global investment strategy - oxford economics€¦ · scenario 4: us fiscal cliff (10% probability)...

Global Investment Strategy

Scenario AnalysisAutumn 2012

2

� The combination of bullish investors, low market volatility and low financial stress suggests that risk assets are vulnerable to a correction on any bad news, particularly as the US fiscal cliff looms closer.

� We don’t believe any of the market’s top three concerns - the US fiscal cliff, a Eurozone break-up, and a China hard landing – will crystallise in 2013. Consequently, any pronounced market weakness should be used as an opportunity to increase exposure to risk assets.

� The outlook for the global economy and hence markets is highly uncertain at present. We assign a probability of just 50% to our central scenario playing out as planned. Consequently, this document also looks at the macroeconomic and market implications of five alternative scenarios: multiple Eurozone exits; Greece exiting the Eurozone alone; a hard landing of the Chinese economy; the US hitting the fiscal cliff; and finally, a corporate re-awakening.

� Investors with a different central scenario from our own may choose to position their portfolio for one of the alternative scenarios. Others may choose to hedge some of the risks implied by the alternative views of the world. Either way, it seems likely that at some point over the coming year the market will at least partially price one or more of these alternative scenarios.

Introduction

3

� Oxford Economics’ baseline forecast (50% probability )

■ Eurozone avoids breakup, with ECB and governments taking significant steps to ensure Eurozone survival.

■ Risk premia fall; consumer & business confidence gradually recover. Recovery is limited by high debt, weak job growth, fiscal retrenchment.

■ Equities and peripheral debt are expected to outpeform safe-haven bond markets and gold.

� Scenario 1: Multiple Eurozone exits (25% probability )

■ Fiscal austerity in Greece becomes unbearable; government falls, defaulting on all external debt. Financial contagion spreads, as run on banks in peripherals leads to credit crunch. Cyprus, Portugal, Spain, Italy and Ireland forced out of the Eurozone.

■ Safe-haven bond markets and the dollar expected to outpeform risk asset like equities, particularly EM, peripheral debt and commodities.

� Scenario 2: Sole Greek exit (5% probability)

■ Greece leaves Eurozone in 2013Q3, but European authorities act quickly and forcefully to prevent further exits.

■ Intervention entails massive bond purchases, further bailouts, temporary capital controls & an acceleration of plans for a banking and fiscal union.

■ Be underweight equities, peripheral bonds, the new Drachma, the euro and commodities.

� Scenario 3: China hard landing (10% probability)

■ Commercial property crash and external weakness leads to banking sector stress.

■ Flight from risk leads to falling share and property prices, and investment slumps, forcing government to recapitalise banks. Asian supply chain affected as domestic engine of growth stalls.

■ Be underweight equities, particularly China plays, emerging market bonds and commodities.

� Scenario 4: US fiscal cliff (10% probability)

■ Political stalemate causes much larger fiscal tightening than in baseline, damaging business and consumer confidence.

■ Additional QE and weaker US$ provide only partially offsets, and trade and financial linkages lead to global slowdown.

■ Be overweight bonds, underweight equities and underweight oil.

� Scenario 5: Corporate re-awakening (5% probability)

■ Swift and decisive action by authorities in US and Europe resolves some macroeconomic uncertainty.

■ Cash hoarded on corporate balance sheets is spent on investment, procurement and staff increases faster than assumed in baseline.

■ Be underweight bonds, gold and oil. Be overweight equities and emerging markets.

Macro Scenario Outlines: Four downside risks, one upside

4

Baseline Macro Scenario

� Unlike many market participants, we expect Europe to remain intact in 2013 – though policy progress towards securing the Eurozone’s future will remain fitful over the next 18 months.

� Congress will see sense and a compromise agreement will see fiscal policy tighten by 1.5% of GDP rather than the up to 5% currently feared.

� The central scenario assumes that the economy gradually gains traction, with US rates not expected to rise until late 2015.

-4

-3

-2

-1

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015

World GDP% year

Source : Oxford Economics/Haver Analytics

Forecast

Multiple Eurozone exits

Baseline

US fiscal cliff

5

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

2005 2007 2009 2011 2013 2015

Stockmarket index


Forecast

Baseline

Multiple Eurozone exitsUS

fiscal cliff

US Equity Market

Under the baseline scenario, equity markets rise in 2013…

� Market pricing reflects the considerable downside risks facing the economy - US equities currently trade on a trailing PE of 14.9, 14% below their historic average.

� Equity markets are likely to fall a little between now and the end of the year due to concerns over the fiscal cliff intensifying as the deadline approaches.

� But in 2013, with the fiscal cliff negotiated, the Eurozone intact and China avoiding a hard landing, we expect US equity prices to rise.

0

5

10

15

20

25

30

35

Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010 Q1 2012

US Equity MarketPrice/Earnings

Source : Oxford Economics/Datastream

Actual

Historic Average

6

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Q1 2005 Q1 2007 Q1 2009 Q1 2011

US and European Equity MarketsRelative P/E, US:EMU

Source : Oxford Economics/Datastream

Actual

Historic average

� Some of the most pronounced rises should be seen in Europe where valuations are low and surveys show investors are underweight. Generally, we expect European equity markets to comfortably outpace the US.

� The strongest performer among the eurozone equity markets could be Greece, given that it trades on a little over 10 times earnings.

� Another equity market we believe will perform strongly in 2013 is China, thanks to a historically low PE ratio (<7); a V-shaped economic recovery starting in 2012Q4; and liquidity expansion policies post November’s change of leadership.

Expected annual % rise in equity markets

2013 2014Greece -2.5 23.9

China 15.7 18.3Germany 8.0 13.3

France 6.2 15.3US 6.2 7.0

0

1000

2000

3000

4000

5000

6000

2005 2007 2009 2011 2013 2015

Greek equity marketStockmarket index


Forecast

…particularly in the eurozone periphery

7

3

3.5

4

4.5

5

5.5

6

6.5

7

2005 2007 2009 2011 2013 2015

10-year government bond yields - Spain & Italy%


Italy

Spain

Forecast

� As it becomes more apparent that Eurozonepolicy makers will finally match rhetoric with action, we expect further falls in peripheral bond yields.

Under baseline scenario, peripheral bond yields fal l…

Expected 10-year government bond yields (%)Spain Italy Portugal Greece Ireland

2012Q3 6.4 5.7 9.8 23.8 5.92012Q4 6.2 5.3 8.1 26.0 5.82013Q4 5.8 5.4 7.5 24.2 5.72014Q4 5.5 5.4 6.9 21.6 5.72015Q4 5.8 5.3 6.4 18.9 5.6

8

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015

10-year government bond yields%


UK

US

Germany

Forecast

0

1

2

3

4

5

6

7

8

2005 2007 2009 2011 2013 2015

10-year government bond yields%


Spain

Italy

Germany

Forecast

� We believe that government bond yields bottomed out in 2012Q2 in safe-haven bond markets such as the US, UK and Germany. We expect them to gradually rise from historically low levels as tail risks diminish further.

� In these countries, we expect yields to rise at an accelerating pace as the recovery gains traction and nominal growth accelerates.

…at the expense of safe-haven government bonds

Expected 10-year gov't bond yields (%)US UK Germany

2012Q3 1.6 1.7 1.42012Q4 1.6 1.9 1.62013Q4 2.0 2.1 1.82014Q4 2.6 2.4 2.12015Q4 3.3 2.8 2.5

9

0

1

2

3

4

5

6

7

2005 2007 2009 2011 2013 2015

Short term interest rates - developed markets%


UK

US

Eurozone

Forecast

� We expect many emerging nations to remain in easing mode this year and the next, with interest rates not expected to trough until 2013 in China and India.

� Given the Fed’s commitment to keep rate on hold until the labour market has clearly improved, we don’t expect US short rates to begin rising until late 2015. Rate rises will be even longer coming in the UK and the Eurozone due to the need to deleverage, with rates on hold in the UK until late 2016 and until late 2017 in the Eurozone.

0

5

10

15

20

25

2005 2007 2009 2011 2013 2015

Short-term interest rates - emerging markets


RussiaBrazil

China

Forecast

%

India

Under the baseline, emergers ease rates, others on h old

10

� With world growth relatively subdued under our central scenario, we expect the Brent oil price to end 2013 around 6% below its current level at $102. As the global recovery accelerates from a 2.3% pace in 2012 to 2.6% in 2013, 3.6% in 2014, and 2.6% in 2015 we expect the oil price to then rise to $109 at the end of 2014 and $114 in 2015.

� Although we don’t expect the gold price to change much during 2012, we expect gold to fall in value by 11% in 2013 and 14% in 2014. Rising bond yields in the US, the UK and Germany will increase the opportunity cost of holding this non-yielding asset and progress towards a more permanent solution to the Eurozone crisis will reduce demand for safe-haven assets.

0

20

40

60

80

100

120

140

2005 2007 2009 2011 2013 2015

World oil price$/barrel

Source : Oxford Economics

Forecast

0

50

100

150

200

250

300

350

400

450

2005 2007 2009 2011 2013 2015

World gold price$/troy ounce


Foreacst

Oil prices are weak & rising bonds yields weigh on gold

11

� Policy rates will be slow to rise. Given the Fed’s commitment to keep rates on hold until the labour market has clearly improved, we don’t expect US short rates to begin rising until late 2015. Rate rises will be even longer coming in the UK and the Eurozone due to the need to deleverage, with rates on hold in the UK until late 2016 and until late 2017 in the Eurozone. We expect many emerging nations to remain in easing mode this year and the next, with interest rates not expected to trough until 2013 in China and India.

� Be overweight equities. Equities are expected to out-perform safe-haven bond markets in 2013 as tail risk fears diminish and the global economic recovery gains traction. We favour the European and Chinese equity markets over the US. Europe will benefit from further policy progress towards fiscal and banking union and China from more stimulative policy following November’s change of leadership.

� Be overweight peripheral Eurozone debt . With tail risk fears expected to diminish and the Eurozone expected to survive we believe peripheral Eurozone government debt will outperform safe-haven bond markets like the US, the UK and Germany.

� Be underweight oil in the near term. With world growth relatively subdued under our central scenario, we expect the Brent oil price to end 2013 around 6% below its current level at $102. As the global recovery accelerates from a 2.3% pace in 2012 to 2.6% in 2013, 3.6% in 2014, and 2.6% in 2015 we expect the oil price to then rise to $109 at the end of 2014 and $114 in 2015.

� Be underweight gold. Although we don’t expect the gold price to change much during 2012, we expect gold to fall in value by 11% in 2013 and 14% in 2014. Rising bond yields in the US, the UK and Germany will increase the opportunity cost of holding this non-yielding asset and progress towards a more permanent solution to the Eurozonecrisis will reduce demand for safe-haven assets.

Investment implications of our central scenario

12

Investment implications of our central scenario

US UK Eurozone Japan

Baseline 2013 2014 2013 2014 2013 2014 2013 2014GDP (%) 2.3 2.8 1.2 2.3 0.1 1.1 1.3 2.6

CPI (%) 2.2 2.2 2.0 1.7 1.7 1.4 0.1 1.3

Policy rate (bps change) 0 0 0 0 0 0 0 0

Equities (%) 3.5 2.8 9.2 9.1 10.1 9.9 11.8 8.6

10-year government bond yields (bps change) 39 59 20 32 1 7 15 55

World oil price (%) -4.4 7.3 - - - - - -

World gold price (%) -16.7 -7.0 - - - - - -

World copper price (%) 5.7 5.0 - - - - - -

13

� The new Greek government only enjoys a slim majority and could fall should the burden of austerity demanded by the bailout package prove unacceptable. Alternatively, Greece would be forced out of the single currency if its creditors withhold funding and Greece resorts to issuing its own currency to meet payment obligations.

� Either way, a Greek exit would be very difficult to contain. Financial contagion would spread instantaneously throughout the Eurozone with steep increases in bond spreads, falls in share prices and a very significant tightening of credit conditions. Fear that other peripheral countries could also leave the Eurozone would trigger a run on banks, leading to their collapse. Multiple exits, involving Portugal, Ireland, Spain, Italy and Cyprus would likely ensue.

� As well as financial linkages, trade and confidence effects would send an economic shockwave across the globe.

� In exiting countries, the level of GDP would drop sharply, falling to around 15% below our central scenario in 2014 and 2015.

� The eleven countries remaining in the Eurozone would be plunged into a deep recession, with GDP falling by nearly 10% relative to our central scenario.

Scenario 1: Multiple Eurozone Exits

14

-4

-3

-2

-1

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015

World: GDP% year


Multiple exits

Baseline

Forecast� The impact of a breakup in 2014Q1 on the

remaining countries in the Eurozone would be huge, with GDP contracting by over 2% in 2014 and by over 4% in 2014.

� The UK would also be badly affected due to close trade and financial links to the Eurozone. By comparison, the US economy is more sheltered, but the breakup will still push the US close to recession in 2015.

� In China, growth would dip to 4.9% in 2015 and the level of GDP would be 5% below baseline at the end of 2016.

Annual % GDP growthWorld Eurozone US UK

Baseline Breakup Baseline Breakup Baseline Breakup Baseli ne Breakup2012 2.3 2.3 -0.5 -0.5 2.2 2.2 -0.3 -0.32013 2.6 2.5 0.1 0.0 2.3 2.2 1.2 1.22014 3.5 1.4 1.1 -2.3 2.8 1.0 2.3 -0.82015 3.6 0.0 1.3 -4.2 3.0 0.0 2.4 -2.2

Multiple Eurozone exits would hit the global economy hard

15

� Interest rates would fall to zero in most of the major economies and remain there until after the end of 2017 as central banks attempt to offset the impact of the financial shock on growth and prevent a deflationary spiral.

� In contrast, inflation in the countries exiting the monetary union would surge as a result of steep currency depreciation increasing import prices. This would drive up nominal rates in the exiting countries.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2005 2007 2009 2011 2013 2015

Eurozone*: REFI rate%


Baseline

Multiple Exits

* Remaining countries

Forecast

-3

-2

-1

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015

% y/y


Baseline

Multiple Exits

Eurozone*: CPI InflationForecast


Short term interest rates, annual average (%)Remaining Eurozone Greece Portugal Spain Italy IrelandBaseline Breakup Baseline Breakup Baseline Breakup Baseli ne Breakup Baseline Breakup Baseline Breakup

2012 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.82013 0.8 0.8 0.7 0.8 0.7 0.8 0.7 0.8 0.7 0.8 0.7 0.82014 0.8 0.1 0.8 4.7 0.8 3.6 0.8 3.6 0.8 3.6 0.8 3.32015 0.9 0.2 0.9 7.9 0.9 8.4 0.9 8.4 0.9 8.4 0.9 6.7

…leading to rate cuts in the residual Eurozone

16

� Safe-haven bond markets would see strong inflows, sending yields on these bonds plunging.

Expected 10-year government bond yields (%), 2014Q2

Baseline BreakupUS 2.3 1.6UK 2.3 1.2

Germany 2.0 1.4

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015

10-year US government bonds%


Multiple Exits

Baseline

Forecast

A breakup would push safe-haven bond yields below 1%...

17

� Peripheral bond spreads would rise sharply, but the risk premium for emerging markets would not rise to the level hit at the worst point of the global financial crisis at the end of 2008 due to their improved risk profile

0

2

4

6

8

10

12

14

16

18

2005 2007 2009 2011 2013 2015

Spanish 10-year government bonds%


Baseline

Multiple Exits

Forecast

10-year government bond yields, quarter average (%)Greece Portugal Spain Italy Ireland

Baseline Breakup Baseline Breakup Baseline Breakup Baseli ne Breakup Baseline Breakup2012Q3 25.5 25.5 9.6 9.6 6.7 6.7 5.9 5.8 6.0 6.02012Q4 26.0 26.0 8.1 8.1 6.2 6.2 5.3 5.3 5.8 5.82013Q1 26.2 26.2 8.0 8.0 6.1 6.2 5.4 5.4 5.8 5.82013Q2 25.5 25.5 7.8 7.8 6.1 6.1 5.4 5.4 5.8 5.82013Q3 24.9 26.4 7.7 9.2 6.0 7.0 5.4 6.4 5.8 6.82013Q4 24.2 27.2 7.5 10.0 5.8 7.8 5.4 7.4 5.7 7.32014Q1 23.5 27.6 7.4 10.9 5.7 8.7 5.4 8.4 5.7 8.22014Q2 22.9 27.9 7.2 11.3 5.6 9.6 5.4 9.4 5.7 8.72014Q3 22.2 32.2 7.1 15.1 5.5 13.5 5.4 13.4 5.7 11.72014Q4 21.6 33.6 6.9 16.9 5.5 15.5 5.4 15.4 5.7 12.7

…while peripheral bond spreads rise sharply

18

0

5

10

15

20

25

30

35

Italy

Spain

Portu

gal

Greec

e Ire

land

Germ

any

Franc

e UK USJa

pan

China

Fall in stockmarket relative to baseline%


0

20

40

60

80

100

120

140

160

180

2005 2007 2009 2011 2013 2015

Spanish equity marketStockmarket index


Forecast

Multiple Exits

Baseline

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2005 2007 2009 2011 2013 2015

US equity marketStockmarket index


Baseline

Multiple Exits

Forecast

Equity markets would sell off particularly sharply in the exiting countries, but all markets would be hit

19

� Initially, national exchange rates would drop by around 40% against the euro in Greece and Cyprus, 33% in Italy, Spain and Portugal, and by 25% in Ireland. These countries have suffered a substantial loss of competitiveness over the past decade and their new exchange rates would adjust to compensate for this.

� Their currencies would probably ‘overshoot’ fair value initially as they experienced large-scale capital outflows.

� We expect the residual euro to initially weaken by around 15% against the dollar as turmoil significantly dampens the value and return prospects of investment in the Eurozone. As activity stabilises and the Eurozone emerges as a more stable entity, the euro exchange rate may appreciate.

0

5

10

15

20

25

30

35

40

45

Ireland Greece Italy Spain Portugal

Currency devaluation against Euro in 1st yr%


1

1.1

1.2

1.3

1.4

1.5

1.6

2005 2007 2009 2011 2013 2015

Eurozone*: $/€$/€


Multiple exits

Baseline

Forecast

* Remaining Countries

euro weaker

New currencies would ‘undershoot’ fair value and the residual euro would initially weaken

20

� With world GDP growth slumping to just 1.4% in 2014 and then being flat in 2015, the oil price falls to a trough of $80/barrel in the first half of 2015.

� As the global financial system deleveraged, hard-pressed investors would be forced to sell liquid assets to meet margin calls as a result the gold price would fall to below $900 by 2015Q3.

0

20

40

60

80

100

120

140

2005 2007 2009 2011 2013 2015



Multiple Exits

Baseline

Forecast

0

50

100

150

200

250

300

350

400

450

2005 2007 2009 2011 2013 2015



Multiple Exits

Baseline

Oil and gold probably both fall in value

21

� Interest rates would be cut to zero in most of the major economies and remain there until after the end of 2017, further QE would be deployed, as central banks attempt to limit the impact of the financial shock on growth and prevent a deflationary spiral. In contrast, inflation in the countries exiting the monetary union would surge as a result of steep currency depreciation increasing import prices. This would drive up nominal rates in the exiting countries.

� Be overweight safe-have bonds . We believe that US treasuries, bunds and gilts would outperform equities and peripheral Eurozone bonds as their yields fell to 1.3%, 1.0% and 0.7% respectively. Peripheral government bonds would fall sharply in value with Italian ten-year yields rising to 15% and Spanish yields rising to 16%.

� Be underweight emerging markets debt . Spreads would rise albeit they would not reach the level hit at the worst point of the global financial crisis at the end of 2008 due to their improved risk profile.

� Be underweighted equities . The equity markets of the exiting countries are expected to fall by 20% to 30% and the major global markets to fall by around 10%. Equity holdings should be skewed towards defensive sectors and less cyclical markets, like the US, rather than emerging markets.

� Be overweight the dollar . Overseas holders of peripheral economy assets will also make currency losses as new national exchange rates drop by around 40% against the euro in Greece and Cyprus, 33% in Italy, Spain and Portugal, and by 25% in Ireland. We expect the residual euro to initially weaken by around 15% against the dollar as turmoil significantly dampens the value and return prospects of investment in the Eurozone.

� Be underweight commodities . With world GDP growth slowing to just 1.4% in 2014 and then being flat in 2015, the oil price falls to a trough of $80/barrel in the first half of 2015 and the copper price falls by 25%. As the global financial system deleveraged, hard-pressed investors would be forced to sell liquid assets to meet margin calls as a result the gold price would fall to below $900 by 2015Q3.

Investment implications of multiple Eurozone exits

22

Investment implications of multiple Eurozone exits


Multiple Eurozone Exits 2013 2014 2013 2014 2013 2014 2013 2014GDP (%) 2.2 1.0 1.2 -0.8 0.0 -2.3 1.3 0.9

CPI (%) 2.2 0.5 2.0 1.5 1.7 1.1 0.1 0.0

Policy rate (bps change) 0 -15 0 -46 0 -70 0 -10

Equities (%) 0.3 -4.5 5.9 1.3 6.8 2.0 9.0 0.3

10-year government bond yields (bps change) 39 -57 21 -95 2 -90 15 3

World oil price (%) -4.4 -20.2 - - - - - -

World gold price (%) -16.8 -27.3 - - - - - -

World copper price (%) 5.6 -17.9 - - - - - -

23

� This scenario assumes that Greece leaves the Eurozone in Q3 2013 but that the European authorities are able to intervene quickly and forcefully enough to prevent other peripheral countries from exiting the euro along with Greece.

� To prevent multiple exits, the ECB would need to engage in massive bond purchases to keep yields at manageable levels, the remaining peripheral countries would require bailouts, and plans for banking and fiscal union have to be accelerated. In the short term, temporary capital controls would probably be needed to stem deposit outflows from peripheral banks.

� The additional bailouts would have to be funded by the core Eurozone countries, partly at the expense of domestic spending which would damage growth.

Scenario 2: Sole Greek Exit

24

� Despite all of the measures taken by the authorities to limit the impact of a Greek exit the Eurozone recession would deepen in 2014, with growth contracting by 1.2%.

� Growth in other major economies, such as the US and China, would be impacted as well World GDP growth would be 3.0%, on a PPP basis, in 2014, compared to 4.4% in our central scenario.

-10

-8

-6

-4

-2

0

2

4

6

2005 2007 2009 2011 2013 2015

Eurozone*: GDP% year


Baseline

Greek exit

Forecast


Grexit: Eurozone recession would deepen…

25

� Interest rates would be cut to almost zero in the Eurozone, the US and the UK, as central banks attempted to offset the impact of the financial shock on growth and prevent a deflationary spiral.

� We believe that rates would stay at zero in the US and the Eurozone until late 2017 and until late 2016 in the UK.

� In contrast base rates would rise to 7.7% in Greece as the central bank attempted to offset the inflationary impact of a sharp currency depreciation.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2005 2007 2009 2011 2013 2015

Eurozone*: REFI rate%


Baseline

Greek exit

Forecast

*Remaining countries

Central Bank rates (%)Greece US Eurozone UK

Baseline Grexit Baseline Grexit Baseline Grexit Baseline Grexit2012Q3 1.0 1.0 0.2 0.2 1.0 1.0 0.5 0.52012Q4 0.7 0.7 0.2 0.2 0.7 0.7 0.5 0.52013Q4 0.7 0.7 0.2 0.0 0.7 0.0 0.5 0.02014Q4 0.7 7.7 0.2 0.0 0.7 0.0 0.5 0.02015Q4 0.7 7.7 0.3 0.0 0.7 0.0 0.5 0.0

…causing major economies to ease monetary policy

26

-60

-50

-40

-30

-20

-10

0

10

20

Maximum currency movements post-Grexit%


€/drachma €/£€/$ $/£

� The combination of rate cuts and the growth impact of the shock would cause the euro to depreciate 11% vs sterling and 16% against the dollar.

� The new Drachma would depreciate by around 50% against the euro, lowering its debt burden and eventually helping to restore competitiveness. In the short term, the depreciation would lead to soaring inflation which would cut households’ real incomes very sharply.

� In response the Greek central bank would increase by 700 bps, raising the cost of outstanding domestic debt.

0

5

10

15

20

25

30

2005 2007 2009 2011 2013 2015

Greek CPI inflation% year


Greek exit

Baseline

Forecast

The new drachma would depreciate steeply

27

� Greece would be cut off from international financial markets. The yield on Greek 10-year government bonds would rise by around 1000 basis points and end 2014 at around 34%.

� Markets would then price in a higher probability of other peripheral countries exiting at some point. For example, the yield on 10-year Spanish debt would rise from the current 6.7% to 8.5% at the end of 2014 and the yield on Italian debt would rise from 4.8% to 8.4%.

0

5

10

15

20

25

30

35

40

2005 2007 2009 2011 2013 2015

Greek 10-year government bond yields%


Greek Exit

Forecast

Baseline

3

4

5

6

7

8

9

2005 2007 2009 2011 2013 2015

Spanish 10-year government bond yields%


Baseline

Forecast

Greek exit

Grexit: Greece would not be the only periphery econ omy to see bond yields rise

28

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2005 2007 2009 2011 2013 2015

German 10-year government bond yields%


Baseline

Forecast

Greek exit

10-year government bond yields, quarter average (%)US UK Germany

Baseline Grexit Baseline Grexit Baseline Grexit2013Q1 1.7 1.7 1.9 1.8 1.7 1.62013Q2 1.8 1.8 1.9 1.9 1.7 1.72013Q3 1.9 1.9 2.0 1.6 1.7 1.32013Q4 2.0 1.9 2.1 1.6 1.8 1.42014Q1 2.1 2.0 2.2 1.7 1.9 1.52014Q2 2.3 2.2 2.3 1.9 2.0 1.62014Q3 2.4 2.4 2.3 1.9 2.0 1.72014Q4 2.6 2.5 2.4 2.0 2.1 1.7

10-year government bond yields, quarter average (%)Greece Portugal Spain Italy Ireland

Baseline Grexit Baseline Grexit Baseline Grexit Baseline G rexit Baseline Grexit2013Q1 26.2 28.2 8.0 9.0 6.1 7.1 5.4 6.4 5.8 6.82013Q2 25.5 27.5 7.8 8.8 6.1 7.1 5.4 6.4 5.8 6.82013Q3 24.9 26.9 7.7 9.2 6.0 7.5 5.4 6.9 5.8 7.32013Q4 24.2 29.2 7.5 9.5 5.8 7.8 5.4 7.4 5.7 7.72014Q1 23.5 33.5 7.4 9.9 5.7 8.2 5.4 7.9 5.7 8.22014Q2 22.9 34.9 7.2 10.2 5.6 8.6 5.4 8.4 5.7 8.72014Q3 22.2 34.2 7.1 10.1 5.5 8.5 5.4 8.4 5.7 8.72014Q4 21.6 33.6 6.9 9.9 5.5 8.5 5.4 8.4 5.7 8.7

…while AAA and AA-rated bonds see safe-haven flows

29

� Investors’ confidence would slump and share prices in Greece Italy and Spain would fall 20% below the level assumed in our central scenario. The US, UK and German markets would fall 7% compared with the central scenario.

0

5

10

15

20

25

Portu

gal

Greec

eSpa

inIre

land

Italy

Franc

eJa

pan US UK

Germ

any

China

Grexit: Fall in stockmarket relative to baseline%


Peripheral equity markets fall by 20%, with lesser falls elsewhere

30

� Weaker demand would cause the oil price to end 2014 about 14% lower than assumed under our central scenario at $94 per barrel.

� As the global financial system deleveraged, hard-pressed investors would be forced to sell liquid assets to meet margin calls as a result the gold price would end 2014 11% lower than assumed under our central scenario at $1120.

40

50

60

70

80

90

100

110

120

130

2005 2007 2009 2011 2013 2015



Forecast

Baseline

Greek exit

400

600

800

1000

1200

1400

1600

1800

2005 2007 2009 2011 2013 2015



Baseline

Forecast

Greek exit

Grexit: Oil and gold prices would both fall

31

� Interest rates would be cut to almost zero in the Eurozone, the US and the UK. Rates would not rise in the UK until late 2016 and until late 2017 in the US and the Eurozone.

� Be underweighted equities . Investors’ confidence would slump and share prices in Greece, Italy and Spain would fall, at worst, 20% below the level assumed in our central scenario. The US, UK and German markets would fall 7% compared with the central scenario.

� Be underweight peripheral bond markets . The yield on Greek 10-year government bonds would rise by around 1000 basis points and end 2014 at around 34%. Markets would then price in a higher probability of other peripheral countries exiting at some point. Consequently, the yield on 10-year Spanish debt would rise from the current 6.7% to 8.5% at the end of 2014 and the yield on Italian debt would rise from 4.8% to 8.4%.

� Be underweight the new Drachma and the euro . The combination of rate cuts and the growth impact of the shock would cause the euro to depreciate 11% vs sterling and 16% against the dollar. The new Drachma would depreciate by around 50% against the euro.

� Be underweight commodities . Weaker demand would cause the oil price to end 2014 about 14% lower than assumed under our central scenario at $94 per barrel. As the global financial system deleveraged, hard-pressed investors would be forced to sell liquid assets to meet margin calls as a result the gold price would end 2014 11% lower than assumed under our central scenario at $1120.

Investment implications of a Greek exit

32

Investment implications of a Greek exit


Greek Exit 2013 2014 2013 2014 2013 2014 2013 2014GDP (%) 2.1 1.6 0.9 0.5 -0.7 -1.2 1.1 1.3

CPI (%) 2.1 1.7 2.3 1.7 2.0 1.7 0.0 0.5

Policy rate (bps change) -10 0 -45 0 -70 0 -10 17

Equities (%) -0.7 2.8 4.5 8.3 2.9 5.9 7.3 8.6

10-year government bond yields (bps change) 30 59 -25 37 63 40 8 62

World oil price (%) -7.9 -4.1 - - - - - -

World gold price (%) -18.3 -15.7 - - - - - -

World copper price (%) 3.6 -4.8 - - - - - -

33

� At the heart of this scenario is a near 20% fall in Chinese property prices in the second half of 2012, which would wipe out all the gains seen since 2007. Other property markets in Asia are also assumed to be affected with Hong Kong and Singapore experiencing price falls of 5-10%.

� The Chinese hard landing is triggered by a sharp correction in the Chinese property and construction sectors which leads to a large rise in non-performing loans. Risk premia in China would rise, pushing up the cost of borrowing. As a consequence, investment would fall sharply, hitting GDP growth and leading to lower employment, which would subsequently weigh on consumption.

0

20

40

60

80

100

120

140

160

180

2005 2007 2009 2011 2013 2015

Chinese house pricesHouse price index


Baseline

Forecast

Chinese hard landing

Scenario 3: China Hard Landing

34

� Under our China hard landing scenario, the level of Chinese GDP falls to around 4.5% below the path assumed under our central scenario. Rather than reaccelerating, Chinese growth slows further in 2013 with the growth rate falling to just 5.1%.

0

2

4

6

8

10

12

14

16

2005 2007 2009 2011 2013 2015

China: GDP% year


Baseline

China hard landing

Forecast

-3-2-10123456789

10

2005 2007 2009 2011 2013 2015

China: CPI% year


Baseline

China hard landing

Forecast

China hard landing: Chinese growth and inflation sl ow…

35

� China and other economies in the region would respond by easing monetary and fiscal policy. Chinese 3-month interest rates would end 2014 around 1.3pp lower than assumed under our central scenario at 2.4%.

� At their trough, Indian rates would be almost 2% lower than our central scenario at 5.7%. Australian rates would be around 1.4 pp lower, than assumed under our central scenario, at 2.7%.

0

1

2

3

4

5

6

7

2005 2007 2009 2011 2013 2015

Chinese 3-month interbank rate%


Baseline

Forecast

China hard landing

…leading to interest rate cuts across Asia…

36

� Given the size of the Chinese economy, the shock would have global implications. GDP growth in the US would be cut to around 1.8% in 2013, rather than the 2.3% assumed under our central scenario, while the Eurozone’srecession would be extended for a year with GDP falling of 0.6% in both 2012 and 2013.

� Higher costs of borrowing and weaker trade hit other emerging markets with growth slowing to around 4% in the emerging market bloc as a whole in 2013.

� World GDP growth is around 1 percentage point lower than in the baseline in 2013, at 2.4%.

-3

-2

-1

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015

World: GDP% year


Baseline

China hard landing

Forecast

…and knock-on effects are felt around the world

37

� A slowdown in demand for China’s exports and a slump in the construction sector would lead to weak profitability and banking sector stress. Consequently, share prices in China are assumed to fall by over 40%.

� A rise in risk premia and financial contagion would lead to falls in share prices in the major financial centres in the US, Eurozone and the UK, of around 10%.

0

1000

2000

3000

4000

5000

6000

2005 2007 2009 2011 2013 2015

Chinese equitiesStockmarket index


Baseline

Forecast

China hard landing

0

5

10

15

20

25

30

35

40

45

50

China Germany France US UK Japan

China hard landing: Fall in stockmarket relative to baseline%


China hard landing: Weaker profit growth hits equit ies…

38

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2005 2007 2009 2011 2013 2015

Risk premia on emerging market interest rates%


China hard landing

Baseline

Forecast

� A flight from risk would lead to a rise in emerging market spreads of around 100 basis points over the course of 2013. This would push up the cost of borrowing in emerging markets leading to slowing consumption and investment.

0

1

2

3

4

5

6

7

8

9

10

2005 2007 2009 2011 2013 2015

Chinese 10-year government bonds%


Baseline

China hard landing

Forecast

…and risk aversion pushes up emerging market bond yields

39

� Weaker demand would cause the oil price to fall to $80 by the middle of 2013 and the copper prices is assumed to end 2013 about 20% lower than under our baseline scenario.

0

20

40

60

80

100

120

140

2005 2007 2009 2011 2013 2015

World oil price: China hard landing$/barrel


Baseline

Forecast

China hard landing

0

200

400

600

800

1000

1200

1400

1600

1800

2005 2007 2009 2011 2013 2015

World gold price: China hard landing$/troy ounce


Baseline

Forecast

China hard landing

China hard landing: Weak global growth weighs on commodities

40

� Be underweigh equities, particularly China plays. A rise in risk premia and financial contagion is expected to cause falls in US, Eurozone and UK equities of around 10%. Chinese share prices would be hit much harder with an expected fall of over 40%.

� Be underweight emerging market bonds . Depending on the market, developed economy bond yields are either flat under this scenario or rise more slowly than under our baseline. Emerging market spreads rise by almost as much as during the financial crisis.

� Be underweight commodities . Weaker Chinese and global growth mean that the oil price falls to $80 by the middle of 2013 and the copper prices is assumed to end 2013 about 20% lower than under our baseline scenario.

Investment implications of China hard landing

41

Investment implications of China hard landing


China Hard Landing 2013 2014 2013 2014 2013 2014 2013 2014GDP (%) 1.8 2.1 0.7 1.6 -0.6 0.2 0.4 1.4

CPI (%) 1.9 1.8 1.6 0.7 1.4 0.4 0.0 1.3

Policy rate (bps change) 0 0 -1 -12 0 0 55 29

Equities (%) -4.2 11.0 1.1 17.8 2.0 18.6 10.0 8.3

10-year government bond yields (bps change) 39 59 21 29 1 12 42 81

World oil price (%) -16.0 3.2 - - - - - -

World gold price (%) -27.1 -11.9 - - - - - -

World copper price (%) -7.4 -0.6 - - - - - -

42

� Unless congress agrees on an alternative plan for the reduction of federal debt, the US faces a significant tightening of fiscal policy on 1 January 2013 as a number of automatic tax rises and spending cuts take effect.

� The Congressional Budget Office estimates that the combined measures amount to around a 5.0% of GDP tightening of fiscal policy for calendar year 2013.

� Our baseline forecast assumes that much of this tightening will be avoided. But there is a risk that political gridlock leads to a much more restrictive fiscal stance.

Scenario 4: US Fiscal Cliff

43

� US GDP growth slows down significantly, falling in recession in the first half of the year. In the quarter that it hits the fiscal cliff, 2013Q1, the economy shrinks at an annual rate of 1.7% and it continues to decline by 2.0% in Q2. Growth turns positive again in the second half of the year and stages a strong rebound due to compensating fiscal measures. Our scenario calls for growth of 8.9% (annualised) in 2013 Q3 as these measures take place. In 2014, US GDP increases by 3.5%.

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015

US GDP% year


Baseline

Fiscal cliff

Forecast

US fiscal cliff: A technical recession in H1 2013

44

� We believe that the Federal Reserve would step in immediately to support the economy with additional quantitative easing, boosting its balance sheet to eventually reach around 22% of GDP and maintaining that level for one year before beginning to unwind it.

-2

-1

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015

US CPI% year


Baseline

US fiscal cliff

Forecast

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2005 2007 2009 2011 2013 2015

US Quantitative EasingUS$, Billions


US fiscal cliff

Baseline

Forecast

…triggering further QE from the Fed

45

� The rest of the world would be significantly affected via a decline in business and consumer confidence and weaker demand from the US.

� The Eurozone recovery would be delayed by one year with 2012’s 0.5% contraction followed by a further 0.4% fall in output in 2013. The UK and Japanese economies would also be affected by a decline in business and consumer confidence, and GDP growth would slow down significantly, although remaining in positive territory.

� Emerging market economies would suffer a deceleration of external demand growth and subdued capital inflows, although domestic demand growth would remain robust. Chinese GDP growth would slow to 7.2% in 2013, around 1 pp below the growth rate assumed in our central scenario, and then reaccelerate to 9.6% in 2014.

-4

-3

-2

-1

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015

World GDP% year


US fiscal cliff

Baseline

Forecast

Growth rates (% year)US World Eurozone UK China Japan

Baseline Fiscal cliff Baseline Fiscal cliff Baseline Fis cal cliff Baseline Fiscal cliff Baseline Fiscal cliff Ba seline Fiscal cliff2013 2.3 1.1 2.6 1.9 0.1 -0.4 1.2 0.6 8.1 7.2 1.3 0.72014 2.8 3.5 3.5 4.0 1.1 1.6 2.3 2.8 9.1 9.6 2.6 3.02015 3.0 3.4 3.6 3.7 1.3 1.3 2.4 2.4 8.7 9.0 1.6 1.7

US fiscal cliff: Growth in the rest of the world af fected…

� The rest of the world would be significantly affected via a decline in business and consumer confidence and weaker demand from the US.

� The Eurozone recovery would be delayed by one year with 2012’s 0.5% contraction followed by a further 0.4% fall in output in 2013. The UK and Japanese economies would also be affected by a decline in business and consumer confidence, and GDP growth would slow down significantly, although remaining in positive territory.

� Emerging market economies would suffer a deceleration of external demand growth and subdued capital inflows, although domestic demand growth would remain robust. Chinese GDP growth would slow to 7.2% in 2013, around 1 pp below the growth rate assumed in our central scenario, and then reaccelerate to 9.6% in 2014.

46

• US ten-year bond yields end 2013 about 50 bps lower than under our central scenario and dip as low as 1.4% in Q2 2013.

• The US equity market falls by 20% from its year end level. Smaller falls are experienced in Europe, the UK and Japan.

-60

-50

-40

-30

-20

-10

0

US Eurozone UK

10-year government bond yields*Basis points


*Difference in yields between US fiscal cliff and baseline forecasts, end-2013

0

5

10

15

20

25

US China UK Germany France Japan

US fiscal cliff - fall in stockmarket relative to baseline%


…with implications for interest rates and equities globally

47

0

20

40

60

80

100

120

140

2005 2007 2009 2011 2013 2015

World oil price: US fiscal cliff$/barrel


Baseline

Forecast

US fiscal cliff

0

200

400

600

800

1000

1200

1400

1600

1800

2005 2007 2009 2011 2013 2015

World gold price: US fiscal cliff$/troy ounce


Baseline

Forecast

US fiscal cliff

US fiscal cliff: Oil price lower; gold little impac ted

48

� Be overweight bonds . US ten-year bond yields end 2013 about 50 bps lower than under our central scenario and dip as low as 1.4% in Q2 2013.

� Be underweight equities , particularly the US. The US equity market falls by 20% from its year end level. Smaller falls are experienced in Europe, the UK and Japan.

� Be underweight oil . With global growth slowing to 1.9% in 2013, 0.7 ppt lower than assumed under our central scenario, the oil price ends 2013 13% below its current level at $94.

Investment implications of US fiscal cliff

49

Investment implications of US fiscal cliff


US Fiscal Cliff 2013 2014 2013 2014 2013 2014 2013 2014GDP (%) 1.1 3.5 0.6 2.8 -0.4 1.6 0.7 3.0

CPI (%) 2.2 2.0 1.7 1.5 1.3 1.4 -0.5 1.2


Equities (%) 6.5 6.4 12.2 9.2 17.1 8.0 15.9 8.4

10-year government bond yields (bps change) -11 -3 14 15 -10 -13 -5 23

World oil price (%) -11.8 17.1 - - - - - -

World gold price (%) -17.5 -7.6 - - - - - -


50

� In the developed economies, the corporate sector has built up a large financial surplus.

� Due to the uncertain macroeconomic outlook, companies have so far preferred to sit on these substantial cash balances rather than use them to fund new equipment, mergers and acquisitions, and extra workers.

� If policymakers can take decisive action with respect to the sovereign debt crisis in Europe and the fiscal cliff in the US, much of the uncertainty surrounding the macroeconomic outlook would dissipate. Business confidence would be boosted further if tensions in the Middle East ease.

� Swift and significant intervention in the US would entail a clear stance on fiscal policy; and further bond buying, bailouts, and credible progress towards fiscal and banking union in the eurozone.

� Higher business confidence would then feed through to higher investment more quickly than assumed under our baseline scenario.

Scenario 5: Corporate Re-awakening

51

� As business confidence improves, quarterly investment rises by 1.5% more than in our baseline scenario throughout 2013 in the major economies.

� Workers wages in these economies would also rise as companies increase their workforce. With both total employment and disposable income up, this feeds through to higher consumption.

� Stronger growth in the US and Europe entails knock-on benefits for emerging markets via increased trade and capital inflows.

-3

-2

-1

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015

World: GDP% year


Baseline

Upside

Forecast

Growth rates (% year)World US Eurozone UK China Japan

Baseline Upside Baseline Upside Baseline Upside Baseline U pside Baseline Upside Baseline Upside2013 2.6 3.3 2.3 3.1 0.1 0.8 1.2 2.0 8.1 9.5 1.3 2.12014 3.5 4.6 2.8 4.2 1.1 2.1 2.3 3.6 9.1 10.2 2.6 3.92015 3.6 4.4 3.0 4.5 1.3 1.6 2.4 2.8 8.7 9.4 1.6 2.5

Corporate re-awakening: Stronger world growth…

52

� Increased investment leads to a rise in the capital stock and higher total factor productivity. This boost to the supply-side prevents higher demand from creating inflationary pressures. World inflation would be 0.6-0.7pp lower than under our central scenario in 2013 and 2014.

� Nevertheless, the improved growth outlook enables major developed economy central banks to start raising interest rates more quickly than assumed under our central scenario.

0

2

4

6

8

2005 2007 2009 2011 2013 2015

World: CPI% year


Baseline

Upside

Forecast

Central bank rates (%)US Eurozone UK

Baseline Upside Baseline Upside Baseline Upside2013Q4 0.2 0.2 0.7 0.8 0.5 0.52014Q4 0.2 0.9 0.7 1.5 0.5 1.32015Q4 0.3 1.3 0.7 1.8 0.5 1.5

…though supply-side boost keeps inflation in check

53

� Bond yields rise but the rise is smaller that it might have been due to lower inflation than under our baseline scenario, as a result of the lower oil price and the boost to the supply side.

• The difference between the performance of the equity market under the upside scenario and the baseline is relatively modest. Equities end 2017 2% higher than under the baseline scenario.

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015

US: 10-year government bonds%


Baseline

Upside

Forecast

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2005 2007 2009 2011 2013 2015

Equity market: upside - USStockmarket index


Baseline

Forecast

Upside

Corporate re-awakening: Impact on equity markets le ss marked on bond markets

54

� Lower political tensions would reduce the risk premium embedded in the oil price which ends 2014 $17 below the price assumed in our central scenario at $92 per barrel, despite stronger global growth.

• With interest rates rising even more quickly than under our baseline scenario, the opportunity costs of holding gold increases. Stronger growth will reduce fears about the survival of the financial system. The gold price falls and ends 2014 25% below its current price.

0

20

40

60

80

100

120

140

2005 2007 2009 2011 2013 2015

World oil price: upside$/barrel


Baseline

Forecast

Upside

0

200

400

600

800

1000

1200

1400

1600

1800

2005 2007 2009 2011 2013 2015

World gold price: upside$/troy ounce


Baseline

Forecast

Upside

Corporate re-awakening: Oil and gold weaker

55

� Policy rates rise more quickly than markets are exp ecting . The improved growth outlook enables major developed economy central banks to start raising interest rates more quickly than assumed under our central scenario. For example, Fed funds start rising in early 2014 rather than in late 2015.

� Be underweight bonds . Faster nominal GDP growth than under our central scenario means that bond yields rise more quickly as well. For example, US ten-year yields rise from their present level of 1.8% to 3.3% at the end of 2014, compared with a rise to 2.6% under our central scenario.

� Be overweight equities . With world GDP growth of 4.6% in 2014, better even than the pre-financial crisis boom years of 2006 and 2007, fears of tail risks dissipate and equity markets rise.

� Be overweight emerging markets . Strong, inflation free, global growth helps emerging market risk premiagradually fall. Due to the falling oil price favour oil consumers over oil producers.

� Be underweight oil . Lower political tensions reduce the risk premium embedded in the oil price which ends 2014 $17 below the price assumed in our central scenario at $92 per barrel, despite stronger global growth.

� Be underweight gold . With interest rates rising even more quickly than under our baseline scenario, the opportunity costs of holding gold increases. The gold price falls and ends 2014 25% below its current price.

Investment implications of corporate re-awakening

56

Investment implications of corporate re-awakening


Corporate Re-Awakening 2013 2014 2013 2014 2013 2014 2013 2 014GDP (%) 3.1 4.2 2.0 3.6 0.8 2.1 2.1 3.9

CPI (%) 2.0 1.4 1.9 1.1 1.5 0.9 -0.1 0.5


Equities (%) 4.1 2.6 9.6 7.1 13.1 8.2 12.0 6.0

10-year government bond yields (bps change) 36 128 16 98 -15 74 10 108

World oil price (%) -11.1 -3.1 - - - - - -

World gold price (%) -18.0 -9.9 - - - - - -


57

Appendix for detailed forecasts

Alternative equity m

arket forecasts2010

20112012

20132014

Baseline

Unite

d States

12,73

81

2,868

14,4

8914

,989

15,41

1 G

ermany

875

762

894

921

977

UK

2,98

12,79

63,0

483

,327

3,63

0 Ja

pan85

774

07

658

5592

8

Eurozone

break-up

Unite

d States

12,73

81

2,868

14,4

8914

,538

13,88

8 G

ermany

875

762

894

893

880

UK

2,98

12,79

63,0

483

,227

3,26

9 Japa

n85

774

07

658

3483

6

Chin

a hard la

nding U

nited S

tates12

,738

12,86

81

3,764

13,1

9014

,641

Germ

any

875

762

849

810

928

UK

2,98

12,79

62,8

962

,928

3,44

8 Ja

pan

857

740

756

832

901

Corporate rea

wakening

Unite

d States

12,73

81

2,868

14,4

8915

,078

15,47

1 G

erman

y87

576

28

949

4698

7 U

K2

,981

2,796

3,048

3,3

413

,577

Japa

n85

774

07

658

5790

8

Greek e

xit U

nited S

tates12

,738

12,86

81

4,489

14,3

9014

,795

Eu

rozon

e87

576

28

948

8493

8 U

K2

,981

2,796

3,048

3,1

843

,449

Japa

n85

774

07

658

2189

1

US

fiscal cliff

Unite

d States

12,73

81

2,868

14,4

2015

,356

16,34

5 E

uro

zone

875

762

893

954

1,02

3 U

K2

,981

2,796

3,045

3,4

173

,732

Japa

n85

774

07

648

8596

0

58


Alternative 10-year yield forecasts

20102011

20122013

2014B

aseline U

nited S

tates2

.92.0

1.62

.02

.6 E

urozone

3.7

4.53.7

3.8

3.8

UK

3.3

2.31.9

2.1

2.4

Japan

1.1

1.00.8

0.9

1.5

Eurozone

break-up

Unite

d States

2.9

2.01.6

2.0

1.5

Eurozo

ne3

.74.5

3.73

.82

.9 U

K3

.32.3

1.92

.11

.1 Japa

n1

.11.0

0.81

.01

.0

Chin

a hard la

nding U

nited S

tates2

.92.0

1.62

.02

.6 E

urozone

3.7

4.53.7

3.8

3.9

UK

3.3

2.31.8

2.0

2.3

Japan

1.1

1.00.8

1.2

2.0

Corporate rea

wakening

Unite

d States

2.9

2.01.6

2.0

3.3

Eurozo

ne3

.74.5

3.73

.64

.3 U

K3

.32.3

1.92

.03

.0 Japa

n1

.11.0

0.80

.92

.0

Greek e

xit U

nited S

tates2

.92.0

1.61

.92

.5 E

urozone

3.7

4.53.7

4.4

4.8

UK

0.8

1.10.7

0.2

0.2

Japan

1.1

1.00.8

0.9

1.5

US

fiscal cliff

Unite

d States

2.9

2.01.6

1.5

1.5

Eurozo

ne3

.74.5

3.73

.63

.5 U

K3

.32.3

1.92

.02

.1 Japa

n1

.11.0

0.80

.81

.0

59


Alternative short rate forecasts

20102011

20122013

2014B

aseline U

nited States

0.30.5

0.40.4

0.4 E

urozone1.0

1.50.7

0.70.9

UK

0.81.1

0.70.7

0.7 Japan

0.20.2

0.20.2

0.2

Eurozone break-up

United S

tates0.3

0.50.4

0.40.3

Eurozone

1.01.5

0.80.8

0.2 U

K0.8

1.10.7

0.70.2

Japan0.2

0.20.2

0.20.1

China hard landing

United S

tates0.3

0.50.4

0.40.4

Eurozone

1.01.5

0.80.8

0.9 U

K0.8

1.10.6

0.60.5

Japan0.2

0.20.1

0.60.9

Corporate reaw

akening U

nited States

0.30.5

0.40.4

1.2 E

urozone1.0

1.50.8

0.81.6

UK

0.81.1

0.70.7

1.4 Japan

0.20.2

0.20.2

0.7

Greek exit

United S

tates0.3

0.50.4

0.30.3

Eurozone

1.01.5

0.70.0

0.2 U

K0.8

1.10.7

0.20.2

Japan0.2

0.20.2

0.10.2

US

fiscal cliff U

nited States

0.30.5

0.40.4

0.4 E

urozone1.0

1.50.7

0.70.9

UK

0.81.1

0.70.7

0.7 Japan

0.20.2

0.20.2

0.2

60


Alternative exchange rate forecasts

20102011

20122013

2014B

aseline U

S$

Effective

73.0

72.4

74.3

78.3

81.5

$/£

1.6

1.61.6

1.5

1.5

£/€

1.2

1.21.3

1.3

1.3

$/€

1.4

1.31.3

1.2

1.1

¥/$

82.5

77.3

81.0

91.5

94.6

Re

nminbi/$

6.7

6.46.4

6.1

5.9

Eurozone

break-up

US

$ E

ffective73

.07

2.47

4.378

.481

.6 $

/£1

.61.6

1.61

.51

.5 £

/€1

.21.2

1.31

.31

.3 $

/€1

.41.3

1.31

.21

.1 ¥

/$82

.57

7.38

1.091

.585

.1 R

enm

inbi/$6

.76.4

6.46

.16

.0

Chin

a hard la

nding U

S$

Effective

73.0

72.4

74.3

78.2

81.7

$/£

1.6

1.61.6

1.5

1.5

£/€

1.2

1.21.3

1.3

1.3

$/€

1.4

1.31.3

1.2

1.1

¥/$

82.5

77.3

81.2

90.8

93.8

Re

nminbi/$

6.7

6.46.4

6.2

6.0

Corporate rea

wakening

US

$ E

ffective73

.07

2.47

4.377

.981

.1 $

/£1

.61.6

1.61

.51

.5 £

/€1

.21.2

1.31

.31

.3 $

/€1

.41.3

1.31

.21

.1 ¥

/$82

.57

7.38

1.091

.595

.0 R

enm

inbi/$6

.76.4

6.46

.26

.0

Gre

ek exit

US

$ E

ffective73

.07

2.47

4.381

.386

.0 $

/£1

.61.6

1.61

.41

.4 £

/€1

.21.2

1.31

.31

.3 $

/€1

.41.3

1.31

.11

.0 ¥

/$82

.57

7.38

1.091

.594

.6 R

enm

inbi/$6

.76.4

6.46

.15

.9

US

fiscal cliff

US

$ E

ffective73

.07

2.47

4.377

.881

.6 $

/£1

.61.6

1.61

.51

.5 £

/€1

.21.2

1.31

.31

.3 $

/€1

.41.3

1.31

.21

.1 ¥

/$82

.57

7.38

1.090

.694

.6 R

enm

inbi/$6

.76.4

6.46

.15

.9

61


Alternative com

modity price forecasts

20102011

20122013

2014B

aseline B

rent O

il ($/bl)8

711

010

610

210

9 G

old1

,367

1,68

21

,627

1,35

51

,260

Co

pper8

,634

7,51

17

,727

8,16

58

,572

Agriculture

140

135

127

122

121

Eurozone

break-up

Bre

nt Oil ($/bl)

87

110

106

102

81

Gold

1,36

71

,682

1,62

71

,354

985

Co

pper8

,634

7,51

17

,727

8,16

26

,699

Agriculture

140

135

127

121

97

Chin

a hard landing

Bre

nt Oil ($/bl)

87

110

105

88

91

Gold

1,36

71

,682

1,62

01

,182

1,04

1 C

opper

8,63

47

,511

7,69

77

,125

7,08

2 A

griculture14

013

512

711

611

9

Corporate rea

wakening

Bre

nt Oil ($/bl)

87

110

106

95

92

Gold

1,36

71

,682

1,62

71

,334

1,20

3 C

opper

8,63

47

,511

7,72

78

,043

8,18

0 A

griculture14

013

512

712

211

7

Gre

ek exit

Bre

nt Oil ($/bl)

87

110

106

98

94

Gold

1,36

71

,682

1,62

71

,329

1,12

1 C

opper

8,63

47

,511

7,72

78

,009

7,62

3 A

griculture14

013

512

711

811

2

US

fiscal cliff B

rent O

il ($/bl)8

711

010

69

411

0 G

old1

,367

1,68

21

,627

1,34

21

,240

Co

pper8

,634

7,51

17

,727

8,08

78

,432

Agriculture

140

135

127

125

119

global investment strategy - oxford economics€¦ · scenario 4: us fiscal cliff (10% probability)...

Documents