas United States Canada Brazil Europe United Kingdom Switzerland Eurozone Germany France Italy Spain Asia Pacific Japan China India Russia Australia South Korea Real GDP (y/y, %) Consensus forecasts 2015 2016 2017 Change GDP forecast since 1. Jul 2015 2016 2017 2.43 3.00 3.30 3.50 -0.20 0.10 2.40 2.40 0.05 2.50 1.20 -3.55 2.50 1.80 -2.50 2.40 2.10 1.00 -0.30 -0.40 -3.40 -0.30 2.60 1.90 0.90 1.60 0.40 -0.40 1.30 2.40 0.90 1.50 1.50 1.10 0.70 3.10 2.30 1.20 1.70 1.80 1.40 1.30 2.65 2.20 1.65 1.70 1.65 1.45 1.20 2.20 -0.10 -0.10 -0.15 -0.10 0.20 0.15 -0.05 0.10 0.20 0.20 7.40 6.90 0.50 2.70 3.40 0.60 6.90 7.35 -3.80 2.30 2.60 1.10 6.50 7.40 -0.50 2.60 2.90 0.65 6.30 7.70 1.30 3.00 3.05 -0.30 -0.20 -0.15 -1.00 -0.20 -0.60 -0.10 -0.10 0.10 0.15 -1.00 -0.05 -0.15 -0.20 -0.20 -0.40 Source: IR&M, Bloomberg. Based on consensus forecasts. Overall, this table has not changed much over the past three months. The consensus estimates for the whole world have risen slightly. GDP forecasts are generally low but positive. The stability of the forecasts in itself is positive too. World GDP consensus forecasts for 2016 to 2017 are currently 3.30% and 3.50% respectively. This seems quite optimistic, given that from the economies in the table above; only China and India have GDP forecasts that are higher than that estimate. The equally weighted average from the 2016 and 2017 forecasts from the economies above imply a growth rate of 2.1% and 2.5% respectively. The most severe revisions of GDP forecasts over the past one and two quarters where in economies that are related to commodities, especially to energy. In Brazil all forecasts were revised downwards. Brazil, apart from being in an economic recession, is also currently going through a political, corruptionrelated crisis and is not expected to get out of recession this year. Whether the summer Olympics will change anything on this dire outlook is doubtful. Russia is the second commodity-based economy that is in a recession that is going through a political crisis of sorts, and where GDP forecasts have been falling. Russia too is not expected to get out of recession this year. Ineichen Research and Management Page 13 Kieger Macro Update Q1 2016 January 2016 Exhibit of the quarter: Swiss industrial production Figure 5 shows annual change of industrial production in Switzerland since 1960 and year-on-year real GDP growth since 1966. Figure 5: Industrial production in Switzerland Source: IR&M, Bloomberg. Industrial production: IMF (1960-2004), Federal Statistics Office of Switzerland (2005-date). GDP: IMF (1966-1980), State Secretariat for Economic Affairs (1981-date). Exhibit is based on quarterly data. Recessions (two consecutive negative quarters of y/y GDP) are marked. The trajectory of industrial production in Switzerland has been negative over the past couple of years. The actual, annual, quarterly-published figure was -0.6% in Q1 2015, -2.1% in Q2 and -2.7% in Q3 of 2015. Often, but not always, do falling industrial production and a recession in Switzerland coincide. Falling and year-on-year negative industrial production is not a guarantor for a recession, here loosely defined as negative GDP growth. Switzerland is largely a service economy and other factors matter too. However, two and three consecutive falls pointed towards 5 from 6 recessions; it failed to anticipate the 1991 recession. The latest fall, a -0.3 standard deviation (sd) event that followed a -0.9 sd fall that followed a 1.5 sd fall in Q1 2015, was the third fall of industrial production in a row. There were six false alarms since 1966 based on two consecutive falls. However, there were no false alarms based on three consecutive falls. Industrial production fell for three quarters or more only on six occasions: 1975, 1983, 1993, 2002, 2009, and now. Our interpretation of these historical facts is that the probability of Switzerland falling into a recession within a year is high. Ineichen Research and Management Switzerland at the brink of recession Page 14 Kieger Macro Update Q1 2016 January 2016 About IR&M and Kieger AG IR&M Ineichen Research and Management (“IR&M”) is a research boutique focusing on investment themes related to risk management, absolute returns and thematic investing. IR&M was founded by Alexander Ineichen in October 2009, has an institutional investors’ orientation, and is domiciled near Zug, Switzerland. Kieger AG Kieger is an independent wealth and asset manager. Kieger offers bespoke investment solutions for clients with a long term investment horizon. The team has been managing and implementing multi-asset solutions for institutional investors for almost 15 years and the firm seeks to build long-term partnerships. Kieger’s Headquarter is based in Zurich with a branch office in Lugano and its subsidiary in Luxembourg (CSSF regulated) manages a broadly diversified portfolio of investment funds for its investors. Kieger develops and manages investment solutions that encompass all major traditional and alternative asset classes including a dedicated Health Care Fund management business. Copyright © 2016 by Ineichen Research and Management AG, Switzerland All rights reserved. Reproduction or retransmission in whole or in part is prohibited except by permission. The information set forth in this document has been obtained from publicly available sources, unless stated otherwise. All information contained in this report is based on information obtained from sources which Ineichen Research and Management (“IR&M”) believes to be reliable. IR&M provides this report without guarantee of any kind regarding its contents. This document is for information purposes only and should not be construed as investment advice or an offer to sell (nor the solicitation of an offer to buy) any of the securities it refers to. The information has not been independently verified by IR&M or any of its affiliates. Neither IR&M nor any of its affiliates makes any representations or warranties regarding, or assumes any responsibility for the accuracy, reliability, completeness or applicability of, any information, calculations contained herein, or of any assumptions underlying any information, calculations, estimates or projections contained or reflected herein. Neither this document nor the securities referred to herein have been registered or approved by any regulatory authority of any country or jurisdiction. This material is confidential and intended solely for the information of the person to whom it has been delivered and may not be distributed in any jurisdiction where such distribution would constitute a violation of applicable law or regulation. 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