october 2013 april 2015 - wamm dc · 2015-04-22 · october 2013 multipolarity and investing:...

October 2013

Multipolarity And Investing: Opportunities & Risks

April 2015

Presentation to:Washington Association Of Money Managers

Marko PapicChief Strategist Geopolitical Strategy

2

A Word On Methodology For (geo)political analysis to be investment-relevant, it has to…

1. Examine policymaker CONSTRAINTS, not their PREFERENCES

2. Maintain risk-neutrality3. Reveal endogenous (geo)political assumptions, not

fixate on exogenous ‘tail risks,’ or as Mark Twain said:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

The Market Is A Poor Judge Of GPS Constraint Paradigm

3

© BCA Research 2015

90

80

70

60

50

40

30

20

10

06 08 10 12 14

90

80

70

60

50

40

30

20

10

PROBABILITY OF EURO BREAK-UP% %

DERIVED FROM ITALY / GERMANY AND SPAIN / GERMANY 5-YEAR YIELD SPREADS.

70

60

50

40

30

02 04 06 08 10 12 14

70

60

50

40

30

USD/RUB EXCHANGE RATE

USD/RUB

USD/RUB


Welcome To Multipolarity

6

© BCA Research 2015 © BCA Research 2015

88

92

96

100

90 94 98 02 06 10

88

92

96

100U.S. GEOPOLITICAL POWER INDEX*:ABSOLUTE TERMS**

* THE GEOPOLITICAL POWER INDEX MEASURES A COUNTRY'SPOWER BASED ON A WEIGHTED AGGREGATION OF ITS ECONOMIC, MILITARY,POLITICAL, TECHNOLOGICAL, AND GEOGRAPHICAL ENDOWMENTS.SOURCE: BCA CALCULATIONS.

** SHOWN REBASED TO 1990 = 100.

88

92

96

100

90 94 98 02 06 10

88

92

96

100U.S. GEOPOLITICAL POWER INDEX*:RELATIVE TO WORLD**

* THE GEOPOLITICAL POWER INDEX MEASURES A COUNTRY'S POWER BASED ON A WEIGHTED AGGREGATION OF ITS ECONOMIC, MILITARY,POLITICAL, TECHNOLOGICAL, AND GEOGRAPHICAL ENDOWMENTS.SOURCE: BCA CALCULATIONS.

** SHOWN REBASED TO 1990 = 100.

American decline is not absolute…

…it is relative

WWI

WWII


Multipolarity Is Messy And Dangerous

7

40

35

30

25

20

15

10

5

1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020

40

35

30

25

20

15

10

5

NATIONAL CAPABILITY INDEX:U.S.U.K.FRANCE

GERMANYCHINAJAPANRUSSIA

% %

SOURCE: CORRELATES OF WAR DATABASE BY SINGER, BREMER, AND STUCKEY.THE NATIONAL CAPABILITY INDEX MEASURES THE MATERIAL CAPABILITY OF COUNTRIES IN THE FORM OF IRON AND STEEL PRODUCTION, MILITARY EXPENDITURES AND PERSONNEL, PRIMARY ENERGY CONSUMPTION, AND TOTAL AND URBAN POPULATION.

Multipolarity Will Erode Globalization

8

.30

.25

.20

.15

.10

1840 1860 1880 1900 1920 1940 1960 1980 2000

.30

.25

.20

.15

.10

TRADE GLOBALIZATION*

* TRADE GLOBALIZATION IS MEASURED BY IMPORTS AS PERCENTAGE OF GDP FOR 148 COUNTRIES WEIGHTED BY POPULATION.SOURCE: BCA CALCULATIONS AND CHASE-DUNN C, KAWANO Y, AND BREWER B, "TRADE GLOBALIZATION SINCE 1975: WAVES OF INTEGRATION IN THE WORLD SYSTEM,“ AMERICAN SOCIOLOGICAL REVIEW 65 1, 2000.


Pax Americana

Pax Britannica

Hegemonic Instability

?

Investment Conclusions

9


20

15

10

5

0

-5

-10

-15

-20

2000 02 04 06 08 10 12 14

20

15

10

5

0

-5

-10

-15

-20

GLOBALTOTAL TRADE MINUSGDP GROWTH* (LS)EXPORT PRICES**(Advanced, RS)

Ann%Chg

* SOURCE: IMF.** SHOWN SMOOTHED. SOURCE: NETHERLANDS BUREAU FOR ECONOMIC

POLICY ANALYSIS.

Ann%Chg

35

30

25

20

15

10

5

0

-5

-10

-15

2013 2014

35

30

25

20

15

10

5

0

-5

-10

-15

JAN APR JUL OCTJAN APR JUL OCTJAN APR

EQUITY RETURNSDEVELOPED MARKETSEMERGING MARKETS

% %

SHOWN REBASED TO JAN. 2013 = 1, IN COMMON-CURRENCY TERMS.SOURCE: MSCI INC. (SEE COPYRIGHT DECLARATION).


Long DM /Short EM

2015

Middle East: Geopolitical Disequilibrium

10


250

200

150

100

50

005 10 15

250

200

150

100

50

0

FOREIGN DEPLOYMENT OF U.S. TROOPS*:MIDDLE EAST AND NORTH AFRICA

Th Th

* SOURCE: THE HERITAGE FOUNDATION AND DEFENSE MANPOWER DATA CENTER.


6000

5000

4000

3000

2000

1000

75 80 85 90 95 2000 05 10 15

6000

5000

4000

3000

2000

1000

U.S. CRUDE OILAND PETROLEUM PRODUCTSIMPORTS FROM OPEC COUNTRIES*

Th Bbl/Day

* SHOWN AS 3-MONTH MOVING AVERAGE.

Th Bbl/Day

Iran And Saudi Arabia Are Fighting For Regional Hegemony

11

12

Energy Markets: Paradigm Shift GEOPOLITICAL EVENT PROBABILITY IMPACT ON OIL

PRICES DURATION

DEATH OF OPEC N/A - event is ongoing MAJOR HEADWIND Long - Or as long as Saudi Arabia pursues this strategy

IRAN - P5+1 NEGOTIATIONS

65% that June deadline produces an agreement

MEDIUM HEADWIND Long - End of sanctions will release about 800,000 bbl/day of Iranian production in mid-2016. However, opening of Iran will allow it to eventually boost production to about 4.1 million bbl/day.

IRAQ STABILIZED BY IRAN

40% that Iran successfully stabilizes Iraq

MAJOR HEADWIND Long - FDI flows in, boosting Iraqi production beyond 6 million bbl/day.

SAUDI ARABIA INVADES YEMEN

50% MINOR TAILWIND Short/Medium - Not clear how this would lead to a sustained spike in geopolitical risk premium.

SAUDI ARABIA INVADES IRAQ

25% MEDIUM TAILWIND Long - Iran and Saudi Arabia square off against one another within the borders of the world’s fourth largest oil producer.

UNCOORDINATED SUPPLY CUT BY A MAJOR PRODUCER

25%

TAILWIND -MAGNITUDE

DEPENDS ON WHICH PRODUCER

Depends on which producer and for how long - We are most concerned about Nigeria, Libya, Venezuela, Algeria, and Russia in that order. Low oil revenues lead to heightened domestic political risk, which in turn leads to supply cuts. This happened in Libya in November, with oil production down 370,000 bbl/day since then.

COORDINATED SUPPLY CUT BY A NON-OPEC MEMBER

15% MAJOR TAILWIND Medium - Russia, or another major producer, throws in the towel and cuts production due to the pain of lost revenue.

ISRAEL ATTACKS IRAN < 5% MAJOR TAILWIND Short - Sustainability of rally depends on Iranian retaliation, which is unlikely to involve closing the Strait of Hormuz.

IRAN CLOSES STRAIT OF HORMUZ

< 1% MAJOR TAILWIND Short - Iran has no reason to do this now that it is close to rapprochement with the West. If it did, however, it would have to face off against the U.S. Navy.

RED – HEADWIND; GREEN – TAILWIND; NOTE: ALL PROBABILITIES ARE SUBJECTIVE.

Energy Markets: Oil Price Volatility

12

10

8

6

4

2

12

10

8

6

4

2

JULY 1, 2014APRIL 6,2015

% %

13

Higher Volatility increases probability of tail risk price moves

PERCENT CHANGE IN DEC/15 BRENT PRICE (%)

-100 -8

0

-60

-40

-20 0 20 40 60 80 100

PRO

BA

BIL

ITY

OF

OC

CU

RR

ENC

E

THIS CHART SHOWS THE EVOLUTION OF THE PROBABILITY DISTRIBUTION FOR RETURNS DERIVED FROM IMPLIED OPTION VOLATILITIES FOR DEC/15 BRENT CRUDE OIL OPTIONS. IN MID-2014, VOLATILITY WAS NEAR-HISTORICAL LOWS, AND THE EXPECTED RETURNS FOR DEC/15 BRENT FELL IN A NARROW RANGE. IN NOVEMBER 2014, OPEC ANNOUNCED IT NO LONGER WOULD ADJUST ITS PRODUCTION TO ACCOMMODATE NON-OPEC PRODUCTION. THIS MOVE WOULD INCREASE RISK IN THE MARKETS ON THE DOWNSIDE DUE TO UNRESTRAINED PRODUCTION, AND ON THE UPSIDE, DUE TO THE HIGHER LIKELIHOOD LOW PRICES WOULD DESTABILIZE FINANCIALLY DISTRESSED OIL EXPORTERS.


Why We Are Not Oil Bears (Yet)

14


1200

1000

800

600

400

200

2000 02 04 06 08 10 12 14 16

1200

1000

800

600

400

200

OPEC:OIL REVENUE* (LS)GOVERNMENT SPENDING** (RS)

BnUSD

* TOTAL OPEC OUTPUT MULTIPLIED BY BRENT PRICE.** TOTAL GOVERNMENT SPENDING OF 12 MEMBERS.

SOURCE: IMF, WEO OCTOBER 2014.

BnUSD

…and thus heightens political risks

CONTRIBUTION TO INCREASE IN GLOBAL OIL SUPPLY

(2013-2020)*40

30

20

10

0

-10

%

U.S

.B

RA

ZIL

IRA

QC

AN

AD

AIR

AN K

AZA

KH

STA

NA

NG

OLA

VEN

EZU

ELA

OTH

ER N

ON

-OPE

CC

HIN

AU

AE

RU

SSIA

MEX

ICO

LIB

YAIN

DIA

ECU

AD

OR

QA

TAR

ALG

ERIA

NIG

ERIA

KU

WA

ITSA

UD

I AR

AB

IA

62

5725

85

25

55 55 48 55 55 25 54 53 25 55 55 25 2555

2525

* RED NUMBERS INDICATE AVERAGE BREAKEVEN OF OIL FIELDS.SOURCE: WORLD ENERGY OUTLOOK 2013/2014, INTERNATIONALENERGY AGENCY AND RYSTAD ENERGY.

Russia-West Tensions: Constraints To Cold War

15 SOURCE: THE BBC, STATE STATISTICS COMMITTEE OF UKRAINE,AND UKRAINE NATIONAL SECURITY & DEFENCE COUNCIL.

Crimean landbridge


Russia-West Tensions: Opportunities In Deescalation

16

7

6

5

4

3

2

1

0

-1

02 04 06 08 10 12 14

7

6

5

4

3

2

1

0

-1

RUSSIA:GEOPOLITICAL RISK PREMIUM*

* BASED ON USD/NOK EXCHANGE RATE, RUSSIAN RELATIVETO U.S. CONSUMER PRICE INDEX, AND A TIME TREND.NOTE: VERTICAL LINE DENOTES MH-17 CRASH.


25

0

-25

-50

02 04 06 08 10 12 14

25

0

-25

-50

12.5

10.0

7.5

5.0

12.5

10.0

7.5

5.0

COMPARATIVE VALUATION INDICATOR**% %

RUSSIA12-MONTH FORWARDP/E RATIO*

* SOURCE: THOMSON / IBES.** PERCENTAGE PREMIUM / DISCOUNT RELATIVE TO EM BENCHMARK.


East Asia: The Forgotten Risk


17

100

90

80

70

60

50

40

30

04 06 08 10 12 14

100

90

80

70

60

50

40

30

TOTAL TRADE WITH*CHINAU.S.

BnUSD

* INCLUDES JAPAN, SOUTH KOREA, INDONESIA, SINGAPORE,PHILIPPINES, VIETNAM, MALAYSIA, AND TAIWAN.

BnUSD

400

300

200

100

0

02 04 06 08 10 12 14

400

300

200

100

0

JAPAN:SCRAMBLES AGAINST CHINESE AIRCRAFT*

Times Times

* SOURCE: RESPONSES TO NEW THREATS AND CONTINGENCIES,JAPANESE MINISTRY OF DEFENSE.

EM: Bloodbath

18

8000

6000

4000

2000

90 95 2000 05 10 15

8000

6000

4000

2000

350300250200150100

350300250200150100

IN LOCAL CURRENCY TERMS

EMERGING MARKETS STOCKS VS DEVELOPED WORLD*:6-YEAR MOVING AVERAGE12-YEAR MOVING AVERAGEIN USD TERMS

* BOTH SERIES ARE REBASED TO JANUARY 1989 AT 100; SOURCE: MSCI INC. (SEE COPYRIGHT DECLARATION)


Breakdown;new lows ahead

Ditto

19

Growth Will Not Rescue EM

1993-19981998-20032003-20082008-2013

1993 - 19981998 - 20032003 - 20082008 - 2013

19

-10

GDP GROWTH AND EQUITY PERFORMANCE

* SHOWN IN COMMON-CURRENCY TERMS. SOURCE: MSCI (SEE COPYRIGHT DECLARATION).** SOURCE: IMF WORLD ECONOMIC OUTLOOK.

NOTE: DATA POINTS REPRESENT CHINA, BRAZIL, INDIA, RUSSIA, SOUTH AFRICA, SOUTH KOREA, TAIWAN, MALAYSIA, CHILE, MEXICO, AND SINGAPORE IN FOUR TIME PERIODS.

14

9

4

0 10 20 30 40AVERAGE GDP GROWTH**

EQU

ITY

PRIC

E LE

VELS

REL

ATIV

E TO

WO

RLD

*

No correlation!


20

EM Needs Structural Reforms

EMERGING MARKET ECONOMIES

6

%

4

2

2001

-200

7

2008

-201

4

2015

-202

0

SOURCE: IMF.

-.44

-.42

-.40

-.38

-.36

-.34

-.32

-.30

-.28

-.26

2000 02 04 06 08 10 12

5000

4500

4000

3500

3000

2500

2000

1500

EMERGING MARKETS*:GOVERNANCE INDICATOR** (LS)GDP PER CAPITA*** (RS)

USD

* INCLUDES CHINA, BRAZIL, RUSSIA, INDIA, MEXICO, INDONESIA,TURKEY, MALAYSIA, THE PHILIPPINES, THAILAND, AND SOUTH AFRICA.

** INDICATOR IS AN EQUALLY-WEIGTHED AVERAGE OF THE FOLLOWINGMEASURES: GOVERNMENT EFFECTIVENESS, VOICE AND ACCOUNTABILITY,POLITICAL STABILITY AND VIOLENCE, RULE OF LAW, AND CONTROLOF CORRUPTION. SOURCE: WORLD BANK AND BCA RESEARCH.

*** WEIGHTED BY POPULATION.



TOTAL FACTORPRODUCTIVITY GROWTHPOTENTIALEMPLOYMENT GROWTHCAPITAL GROWTHPOTENTIALOUTPUT GROWTH(For both panels)

21

China: Growth Over Reforms


15.0

12.5

10.0

7.5

06 08 10 12 14

160

140

120

100

80

60

CHINA:REAL GDP (LS)MONETARY CONDITIONS INDEX (RS)

Ann%Chg

56

54

52

50

48

46

44

08 10 12 14

56

54

52

50

48

46

44

PMI ON EMPLOYMENT*:MANUFACTURINGNON-MANUFACTURING

* SOURCE: NATIONAL BUREAU OF STATISTICS OF CHINA.


© BCA Research 2015 © BCA Research 2015 SOU

TH K

OR

EA**

(198

7)

China: Can China Reform?

22

VIEWS ON CURRENT ECONOMIC SITUATION

SOURCE: “GLOBAL PUBLIC DOWNBEAT ABOUT ECONOMY,” PEW RESEARCH CENTER, SEPTEMBER 2014.

CH

INA

IND

IA

IND

ON

ESIA

SOU

TH A

FRIC

A

TUR

KEY

RU

SSIA

BR

AZI

L

POLA

ND

THA

ILA

ND

Percentage of respondents answering, “Good”

!

CH

INA

–C

OA

STA

L PR

OVI

NC

ES* (

2013

)

TAIW

AN

** (1

987)

GDP PER CAPITA (CONSTANT USD)

* SHOWN AS POPULATION WEIGHTED GDP PER CAPITA. SOURCE: CEIC.

** SOURCE: IMF WEO (2014) AND WORLD BANK.

90

80

70

60

50

40

30

20

10

USD

10000

8000

6000

4000

2000

China: One Country, Two Economies

23© BCA Research 2015

GDP PER CAPITA BY PROVINCE (2012)

SOURCE: CEIC.

ThUSD

16

14

12

10

8

6

4

2

TIA

NJI

NB

EIJI

NG

SHA

NG

HA

IJI

AN

GSU

INN

ER M

ON

GO

LIA

ZHEJ

IAN

GLI

AO

NIN

GG

UA

NG

DO

NG

FUJI

AN

SHA

ND

ON

GJI

LIN

CH

ON

GQ

ING

SHA

AN

XIH

UB

EIH

EBEI

NIN

GXI

AH

EILO

NG

JIA

NG

XIN

JIA

NG

SHA

NXI

HU

NA

NQ

ING

HA

IH

AIN

AN

HEN

AN

GU

AN

GXI

SIC

HU

AN

JIA

NG

XIA

NH

UI

TIB

ETYU

NN

AN

GA

NSU

GU

IZH

OU

About 60% of the population is still very poor

COASTAL PROVINCESINTERIOR PROVINCES


Europe: The Euro Is Geopolitics

24

1.00

.75

.50

.25

90 94 98 02 06 10

1.00

.75

.50

.25

GEOPOLITICAL POWER INDEX*:EMU-5** AGGREGATEEMU-5** AVERAGE

* THE GEOPOLITICAL POWER INDEX MEASURES A COUNTRY'SPOWER BASED ON A WEIGHTED AGGREGATION OF ITS ECONOMIC, MILITARY,POLITICAL, TECHNOLOGICAL, AND GEOGRAPHICAL ENDOWMENTS.SOURCE: BCA CALCULATIONS.

** INCLUDES FRANCE, GERMANY, ITALY, SPAIN, AND THE NETHERLANDS.


90

80

70

60

50

02 04 06 08 10 12 14

90

80

70

60

50

% OF RESPONDENTS IN FAVOR OF THE EURO*:FRANCEGERMANYITALYSPAINGREECEEURO AREA

% %

* SOURCE: EU COMMISSION.

Where Europeans want to be…

…where they are on their own Support for the euro is holding…

Europe: Populism Is Overstated


25

12

10

8

6

92 94 96 98 2000 02 04 06 08 10 12 14

12

10

8

6

EURO AREA*:SEATS HELD BY NON-CENTRIST PARTIES IN PARLIAMENT(AS % OF TOTAL SEATS)

% %

* INCLUDES AUSTRIA, BELGIUM, FINLAND, FRANCE, GERMANY, GREECE, ITALY, THE NETHERLANDS, PORTUGAL, AND SPAIN.

Support rises……and then peaks

Great Recession


Europe: Two Trade Ideas

26

10

8

6

4

2

0

-2

06 08 10 12 14

10

8

6

4

2

0

-2

POLICY RATE:ECB OFFICIAL RATEPERIPHERY TAYLOR RULE*CORE TAYLOR RULE

% %

* TAYLOR RULE INCLUDES INFLATION AND THE UNEMPLOYMENT GAP.FOR ADDITIONAL DETAILS PLEASE SEE: NECHIO, FERNANDA,"MONETARY POLICY WHEN ONCE SIZE DOES NOT FIT ALL,“FRBSF ECONOMIC LETTER (JUNE 2011).

30

25

20

15

10

06 08 10 12 14

30

25

20

15

10

SHILLER P/E RATIOU.S.SPAINITALYPORTUGAL

NOTE: BASED ON DATA FROM MSCI INC. (SEE COPYRIGHT DECLARATION).

Germany’sbank

Periphery’sbank


SUCC

ESS

SCAL

E

FAILURE(UNACCEPTABLE)

SUCCESS

EURO AREA MEMBERSHIP(BINARY)

AUSTERITY RELIEF(ORDINAL)

IN

OUT

NO RELIEF

FULL RELIEF

LIKELYOUTCOME

PROMISED RELIEF

9

7

6

5

2

3

Can Greece Ruin The Euro-Party?


80

70

60

50

02 04 06 08 10 12 14

80

70

60

50

PERCENT OF RESPONDENTSIN FAVOR OF THE EURO*:

GREECEEURO AREASPAIN, ITALY, AND PORTUGAL**

% %

* SOURCE: EU COMMISSION.** POPULATION-WEIGHTED AVERAGE.

27

What About The U.K.?


40

30

20

10

2014

40

30

20

10

JUL OCT JAN APR JUL OCT JAN APR

U.K. VOTING INTENTIONS*:CONSERVATIVELABOURLIBERAL DEMOCRATSUKIP

% %

* SOURCE: U.K. POLLING REPORTS. SHOWN AS 15-DAY MOVING AVERAGE.


50

45

40

35

2013 2014 2015

50

45

40

35

EU REFERENDUM*RESPONDENTS WHO ANSWERED:

STAYLEAVE

% %

* SOURCE: DATA AGGREGATED FROM YOUGOV, TNS, COMRES, SURVATION,LORD ASHCROFT POLLS, PEW RESEARCH, AND POPULUS.SHOWN AS 4 WEEK MOVING AVERAGE.28

U.S.: Polarization In Context

22 © BCA Research 2015

‐1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1

More liberal

SOURCE: POOLE, ROSENTHAL, ET AL. (2014) AND BCA CALCULATIONS.

More conservative

House Democrats (1985-1987)

Clinton (1995-1997)

Obama (2013-Present)

Reagan (1985-1987)

House Republicans (1995-1997)

House Republicans (2013-Present)

Ideological difference = 1.0



october 2013 april 2015 - wamm dc · 2015-04-22 · october 2013 multipolarity and investing:...

Documents