7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012 http://slidepdf.com/reader/full/csam-bob-parker-basis-economic-capital-markets-analysis-november-2012 1/56 Robert Parker, Head – Strategic Advisory Group November 2012 Economic & Capital Market Analysis & Investment Strategy
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CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
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7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
After 2% annualised growth in 3Q12, can US growth momentum be maintained and what arethe risks of the “fiscal cliff” driving the US back into recession?
To what extent has Northern Europe and Germany slowed down and what will be the pace andtiming of recovery?
How long and how deep will the recessions be in the European bailout countries and Spain and
Italy?How vulnerable is France to recession?
Will Japan experience a long-term trend period of mediocre growth?
After 7.4% yoy growth in China in 3Q12, can growth move back towards 8% annualised?
Elsewhere in the BRICS, will reform programmes lead to a recovery in Indian growth back toabove 6%, can monetary and fiscal easing in Brazil result in growth recovering back to 4% and
are estimates of Russian growth slowing to 3% too pessimistic? To what extent is labour unresthurting South Africa?
Given the extent of QE from major Central Banks, will (and when) inflation pick-up and if so,what will the pace of price acceleration be?
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7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
How will the Federal Reserve QE3 programme progress and what will the impact be on US growthand does it represent an “insurance policy” against the fiscal cliff?
In the Eurozone, will Greece obtain an extension to the conditions of its bailout, will Portugal needfurther funding and is the Irish programme on track?
Are the Spanish and Italian governments correct in saying that they do not need to access bailout
funds via the ESM and the ECB/OMT programme?Will Brazil and China continue to ease fiscal and monetary policy, is Indian fiscal policy viable andcan Russia avoid budget deficits?
Is the period of risk to the Chinese economy from the leadership change now over?
To what extent will Japanese political gridlock prevent any action in dealing with the deficit and debtlevels and the need to re-accelerate the economy?
Will political risk in Asia impact on markets?Will the political situation in the Middle East deteriorate and impact the oil price?
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7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
Although G4 10-year government bond yields have risen slightly, yields are still near historic lowsand what is the risk of a market sell-off?
Will the improvement in Eurozone government bond spreads continue and to what extent aremarkets discounting positive progress on resolving Eurozone problems?
Is the spread compression in corporate, high yield and emerging debt markets sustainable?
Will FX market stability persist with low levels of volatility and will the emerging currencies benefitfrom Central Bank QE programmes?
How vulnerable is the US dollar in the event of the fiscal cliff occurring?
Can the overvaluation of the commodity linked currencies persist?
After the sideways movement in equity markets in September/October, will markets now recover and what are the downside risks?
How should equity strategy be positioned by region, sector, capitalisation and risk?Will the recent moderation in commodity prices continue and how vulnerable is the oil price to eventsin the Middle East and precious metals prices to further labour unrest in South Africa?
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7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
The Central case is that the US fiscal cliff is delayed until mid 2013 and that a medium-termfiscal plan is agreed irrespective of the winner of the Presidential election, broadly in line with theSimpson–Bowles recommendations, implying a fiscal tightening in 2013 of approximately 1%,implying a growth rate of close to 2%.
If the fiscal cliff does occur (a 20% probability), then inevitably the US economy will contract at a2%+ annualised rate in 1H13 and there is a serious risk of a further US credit downgrade.
Under any scenario, monetary policy will remain exceptionally easy, with the Fed Funds Ratestaying at 0-2 bps for at least 2013 and thereafter, any increase in the Funds rate will lag a pickup in economic activity and inflation. The Federal Reserve QE3 policy will persist for 1H13 andthe Fed balance could expand from the current US$ 2.9trn to around US$3.3trn by 2Q13.
As demonstrated by the improvement in German wages growth, Northern European demandshould improve and with export market shares being maintained and investment spending
improving, German growth should recover to above 1.5% during 2H13 with an associatedincrease in Northern European growth.
Asset Management, Robert Parker
7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
Although there has been a clear improvement in European bank funding with dependence on the
ECB decreasing, there is a high probability that Spain, faced by continued restructuring of itsbanks, problems with regional deficits, the difficulty of achieving its budget targets andentrenched recession, will apply for assistance via the ESM (in the primary market) and the ECB(in the secondary market) in its sovereign bond market. Given the improvement in the Italianbudget position, a bailout programme for Italy is unlikely and Italy should emerge from recessionin mid 2013. Given the challenge to France of reducing its budget deficit and improvingcompetitiveness, French growth may undershoot in the near-term and will certainly lag Germany.
The bailout programme is clearly working in Ireland and Portugal is close to achieving itsprogramme targets. Greece will have to be given a 1-2 year delay and unless public sector creditors accept write-offs, Greece will not achieve its debt/GDP targets. It remains a highprobability that Greece may have to leave the Eurozone in 2014.
ECB policy is likely to keep its Reference Rate at 75 bps, but with the LTRO providing liquidity tobanks as necessary and along with the OMT, this will provide a backstop to sovereign markets. It
is assumed that although the fiscal pact within the Eurozone is intact, some leeway will be givento Spain and Greece in achieving their targets and given the correct perception that bothcountries are in a “debt trap”, that additional austerity measures will compound recessionarytrends. It is therefore premature to forecast a cohesive banking union and Eurobonds areunlikely to be issued by the EU to support weaker countries, although the EIB will continue itsactive borrowing/issuing programme and the ESM will employ limited leverage.
Asset Management, Robert Parker
7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
Given the overvaluation of the Yen, corporate investment outside Japan, weak domesticspending, the troubled energy sector, political gridlock and the lack of progress in dealing withthe deficit and debt levels, Japanese growth will be mediocre at close to 1% for the foreseeablefuture. However, BoJ QE will become more active in the loan market.
Brazilian and Chinese monetary and fiscal policies will be eased further, resulting in Braziliangrowth reaching 4% and annualising by 2Q13, while Chinese growth should recover to close to8% annualised by 1Q13. However, given the problem of elevated inflation, any easing in Indianmonetary policy will be slow and the programme of budget deficit reduction will be difficult toachieve. Assuming that fiscal policy is stable in Russia, economic data will be robust, withgrowth reaching 4% annualised.
Slow monetary velocity should progressively pick-up and capacity utilisation will slowly erode,implying that global inflation although muted in early 2013, will progressively pick up in 2H13.
Developed economy inflation could exceed 3% yoy in 2H13.
Asset Management, Robert Parker
7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
The trend increase in G4 bond yields will be moderate in 1H13, with yield upside constrained bythe sluggish recovery and the impact of QE. However, as inflationary expectations deteriorate in2H13, yield upside may accelerate. JGBs are vulnerable to reduced domestic savings and aswitching by the banks from JGB holdings into financing corporates outside Japan.
Corporate risk /reward will remain favourable, with default rates low and current narrow spreadlevels should be maintained in corporate and emerging debt markets.
2-year Italian yields are now close to 2% and Spanish yields are less than 3%. These levelsshould be maintained, assuming that Italian budget progress continues, while Spain activating theOMT programme could result in yields declining a further 50 bps. Greek yields will trade for 10-year paper between 15-20 %, while other Eurozone yields will be relatively stable. It ispremature to call a sell-off in the French market.
Foreign exchange market volatility will remain low, except if the US fiscal cliff occurs, in which
case a significant dollar sell-off will develop. The Euro, on the central case, will trade for the next6 months in a range of 1.25-1.35 with a bias towards the upper end of this range, while the Yenshould reverse to 82. The commodity currencies will experience modest downside from their current overvalued levels with, e.g., the Australian dollar reversing to parity. The Swiss franc willhold against the Euro in a range of 1.20-1.22.
QE3 should benefit the emerging currencies, which will appreciate on trend.
Asset Management, Robert Parker
7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
Equity markets will remain nervous in November and December given the risks to markets fromthe fiscal cliff; in addition, poor corporate results in 3Q12 have discouraged investors who willremain defensively positioned in the near-term. However, assuming that the fiscal cliff is at leastpartly resolved, that growth holds at 2% in the US, that growth improves in China, NorthernEurope and Brazil with a trend, albeit modest, recovery in corporate profits, then equity markets
should improve in 1Q13, with equities outperforming other asset classes. Amongst equity markets, risk management argues for positions to focus on large cap North American/North European higher dividend sectors, but with positions being built in undervaluedemerging markets, viz China, Korea, Brazil and Russia. Although valuations are more elevated,the strong economic and corporate outlook justifies continuing holding South East Asianpositions.
Oil prices will drift US$5-10pb lower, assuming no major escalation in the Middle East. Softcommodity prices and precious metals are going through a 3-month downward correction, butindustrial metals should improve in early 2013 from a recovery in Chinese demand.
Asset Management, Robert Parker
7/29/2019 CSAM Bob Parker Basis Economic Capital Markets Analysis November 2012
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