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Today’s Speakers
Stuart Cowan Chartered FCSI
Investment Director
“Welcome & Introduction”
Peter Robertson BA (Hons)
Chartered FCSI
Senior Investment Manager
“Global Economic Outlook”
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Disclaimer
Where Ramsey Crookall has expressed views and opinions, these may change. Where
markets and securities are mentioned in this document they do not necessarily represent a
specific portfolio holding and do not constitute a recommendation to purchase or sell. This
does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer
is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.
The value of investments and any income will fluctuate (this may partly be the result of
exchange rate fluctuations) and investors may not get back the full amount invested.
Ramsey Crookall and Co Limited is licensed by the Isle of Man Financial Supervision
Commission.
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QE to Infinity and beyond
Global markets in 2014
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Today’s Presentation
•
Intro - too much Debt
•
Quantitative Easing and unconventional measures:
United States
Winners and losers
Abenomics
Europe
UK
•
GDP forecasts
•
•
The market outlook
Themes for 2014
•
Conclusion
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Debt
•
Budget deficits have fallen over the last 5 years,
due to austerity
•
But overall debt levels have continued to rise
•
And interest rates are at historically low levels
•
Governments would love to inflate away the debt
Sovereign
Debt
Global
Banking
System
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Corporate
and
consumers
US Oct 2013:
$17.07 trillion
UK total public
sector debt:
£1.2trn
EU total public
sector debt:
€8.75trn
Japan total
public sector
debt: $10trn
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Quantitative easing and other ‘unconventional measures’
Aim – stimulate the economy when conventional measures exhausted:
•
Zero rate interest policy (ZIRP)
•
QE: - open market operations
•
Forward guidance:
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‘Unconventional measures’ - $4.7trn so far and counting
Total assets on central bank balance sheets Q2 2013 (in USD)
Source: Mckinsey 2013
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QE – a quick example; Fed buys a Treasury bond from bank
Before
Bank A
Assets
Reserves
Loans
Treasury
50
20
40
Liabilities
Deposits
Capital
100
10
Assets
Treasury
0
Fed
Liabilities
Bank A Reserve A/C
0
40
Fed
Liabilities
Bank A Reserve A/C
40
After
Bank A
Assets
Reserves
Loans
Treasury
90
20
0
Liabilities
Deposits
Capital
100
10
Assets
Treasury
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QE - the US experience
The FOMC’s ‘dual mandate’: the goals of maximum employment, stable prices and moderate long-term
interest rates’.
•
Under Bernanke, Fed Balance sheet has risen from $800bn
in 2007 to over $4 trn:
•
QE1 (sept 2008): $1.7trn (mortgage backed secs, commercial paper lending facility)
•
QE2 (Oct 2010): $600bn (long term Treasury bonds)
•
Operation twist (Sept 2011) : sell short dated bonds, buy longs
•
QE3 (Sept 2012) $40bn per month MBS
•
QE infinity (Dec 2013): increase open ended purchases from $40bn to $85bn per mth
How has this stimulus impacted on the ‘dual mandate’ and these other goals?
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Inflation/prices
• Fed targets PCE 2%
• QE has not caused hyper-inflation
• Inflation remains subdued
• Despite an increase in consumer
credit:
• Credit cards
• Car loans
• Personal loans
total outstanding; $3trn ($2.6trn
2008)
Rather than stimulating
growth (and inflation), is the
Fed ‘fire-fighting’ deflation?
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Most of the QE money is in
the banking system
• Banks sell assets to Fed,
credits bank reserve
accounts at Fed
• Fed pays banks 0.25%
interest on excess reserves
• Maintaining reserves has
little influence on bank’s
ability to lend….
• ….that’s a function of
consumer and business
demand for credit
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Unemployment
• The ‘official’ rate is trending lower
• But remains above the Fed’s 6.5%
target
• A lagging indicator
• Subject to revision
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QE and long term interest rates
• Mortgage rates have benefited from
QE
• But have risen by over 25% in the
last 12 months.
• Long dated Treasury bond yield has
fluctuated during periods of QE and
has, if anything, trended higher
during these periods.
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QE and growth
• Growth in the US was trending
lower before the credit crisis
• US economy remained in
recession for much of QE1 (Nov
08- Mar 10)
• It was a deep recession but
economic growth recovered in
2010 and got back to pre Crisis
levels.
•
QE1 brought some stability
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QE: winners and losers
Government:
lower borrowing costs, ‘rolling credit
facility’ from Central bank holdings
Collective benefit $1.4 trn from lower
borrowing costs
$350bn remitted to US Treasury since ‘09
• Banks
Fed provided solvency and restored confidence.
Interest paid on excess reserves held with Fed.
• Borrowers:
low interest rates, low real borrowing costs
• Exporters:
initially benefitted from weaker currency
• Investors:
falling bond yields initially, rising stock markets
• Biggest losers have been savers –
Savings rates decimated
Negative real returns
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Since the introduction of QE in the US
•
Short term interest rates have stayed at historically low levels
•
Bond yields have fluctuated with the timing of different phases
of QE but have not been controlled by the Fed
•
The dollar weakened initially – helping exports
•
Potential ‘USD carry trade’ – significant capital inflows in to
higher yielding emerging markets
•
CPI inflation has remained low – no ‘hyper-inflation’
•
The Fed’s aggressive stance and forward guidance has improved ‘confidence’
•
And a renewed appetite for risk. Highest inflation in asset prices (stocks, housing)
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US Fed Funds
Bouyant stock market
• Fed support has given
investors confidence
• Better relative value vs
bonds
• Share buy backs
2011:
2012:
2013 to Q3:
$405bn
$399bn
$344bn
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US
Housing
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Tapering
• Fed recently announced a $10bn reduction in its monthly
asset purchases to $75bn – still extremely accommodating
policy
• Further tapering ‘data dependent’
• Assume an improving economy:
Lower budget deficit
Lower unemployment
Higher Government revenues via taxes
Consumer/business demand for credit – higher bank
lending
• Options : Sell bonds back to banks
Reduce interest payments on reserves
Abandon QE via progressive scale-back
Retain bond interest on residual holdings
New laws forcing banks and pension schemes
to hold more Govt debt
Don’t expect any of these to happen in the immediate future
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Japan and ‘Abenomics’ – origins in Fukushima
The solution?
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‘Abenomics’ – the ‘three arrows’
1. Aggressive monetary easing
2. A credible fiscal plan
3. Growth strategy based on structural reform
Aims:
Target inflation rate of 2% pa
Decimate yen – boost exports
Expect: currency wars (competing trading partners will respond)
ultimate failure
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Results so far
•
A notable weakness in
the yen (as hoped)
USD/JPY 104
•
A strong rise in the
Japanese Stock market
But…
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Fiscal Plan
• Debt to GDP 240%
• 24% of revenues to pay debt interest
• Sales tax rise from 5% to 8% April 2014
• Demographics not supportive of GDP
growth
• Ageing population reduces productivity
potential.
• Poor track record in structural reform
• Who will buy Japan’s debt with a known
2% inflation target?
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Eurozone – heading for deflation?
• ECB cut discount rate to 0.25% in Nov 2013 – lowest
level on record
• Deflationary forces persist in the Eurozone
• Inflation reached a 4 year low of 0.7% in October
(below Japan).
• Eurozone unemployment: 12.1% (all time high)
Italy youth: 41.6%
Spain: 26.7% (all time high)
France: 11.03% (16 year high)
• Will ECB consider some form of QE in 2014?
• Bond markets stable since Draghi’s June ’12
‘whatever it takes’ comments
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UK – tentative recovery
• BOE did £375bn of QE – owns 31% of UK gilts
• Potential to do more if we see ‘triple dip’
• Expect more austerity in 2014
• BOE now using forward guidance – no rate rise until
unemployment falls to 7% (currently 7.4%)
• Economy showing tentative signs of recovery
• ‘Help to buy’ supportive of housing market
• UK consumer remains heavily indebted but are taking
on more debt (total net lending rose by £1.5bn in Nov)
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The market outlook
•
Growth forecasts
•
Interest rates/credit
•
Bonds
•
Equities
•
Commodities
•
Currency
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Growth Forecasts
2013
GDP
2013
CPI
2014
GDP
2014
CPI
2015
GDP
2015
CPI
USA
1.6
1.4
2.6
1.4
3.4
1.4
Japan
2.0
0.04
1.2
2.8
1.1
1.9
-0.4
1.5
1.0
1.5
1.3
1.4
UK
1.4
2.7
1.9
2.3
1.9
2.0
G7
1.5
2.5
2.6
1.5
3.3
1.7
Eurozone
Source: IMF World Economic Outlook Sept 2013
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Growth Forecasts: ‘BRICS’
2013
GDP
2013
CPI
2014
GDP
2014
CPI
2015
GDP
2015
CPI
Brazil
2.5
6.3
2.5
5.7
3.1
5.3
Russia
1.5
6.7
3.0
5.7
3.5
5.3
India
3.8
10.8
5.1
8.9
6.3
7.5
China
7.6
2.7
7.2
3.0
7.0
3.0
Source: IMF October 2013
BRIC: recent stock market performance
31.12.2012
% Chg
31.12.2013
Chg %
All time high (date)
60,952
+7.4
51,507
-15.5
73,516 (20.05.08)
1,526
+10.5
1,442
-5.5
2,487 (19.05.08)
BSE Sensex
19,444
+25.8
21,097
+8.7
21,326 (09.12.13)
Shanghai SE
2,233
+3.17
2,115
-7.7
6,092 (16.10.07)
Bovespa
RSTI
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A quick word on China
• The only country in the world that sets
growth targets (7.5% pa)
• Q3 GDP rose 7.7% in Q3 2013
• Investment makes up 56% of GDP
• Most of it funded by debt, local govt,
corporate borrowing: now 200% GDP
• Economy trying to shift from export and
investment led growth to consumer led
(34%)
• Bank assets have ballooned in last 5 years
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The economic outlook
Interest Rates/credit
•
US:
UK:
Eurozone:
0.25%
0.50%
0.25%
interest rates remain at historically low levels
US/UK/ECB ‘Forward guidance’ suggests short term
rates will stay low
•
Must keep an eye on inflation – recovery in consumer credit/borrowing
•
Market rates (bond yields) will provide guidance
•
Will the ECB undertake QE?
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The market outlook - Bonds
•
•
•
Yield%
Jan
2014
3 month
0.49
0.29
6 month
0.46
0.37
1 Year
0.51
0.33
2 Year
0.52
0.48
5 Year
1.11
1.68
10 Year
2.19
2.83
20 Year
2.98
3.38
30 Year
3.19
3.57
Governments still carrying massive debts
Yields on 5-30 year bonds creeping higher (UK, US)
No sign of hyper-inflation. Negative real returns out to 5 yrs
•
Low market rates supportive for corporate borrowers
•
Disparity among European Government bonds to continue in 2014
although spreads have narrowed since Q3 2012.
•
Yield%
Nov
2011
Bonds remain fundamentally expensive
•
•
Maturity
Expect aggressive QE from Japan in 2014
Spreads on high yield debt have fallen, as investors embrace risk and
yield (again)
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Anything with ‘yield’ (source: Financial Times)
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The market outlook - Equities
•
Remain attractive relative to bonds but some caution required
•
Non cyclically adjusted forward PE’s do not look excessively
demanding, nor excessively cheap (FTSE 100 FPER: 12.4x)
•
Dividend yields are attractive (FTSE All Share 3%)
•
Far East Asian and Emerging Markets – various headwinds
•
Markets of developed countries have scope for further gains in 2014
•
But could experience a c5-10% correction, as looking
‘overbought’ short term.
•
UK listed: Focus on dividends, cash flow, low debt,
international revenues. Need to keep an eye on earnings
•
Have some international exposure too
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FTSE 100 Index (Jan 2014)
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The market outlook: Commodities
•
Commodities underperformed developed equity markets in 2013
•
Potential headwinds:
•
Difficult year for precious metals
•
Recent poor weather should support agriculture
•
Future performance growth dependent
Slowdown in China
Stronger US dollar, ‘taper’ concerns
Rising supply expectations
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Gold – Jan 2014
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The market outlook: currency – ‘the race to devalue’ continues
•
Aggressive policy by Japan to deliberately weaken yen- expect
retaliation
•
USD- should strengthen as taper now in play
•
Eurozone – strong due to restrictive nature of EU monetary policy
•
Significant QE (none so far) will weaken the Euro. Watch banking sector
•
Swiss Central Bank has ‘pegged’ SFr to Euro at €1 = SFr 1.20
•
Sterling has benefited from Govt austerity – ‘tackling the deficit’
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Summary of main themes for 2014
•
Tapering of QE in United States – but data dependent
•
US Government debt ceiling
•
Action by ECB to stimulate growth – how will they act?
•
Tensions between Japan and F.E neighbours over Abenomics
•
China – watch the financial sector
•
Geopolitical (Mid East, Japan/China, European Elections, social unrest)
•
Fukushima Unit 4 reactor
•
•
•
Expect pace of global growth to remain below pre-crisis levels – still too much debt
Choice of asset driven by attitude to risk and potential return
Investment portfolios need to remain well balanced by asset class/geography
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Questions
Stuart Cowan Chartered FCSI
Director
Peter Robertson BA (Hons) Chartered FCSI
Senior Investment Manager
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Disclaimer
Where Ramsey Crookall has expressed views and opinions, these may change. Where
markets and securities are mentioned in this document they do not necessarily represent a
specific portfolio holding and do not constitute a recommendation to purchase or sell. This
does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer
is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.
The value of investments and any income will fluctuate (this may partly be the result of
exchange rate fluctuations) and investors may not get back the full amount invested.
Ramsey Crookall and Co Limited is licensed by the Isle of Man Financial Supervision
Commission.
Stockbrokers & Investment Managers
Licensed by the Isle of Man Financial Supervision Commission