Global Macroeconomic & Market Outlook T en Years After The Great Recession – The Great Normalisation Neil Michael Chief Investment Strategist & Senior Fund Manager November 2018 Private & Confidential Crown Agents Macroeconomic & Market Outlook
Executive Summary • September 2018 was the ten year anniversary of the collapse of Lehman Brothers, which started one of the most severe recessions since the Great Depression – what has become known as the Great Recession. • Since then, the global economy has experienced a Great Normalisation – a slow path of normalisation in economic activity, labour markets, inflation and monetary policy. • The US is in the vanguard of the normalisation process, due to being much further ahead in the business cycle and having a positive output gap. Other major economies are not as advanced in their economic normalisation process and so monetary normalisation has much further to go. • One legacy of the Great Recession has been the massive build-up in global debt, which is likely to be at the centre of the next phase of the normalisation process. • For the time being, the normalisation in global economic activity is likely to continue as business sentiment remains fairly solid (helped in part by fiscal stimulus in the US and China) and consumer confidence is buoyant as a result of low unemployment rates, and gently rising wages and house prices. • However, despite continued global growth, momentum is likely to moderate as monetary conditions tighten, fiscal policy fades, trade uncertainty lingers and the business cycle reaches its end-game. • A fairly benign global macroeconomic environment and consequent continued growth in company earnings is likely to remain reasonably supportive for equities. However, more volatility can be expected as we enter the latter stages of the business cycle. • Tighter labour markets and rising wages, as well as increasingly positive output gaps, will continue to put upward pressure on inflation and therefore bond yields. Significant fiscal stimulus in the US and the associated increase in the supply of government bonds, will also be a tailwind for bond yields, as will the normalisation of monetary policy by a number of large central banks. Private & Confidential Crown Agents Macroeconomic & Market Outlook 1
Table of Contents The Great Recession The Great Moderation The Great Normalisation Trade Uncertainty Emerging Market Vulnerabilities Brexit Uncertainty Quitaly? Market Outlook Private & Confidential Crown Agents Macroeconomic & Market Outlook 2
Macro Outlook Private & Confidential Crown Agents Macroeconomic & Market Outlook
The Great Recession & The Great Moderation US Industrial Production & World Equity Market World GDP %YoY & GDP Volatility During Great Recession Source: Bloomberg. Data to Sep 18. Source: Bloomberg. June 2009. Private & Confidential Crown Agents Macroeconomic & Market Outlook 4
Normalisation In Economic Activity Advanced Economies Output Gap Country Output Gaps Source: Bloomberg. Data to Dec 19 (Est). Private & Confidential Crown Agents Macroeconomic & Market Outlook 5
Normalisation In House Prices Average Annual House Price Growth Since Recent Annual House Price Growth (%) The Great Recession (%) Source: Bloomberg. Private & Confidential Crown Agents Macroeconomic & Market Outlook 6
Normalisation In Labour Markets Unemployment Rate Since The Great Recession Annual Wage Growth Since The Great Recession Source: Bloomberg. Data to Aug 18. Private & Confidential Crown Agents Macroeconomic & Market Outlook 7
Normalisation In Inflation Rates Inflation Since The Great Recession Source: Bloomberg. Data to Aug 18. Private & Confidential Crown Agents Macroeconomic & Market Outlook 8
Business Confidence Continues To Be Positive But At a More Moderate Level Global Manufacturing PMI Global Services PMI Source: Bloomberg. Data to Oct 18. Private & Confidential Crown Agents Macroeconomic & Market Outlook 9
Consumer Confidence Is Fairly Strong But Not In The UK Global Consumer Confidence US GDP Growth With/Without Fiscal Cliff Source: Bloomberg. Data to Aug/Sep 18. Source: Citi. Private & Confidential Crown Agents Macroeconomic & Market Outlook 10
Economic Normalisation Means Monetary Normalisation Normalisation of Central Bank Balance Sheets Normalisation of Global Interest Rates Source: Bloomberg. Source: IMF, Haver. Private & Confidential Crown Agents Macroeconomic & Market Outlook 11
What Is “Normal”? Function of “Natural” Economic Growth US Natural Growth Rate versus Trends In US Factors of Production 10 Year Treasury Yield Source: Bloomberg. Data to Dec 19 (Est). Private & Confidential Crown Agents Macroeconomic & Market Outlook 12
Higher Debt Is A Legacy of The Great Recession Global Government Debt (% GDP) Global Non-Financial Private Debt Source: Bloomberg, IMF. Private & Confidential Crown Agents Macroeconomic & Market Outlook 13
Trade Uncertainty Is Material But Lower Than In The Past Share of World Trade Affected by Potential Total US/China Trade Subject To Tariffs Protectionist Measures (%) Source: Bloomberg. Data to Sep 2018. Source: Bloomberg, Deutsche Bank. Private & Confidential Crown Agents Macroeconomic & Market Outlook 14
Trade Uncertainty Is Affecting World Trade & Business Confidence World Trade & Manufacturing PMI Source: Bloomberg. Data to September 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 15
Emerging Markets Are The Most Vulnerable Emerging Market External Economic Fundamentals Source: Bloomberg. Private & Confidential Crown Agents Macroeconomic & Market Outlook 16
China Is Engineering A Soft Landing China Interest Rates & Reserve China Trade-Weighted Exchange Rate & Exports Ratio Requirement Source: Bloomberg. September 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 17
Brexit Continues To Be A Major Source Of Uncertainty For The UK Possible Effect on UK GDP of Possible Brexit Models Possible Brexit Scenarios Private & Confidential Crown Agents Macroeconomic & Market Outlook 18
Some Asset Classes Are More Resilient To A Hard Brexit Scenario Sensitivity of Different Assets To Possible Market Moves After The 2016 Referendum Changes In Macro Variables Source: Bloomberg. Using quarterly data from March 1986 to June 2018. Based on a Source: Bloomberg. regression (estimated line of best fit) of each variable on all the other variables. Private & Confidential Crown Agents Macroeconomic & Market Outlook 19
In All The Gloom Over Increased Protectionism, There Is Also Trade Liberalisation Taking Place EU-Japan Economic Partnership Agreement (17 July 2018): • Accounts for 30% of the world economy. • Covers 86 billion euros of EU exports of goods/services to Japan. • Covers 62 billion euros of Japanese exports to EU. • Covers 37% of world trade by value. • Involves 467 million people. Regional Comprehensive Economic Partnership (RCEP – by end 2018): • Comprises 10 ASEAN countries plus Japan, China, South Korea, India, Australia, & New Zealand. • Covers 39% of world GDP – 50% by 2050. • Covers 40% of world trade. • Involves 3 billion people – 45% of world population. Private & Confidential Crown Agents Macroeconomic & Market Outlook 20
Quitaly? Implicit ECB Back-Stop Plus Primary Budget Balance Cyclically Adjusted Primary Balance Italy vs Eurozone 10 Year Government Bond Yield (% of Potential GDP) Source: Bloomberg. Source: IMF. Private & Confidential Crown Agents Macroeconomic & Market Outlook 21
Market Outlook Private & Confidential Crown Agents Macroeconomic & Market Outlook
Market Performance YTD – US Equities & Oil Outperformed; Longer Dated Bonds & Non-US Equities Underperformed Market Performance % Source: Bloomberg. Data to 31 October 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 23
Government Bonds - Inflation Pushing Up Bond Yields But Growth Momentum Is Moderating Weighted Ave 2Yr Govt Bond Yield & Inflation Weighted Ave 2Yr Govt Bond Yield & PMIs Source: Bloomberg. Data to June 2018. Note: Ave = GDP weighted Average of US, UK, Eurozone, Japan & Canada Private & Confidential Crown Agents Macroeconomic & Market Outlook 24
Longer Term Bond Yields Rising On The Back Of Oil Price UST 10 Year & Oil Price %YoY Source: Bloomberg. Dec 1989 to Oct 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 25
Government Bonds – US Offers the Best Carry & Compensation for Inflation in the Developed World Government Bond Yields 2Yr % Government Bond Yields 10Yr % Source: Bloomberg, Data from 12 Jan 2001 to 5 Oct 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 26
Short Term Bond Yields Being Pulled Up By Fed Funds Rate UST 2 Year vs 1Y1Y Forward vs Fed Funds Rate Source: Bloomberg. Dec 1989 to Sep 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 27
Recommend
More recommend
