War Room 27 June 2013

China’s Slowing Growth

War Room•Monthly macro discussion

•Using tools in context

•Update on HiddenLevers Features

•Your feedback welcome

China’s Slowing Growth

I. China Boom – History + Current Snapshot

II. China Slowdown – Effect on Macro

III. China Slowdown – Effect on Markets

IV. Historical Comparisons + Scenarios

HiddenLevers

CHINA BOOM – HISTORY + CURRENT SNAPSHOT

China – Goodbye Mao, Hello World

1950s-1970s 4.5% GDP annual growth

1976 Death of Mao Zedong

1979 Free market reform Opened to foreign trade

1979-2012 10% GDP annual growth 500m people out of poverty economy doubled every 8 years

China – Now World’s #2 economy

#1 merchandise exporter #1 manufacturer #1 holder of FX reserves #1 creditor nation

#2 economy #2 merchandise importer #2 receiver of foreign direct investment

source: IMF

China – Overtake the USA as #1?China as B-M-O-C

Pundits thought China would be on top by 2014. #fail

source: Economist

From 2005

source: akarlin.com

From 2006

China – 2008 Global Financial Crisis

CHINA GDP Growth

2007: 14.2%

2008: 9.6%

2009: 9.2%

2010: 10.4%

2011: 9.2%

2012: 7.8%

$586 billiongovernment stimulus

China – Current Macro Picture

GDP slowing

real estate bubble popping

tightening liquidity

trade deficit

14.2

2013

below 7

2007

CHINA SLOWDOWN – EFFECT ON MACROHiddenLevers

It ain’t over til its over

China’s Global Investments

Source: Heritage Foundation

China’s global investments (energy is #1) are growing rapidly, and a pullback would be felt on every continent.

China’s Trade Balance

Sources: China General Admin of Customs, ZeroHedge

2000 – 2008Steady trade surplus

2008 – presentToo many deficits to count

consume!

China’s Import Trade Flows

Source: IMF, UN FAO

world’s largest importerwheat cornvegetable oil porkcotton rice

Chinese imports are 10% of GDP for South Korea and Taiwan

Significant GDP impact on most Asian neighbors and Australia

Australia: Canary in the Coal mine?

Source: Heritage Foundation

• Over 25% of Australia’s exports directly to China• 70% of exports to East Asia (all dependent on China)• Australian Dollar down 14% over last month

-14%

Source: HiddenLevers

bummer

Steel

Copper

Aluminum

Industrial Metals: Case of Chinese Bird Flu?1y

-68%

1y-20%

1y-11%

source: HiddenLevers

HiddenLevers

CHINA SLOWDOWN – EFFECT ON MARKETS

China Slowdown – Markets Reacting to Macro

Monday 24June5.3% down in a day

Shanghai Index4.5 year low

China A-Shares70% off since peak

China A-Shares15% down in June

Interbank rate 3.30% to 6.97%

China Slowdown – Corporates with most exposureLuxury will suffer

(party’s over ladies)

China Slowdown – Corporates with most exposureSpirits will suffer

(fake bags, fake booze)

China Slowdown – MSG tainting EM funds?

source: HiddenLevers

EM funds keeping pace withShanghai Composite.

two possibilities1. PMs overexposed to China2. PMs unloading all of Asia

China Slowdown – Sectors that will lose most?

industrial metals

mining + equipment

industrial transport solar energy

luxurycommodities

China Slowdown – US Dollar will gain

source: HiddenLevers

Man that dollar sure is strong…

HISTORICAL COMPARISONS + SCENARIOSHiddenLevers

Historical Comparison: China vs Japan GrowthJapan grew explosively from 1960-1995, then flat lined.

China grew even faster: 1990-2010

What’s next?

source: World Bank

Historical Comparison: China vs Japan Equities

-69%

-67%

China equity market decline mirrors Japan

China + Japan face same demographic problems

source: HiddenLevers

Historical Comparison: Lehman vs China

Beijing home value / income = 22.3

NYC home value / income = 5.3

Similarities to 2008 Differences from 2008

China 2013 private credit / GDP = 180%

US 2008 private credit / GDP= 195%

US has free-flowing capital markets, 98% of China’s investment capital is domestic

US 2008 crisis occurred before Fed intervention, while Chinese central bank is heavily involved in capital markets

US real estate bubble popped when US entered recession – China GDP is similarly slowing

Chinese equities have already crashed, while US equities were near highs

GoodSoft landing

BadHard Landing

UglyChinese

Recession

China Slowdown Scenarios

Copper prices a good metric for China’s economic health – key lever in scenarios

Commodities are most impacted sector in all scenario outcomes

China soft landing effectively priced in today

Recession in China (and current Europe recession) overwhelms US economic recovery

China Scenarios – How priced in?

Copper and S&P: Correlated over past decade

Breakdown in Feb 2013: Is Dr. Copper right or wrong?

source: HiddenLevers

HiddenLevers – Product Update

• Envestnet – Launch of Integration

• New Homepage + Headers

• New Levers – bond spreads

• Integration Partners – improved design

Coming soon:1. Obamacare Scenarios

2. Non-correlated securities screener

3. SMA support