06/04/20 16 11:52:53 IAPF Conference 2016 Macro view Keith Wade, Economist, Schroders For professional investors and advisers only. Not suitable for retail clients IAPF Annual Investment Conference
06/04/2016 11:52:54 Macro overview 2016: storm warning Key ey q ques estio ions China: heading for recession? • US: heading for recession? • UK: heading for Brexit? • IAPF Annual Investment Conference
06/04/2016 11:52:54 China and oil are driving the markets High correlations at times of stress CNY Y vs s glob obal equi uity m mark rket Oil l vs s global e l equit ity y marke ket Source: Thomson Reuters Datastream, Schroders, 30 March 2016. CNY - Chinese Yuan Renminbi IAPF Annual Investment Conference
06/04/2016 11:53:02 China: heading for recession? Will the real China please stand up? Has gro rowth c h collapsed? Or j r jus ust s slow owed? % y/y y/y, % y/y, % 30 14 14 13 13 25 12 12 20 11 11 10 10 15 9 9 10 8 8 7 7 5 6 6 0 5 5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 GDP Li Keqiang index Schroders Activity Model GDP Source: Thomson Datastream, Schroders Economics Group, 30 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:02 China: now tracking the trade weighted exchange rate CNY policy will impact dollar strength USD/CNY spot Index 6.7 130 6.6 125 6.5 120 6.4 115 6.3 110 6.2 105 6.1 100 6 95 2011 2012 2013 2014 2015 2016 USD/CNY Spot China effective exchange rate, nominal (BIS) (RH Scale) Source: Thomson Datastream, Schroders Economics Group, 30 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:02 CNY: how much control do the authorities have? FX reserves are declining sharply Chi hina na f fore reign e n excha hang nge re reserves Actual, USD, billions 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 USD, billions, monthly actual change 150 100 50 0 -50 -100 -150 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Change in FX Reserves (3 month moving average) Source: Thomson Datastream, Schroders, 30 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:02 Oil price winners and losers The energy tax cut in the US vs the hit to oil and gas capex Price per barrel Count Dollars per gallon % 140 1600 6.5 5.0 1400 4.5 120 6 4.0 1200 100 5.5 3.5 1000 80 5 3.0 800 60 2.5 600 4.5 40 2.0 400 4 1.5 20 200 3.5 1.0 0 0 01 03 05 07 09 11 13 15 96 98 00 02 04 06 08 10 12 14 16 Energy as a % of Disposable Income Brent Crude U$/BBL US Rotary Oil Rigs (rhs) Gasoline Retail Regular U$/GL (rhs) Source: Thomson Datastream, Schroders Economics Group, 30 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:02 US consumers eat much of their gas savings Percent of savings from lower gas prices spent on non-gas categories 2% 73% 2% 6% 4% 5% 33% 5% 6% 7% 10% 1% 32% 6% 7% 18% Source: JPMorgan Chase Institute, Schroders Economics Group, 14 October 2015 IAPF Annual Investment Conference
06/04/2016 11:53:05 Global trade growth stalls EM exports not responding to DM recovery y/y% 20 15 10 5 0 -5 -10 -15 -20 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 World export volumes y/y% Average trade growth Recession Source: Thomson Datastream, Schroders, 30 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:05 China shakes the world? No hard landing, but watch for a wave of deflationary pressure from EM y/y% 6 4 2 0 Deflationary pressures from emerging markets as supply expands -2 Inflationary pressures from emerging markets as demand expands -4 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 US core goods prices UK goods prices Source: Thomson Reuters Datastream, Schroders, The Economist,, 30 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:05 Fed tightening delayed, not dodged US unemployment cycles and real Fed funds rate 5% -2% 4% -1% 3% 0% 2% 1% 1% 2% 0% 3% -1% 4% -2% 5% 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Recessions Unemployment gap (U/E rate minus NAIRU) Real interest rates (Fed funds rate minus core inflation), rhs inv. Source: Thomson Datastream, Schroders Economics Group, 30 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:05 The risk universe Scenarios versus baseline Source: Schroders Economics Group, 20 February 2016 IAPF Annual Investment Conference
Brexit Understanding the risks and implications March 2016 | For professional advisers only. This material is not suitable for retail clients IAPF Annual Investment Conference
06/04/2016 11:53:05 Poor reaction to Cameron’s draft deal with EU Snap polls suggest deal makes voters more likely to vote to leave Source: The Sun, Metro, Daily Mail from 3 February 2016 IAPF Annual Investment Conference
06/04/2016 11:53:05 What are the polls saying? Voting intentions on an EU exit neck and neck Source: ComRes, ICM, ORB, YouGov, BMG Research, Survation, Ipsos MORI Panelbase, Pew Research Centre, Norstat, Populus, TNS-BMRB. Schroders Economics Group. Last survey conducted 24 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:05 Betting markets show lower Brexit risk than opinion polls Betfair implied probability shows a 34% chance of voting to leave January 2016 February 2016 March 2016 Source: Betfair.com, 30 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:05 UK’s top 10 trade partners UK exports and imports as share of total (2012-2014 average) Ire, 3.2% Spa, 2.8% Ita, 3.7% Ita, 2.9% Nor, 3.8% Chi, 3.3% Bel, 4.1% Bel, 3.3% Spa, 4.3% Swi, 3.5% Ire, 5.5% Fra, 6.6% Fra, 6.2% Chi, 6.6% Neth, 6.9% Neth, 6.9% US, 9.3% Ger, 8.5% Ger, 12.3% US, 17.2% EU, 51.8% EU, 44.9% 60% 40% 20% 0% 20% 40% 60% % of total UK imports % of total UK exports Source: ONS, Schroders Economics Group, 3 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:05 The UK’s relationship with the EU Trade, investment and migration Tr Trade: 45% of UK exports go to the EU28 (£23bn, 13% of GDP) • 52% of imports are from the EU (£29bn, 16% of UK GDP) • Inves estmen ent: The EU owns £1.6tn worth of UK assets (FDI £0.6tn, Portfolio £1.0tn) • The UK received £9.4bn (0.6% of GDP) worth of inward FDI per annum from the EU (2011-14 average) • The UK invested £21.8bn (1.6% of GDP) in outward FDI per annum in the EU (2011-14 average) • Migra ration: n: Since 2005, there has been 1.2m net inward migrants from the EU23 • Since 2005, there has been 2.1m net inward migrants from the non-EU countries • 64% of EU inward migrants are arriving for work and 22% for study • Source: ONS, Schroders Economics Group, 3 March 2016. FDI = Foreign direct investment IAPF Annual Investment Conference
Life after Europe What would the UK’s future look like? IAPF Annual Investment Conference
06/04/2016 11:53:05 Life after Europe Options for Brexit After ter lea eaving th the E e EU, th thes ese e are s e som ome e of th the m e mod odel els th the U e UK cou ould fol ollow: European Economic Area membership (Norway, Iceland Lichtenstein) • Full access to EU markets – Still pay 90% of fees, and bound by EU rules on employment, health & safety, transport and the environment – However, no political influence on rules, and must implement any new regulations – Free movement of labour and capital – European Free Trade Area (EFTA) Switzerland • Partial access to EU markets (goods), almost no access to services markets – Pays less in fees (40%), but can be selective on most rules depending on market access – Free movement of labour is required, but no free movement of capital – Separate bi-lateral trade agreements required, which often become outdated as EU changes regulations – Customs Union (Turkey) • T ariff free access to most goods markets, but some regulation required. Fees are very small – No free movement of labour or capital – Source: Schroders Economics Group, 4 March 2016 IAPF Annual Investment Conference
06/04/2016 11:53:06 Conclusions Highly uncertain outlook in the event of a Brexit vote Macro impact likely to be negative • Short-term negative as consumers and corporates pause in the face of uncertainty, – higher inflation from fall in GBP Long-term depends on renegotiation, but risk of reduced FDI and trade whilst lower – immigration will slow trend growth Markets • GBP likely to be negatively impacted – Most stocks with large EU trade would also suffer – Some stocks with little to no trade with the EU could benefit from weaker GBP – Gilts could rally on uncertainty, but could also suffer from ratings downgrades – (S&P will downgrade by 2 notches) Longer-term, possible loss of business due to increased costs of trade with EU – Scotland ? • Scotland would almost certainly call for a referendum to leave the UK – Source: Schroders Economics Group. Image right from Whatinvestment, 4 March 2016. Forecast risk warning: Please see the information slide at the end of this presentation. IAPF Annual Investment Conference
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