iapf conference 2016 wade slides.pdf · 2016-04-08 · iapf annual investment conference cny vs...

IAPF Annual Investment Conference

IAPF Conference 2016 Macro view

06/04/2016 11:52:53

For professional investors and advisers only. Not suitable for retail clients

Keith Wade, Economist, Schroders


Macro overview 2016: storm warning

Key questions

• China: heading for recession?

• US: heading for recession?

• UK: heading for Brexit?

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CNY vs global equity market Oil vs global equity market

China and oil are driving the markets High correlations at times of stress

Source: Thomson Reuters Datastream, Schroders, 30 March 2016. CNY - Chinese Yuan Renminbi

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Has growth collapsed?

Or just slowed?

China: heading for recession? Will the real China please stand up?

Source: Thomson Datastream, Schroders Economics Group, 30 March 2016

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5

6

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14

5

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2008 2009 2010 2011 2012 2013 2014 2015 2016

Schroders Activity Model GDP

y/y, % y/y, %

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP Li Keqiang index

% y/y


China: now tracking the trade weighted exchange rate CNY policy will impact dollar strength


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95

100

105

110

115

120

125

130

6

6.1

6.2

6.3

6.4

6.5

6.6

6.7

2011 2012 2013 2014 2015 2016USD/CNY Spot China effective exchange rate, nominal (BIS) (RH Scale)

IndexUSD/CNY spot


CNY: how much control do the authorities have? FX reserves are declining sharply

Source: Thomson Datastream, Schroders, 30 March 2016

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China foreign exchange 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 2014 2015 2013

USD, billions, monthly actual change 150 100 50 0

-50 -100 -150

2006 2007 2008 2009 2010 2011 2012 2014 2015 2013 Change in FX Reserves (3 month moving average)


Oil price winners and losers The energy tax cut in the US vs the hit to oil and gas capex


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96 98 00 02 04 06 08 10 12 14 16

Brent Crude U$/BBL US Rotary Oil Rigs (rhs)

1.0

1.5

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01 03 05 07 09 11 13 15Energy as a % of Disposable IncomeGasoline Retail Regular U$/GL (rhs)

Count

Price per barrel

Dollars per gallon

%


US consumers eat much of their gas savings Percent of savings from lower gas prices spent on non-gas categories

Source: JPMorgan Chase Institute, Schroders Economics Group, 14 October 2015

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18%

7%

6% 1% 32%

10%

7%6%

5%5% 33%

4% 2% 6% 2% 73%


Global trade growth stalls EM exports not responding to DM recovery

Source: Thomson Datastream, Schroders, 30 March 2016

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20

15

10

5

0

-5

-10

-15

-20 1992 1994 1998 1996 2000 2002 2004 2006 2008 2010 2012 2014 2016

World export volumes y/y% Average trade growth Recession

y/y%


China shakes the world? No hard landing, but watch for a wave of deflationary pressure from EM

Source: Thomson Reuters Datastream, Schroders, The Economist,, 30 March 2016

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-4

-2

0

2

4

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'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

US core goods prices UK goods prices

Deflationary pressures from emerging markets as supply expands

Inflationary pressures from emerging markets as demand expands

y/y%


Fed tightening delayed, not dodged US unemployment cycles and real Fed funds rate


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-2%

-1%

0%

1%

2%

3%

4%

5%-2%

-1%

0%

1%

2%

3%

4%

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 16Recessions Unemployment gap (U/E rate minus NAIRU) Real interest rates (Fed funds rate minus core inflation), rhs inv.


The risk universe Scenarios versus baseline

Source: Schroders Economics Group, 20 February 2016

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IAPF Annual Investment Conference March 2016 | For professional advisers only. This material is not suitable for retail clients

Brexit Understanding the risks and implications


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

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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

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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

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EU, 44.9%

US, 17.2%

Ger, 8.5%

Neth, 6.9%

Fra, 6.2%

Ire, 5.5%

Swi, 3.5%

Bel, 3.3%

Chi, 3.3%

Ita, 2.9%

Spa, 2.8%

EU, 51.8%

Ger, 12.3%

US, 9.3%

Neth, 6.9%

Chi, 6.6%

Fra, 6.6%

Spa, 4.3%

Bel, 4.1%

Nor, 3.8%

Ita, 3.7%

Ire, 3.2%

60% 40% 20% 0% 20% 40% 60%% of total UK imports % of total UK exports

UK’s top 10 trade partners UK exports and imports as share of total (2012-2014 average)

Source: ONS, Schroders Economics Group, 3 March 2016

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The UK’s relationship with the EU Trade, investment and migration

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) Investment: • 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) Migration: • 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

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Life after Europe What would the UK’s future look like?


Life after Europe Options for Brexit

After leaving the EU, these are some of the models the UK could follow: • 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) – Tariff 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

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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.

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Important information For professional investors only. This material is not suitable for retail clients.

The views and opinions contained herein are those of the Schroders Economics Group, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data.

The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.

Issued in April 2016 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 1893220 England. Authorised and regulated by the Financial Conduct Authority. INS04734

06/04/2016 11:53:06

iapf conference 2016 wade slides.pdf · 2016-04-08 · iapf annual investment conference cny vs...

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