Still on track, despite China;
the end-game is not here yet
Christophe Donay,
Head of Asset Allocation & Macro Research
Wealth Management Investment Committee member
And slides from various Research and Investment solutions specialists
Presented by Pascal de Crousaz, PhD
September 2015
Kibbutz Shefayim
1.
US economy
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
2
Employment growing irregularly, but solidly overall
Monthly job creation*: in thousands
Non-farm payroll employment: year-on-year growth rate
%
Thousands
400
2
3-monthcentered
movingaverage
350
2.1%
1
300
250
0
200
-1
150
-2
100
50
Monthly numbers
-3
0
-4
-50
* Excluding 2010 Census hiring
-100
10
11
12
13
14
15
-5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
Source: Pictet WM - AA&MR, Datastream
6
Household wealth is rising rapidly and bank credit is growing strongly
Household wealth: as a % of disposable income
Commercial banks - loans & leasing: growth rate, annualised
%
%
620
14
600
Past 3 months over previous 3 months*
10
580
+6.7%
6
560
540
2
520
-2
500
-6
480
-10
460
-14
440
* Last point = past 2 months
over previous 3 months
-18
420
75
80
85
90
95
00
05
10
15
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
Source: Pictet WM - AA&MR, Datastream
7
Full employment likely to be reached sooner rather than later
Different measures of labour underutilisation, with forecasts
17.5
%
16.5
10.0
** Includes:
(1) working part timefor economic reasons,
(2) 'marginally attached' to the labour force
Unemployment rate U6**
%
9.2
15.5
8.4
14.5
13.5
Unemployment
rate
12.5
7.6
6.8
11.5
6.0
Forecasts*
10.5
Full-employment,
Fed estimates
9.5
5.2%
5.0%
8.5
5.2
Forecasts*
4.4
7.5
* Forecasts: the decline continues at the same pace as on average over the past 12 months
3.6
6.5
06
07
08
09
10
11
12
13
14
15
16
Source: Pictet WM - AA&MR, Federal Reserve, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
11
Unconvincing signs of acceleration in wage increases, at least so far
Wage inflation and small business survey on compensation
%
NFIBsmall business survey:
% of firms planning toraise
workers' compensation
(lagged 8 months)
4.2
%
20
3.8
3.4
15
3.0
2.6
10
2.2
Employment Cost Index,
y-o-y% change:
Wage & salaries, private sector
1.8
5
1.4
1.0
0
88
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: Pictet WM - AA&MR, Federal Reserve, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
12
Market-based inflation expectations are falling back markedly
5-year forward 5-year breakeven inflation rate*
%
3.7
Different measures of long-term inflation expectations
* Fed data: corrected for inflation risk premium and TIPSilliquidity
3.5
%
Michigan survey:
inflation expectations
next 5 to10 years*
3.2
3.3
3.0
'Taper'
pre-announced
3.1
2.9
2.8
2.7
2.6
2.5
Average
2005-2013
2.3
2.4
QE3
launched
2.1
QE2 pre-announcement
(Jackson Hole)
1.9
QE1 announced
Survey of Professional
Forecasters: 10-year
inflation expectations
2.2
Operation Twist
announced
1.7
* 3-month moving average
2.0
08
09
10
11
12
13
14
15
96
Source: Pictet WM - AA&MR, Bloomberg
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
98
00
02
04
06
08
10
12
14
Source: Pictet WM - AA&MR, Datastream
14
Market projections for Fed funds rates have dropped abruptly
Expected Fed funds rate: END-2015
Expected Fed funds rate: END-2016
%
2.9
%
1.4
2.7
Fed projections
(median)
1.3
2.5
1.2
1.1
2.3
1.0
2.1
0.9
1.9
0.8
1.7
0.7
0.63%
0.6
1.63%
1.5
1.3
0.5
Future market expectations
1.1
0.4
Future market expectations
0.9
0.3
0.2
Fed projections
(median)
H1 13
H2 13
H1 14
H2 14
H1 15
0.23%
H2 15
0.7
Source: Pictet WM - AA&MR, Federal Reserve, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
0.75%
H1 13
H2 13
H1 14
H2 14
H1 15
H2 15
Source: Pictet WM - AA&MR, Federal Reserve, Datastream
16
US: the pace of FED’s retightening is likely to be slow by past standards
Fed funds rate (mid-point of target range): FOMC participants’ projections* (June 15), expectations by future markets and PWM forecasts
%
3.0
2.9%
Medianof Fed
forecasts (June)
2.5
2.0
2.6%
Pictet WM
forecasts
1.6%
1.5
1.45%
1.1%
1.0
0.85%
0.63%
0.5
Forecasted for December
Priced infor January 2016
Future market
expectations
0.38%
0.30%
0.0
First hike
End-2015
Mid-2016
End-2016
Mid-2017
End-2017
Source: Pictet WM - AA&MR, Federal Reserve
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
18
2.
Eurozone economy
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
20
Sustained employment growth in Germany
EURO AREA: Employment
Index2000 = 100
112
110
Germany
France
108
Italy
106
104
102
100
98
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
23
In periphery countries, employment has bottomed out
EURO AREA: Employment
Index2000 = 100
134
128
122
Ireland
116
Spain
110
104
98
Greece
92
Portugal
86
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
24
Sustained growth in real wages thanks to disinflation
EURO AREA: Negotiated wages
% y-o-y
Negotiated wages
Negotiated wages minus HICP
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
25
Euro area: credit recovery is gaining traction
Euro area: Money supply and loans to private sector
% y-o-y
14
Loans to the
private sector
12
10
M3
8
6
Reference value for M3
4
2
0
-2
-4
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
26
Car registrations have rebounded by 18% since the trough
EURO AREA: Car registrations & consumer sentiment
Thousands
1'150
10
Newcar registrations (ECB)
1'050
0
950
-10
850
-20
12M mov.
average
ECsurvey:
Major
purchases
intentions
750
-30
650
-40
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
28
Official interest rates set to remain low for a prolonged period
ECB: Official and market interest rates
%
7
6
3Minterest rate
5
4
Deposit facility
3
Marginal lending facility
2
Refi
Refi forecast
EONIAO/N
1
-1
06
07
08
09
10
11
12
13
14
15
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
32
Currencies: low euro area inflation outlook supports monetary policy divergence
EUR/USD and relative central-bank balance-sheet assets compared
1.60
Euro area: inflation expectations
1.90
Relative central-bank
balance-sheets assets
euro area /US(r.s.)
EUR/USD
(l.s.)
1.50
1.80
EA5y5y breakeven swap
3.0
1.70
1.40
1.60
2.5
1.50
1.30
1.40
1.20
2.0
1.30
1.20
1.5
1.10
Simulations of constant Fed assets and increasing ECB
assets to €1 trn
1.00
1.10
1.00
07
08
09
10
11
12
13
14
15
1.0
11
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
12
13
14
15
Source: Pictet WM - AA&MR, Datastream
33
China: a very delicate transition phase
GDP growth
Transition phase
Legal ‘innovation shock’ regime:
from communism to capitalism
12%
Smooth path
Standard economic growth regime
6%
Shaky path
1995
2007
› Normalisation: Likonomics
2017
› Deleveraging
› No stimulus
› Structural reforms: financial market
liberalisation, decrease in
infrastructure spending …
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
Source: Pictet WM - AA&MR,
37
China’s population cliff: impact of demographic changes
Annual increase in new workers
Key macroeconomic changes before and after Lewis Turning Point
15
10
5
0
-5
-10
2001-05
2006-10
2011-15
2016-20
2021-25
Wages
Before
Stable
After
Rising
Inflation
Stable
Rising
Profits
Increasing
Pressure
Savings/GDP
Rising
Declining
Current account/GDP
Improving
Deteriorating
Consumption/GDP
Falling
Increasing
Investment/GDP
Rising
Decreasing
Labour Intensive industries
Expanding
Shrinking
GDP growth
Accelerating
Decelerating
2025-30
Source: Pictet WM - AA&MR, China Population and Labour Report
Pictet Wealth Management | Still on track, despite China; the end-game is not here yet
Source: Pictet WM - AA&MR,
39
China: structurally unbalanced economic growth is a source of instability
China: Consumption and investment as a % of GDP
% of GDP
Unbalanced economic
growth and excess credit
80
70
Private consumption
60
50
40
30
Investment
20
10
0
52
56
60
64
68
72
76
80
84
88
92
96
00
04
08
12
16
Source: AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
40
Chinese total debt surge by more than 40% of GDP over the past 3 years
China: Total debt (excl. financial sector), as a % of GDP
200
China: Total debt (excl. financial sector), as a % of GDP
208
%
200
Unbalanced economic
growth and excess credit
Local
40 government
190
175
180
170
167
29
150
160
140
Non-financial
118 corporates
100
130
96
120
Central
government
15
125
150
15
75
110
50
100
90
25
36 Households
28
80
0
70
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: Pictet WM - AA&MR, BSI, IMF, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
06
07
08
09
10
11
12
13
14
15
16
Source: Pictet WM - AA&MR, BSI, IMF, Datastream
42
China: investment in China is unsustainably high
Japan, China and Korea: Investment as a % of GDP
% of GDP
China
50
Japan
Korea
China high investment ratio
was pushed further bythe post
2008 financial crisis plan
45
Korea peakin 1991 at 39%
40
Japan peak in 1973 at 36%
35
30
25
20
15
10
55
59
63
67
71
75
79
83
87
91
95
99
03
07
11
15
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
43
Emerging Markets bonds: tensions re-emerge
Emerging markets: Sovereign bond yield (USD versus local currency)
%
GBI-EMGlobal diversified bond yield (local currency)
13
Subprime
crisis
12
EMBI Global diversified bond yield (USD)
US
tapering
Euro crisis
Chinese
shock
11
10
9
8
7
6
5
4
05
06
07
08
09
10
11
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
12
13
14
15
Source: Pictet WM - AA&MR, Bloomberg
52
EM bonds: the valuation of EM currencies strongly depressed
EM local bond yields minus global average yield
%
7.0
EMlocal bond yields- global average
+/- 2 standard deviation
EM currencies over (+) undervaluation (-)
Deviation from equilibrium
+/- 1 standard deviation
+/- 2 & 3 standard deviations
20
%
15
6.5
EMFXovervalued
10
6.0
5
5.5
5.0
0
4.5
-5
4.0
-10
3.5
-15
3.0
-20
2.5
-25
2.0
-30
03 04 05 06 07 08 09 10 11 12 13 14 15
-23.1%
EMFXundervalued
80
84
88
92
96
00
04
08
12
16
Source: Pictet Asset Management.
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
53
Equities: this correction is not different from previous ones
S&P 500
Peak date
19.07.2007
09.10.2007
19.05.2008
16.12.2008
29.12.2009
23.04.2010
07.07.2011
08.11.2011
02.04.2012
14.09.2012
21.05.2013
02.08.2013
18.09.2013
15.01.2014
02.04.2014
04.07.2014
18.09.2014
21.05.2015
20.07.2015
Stoxx Europe 600
Trough date
15.08.2007
10.03.2008
20.11.2008
09.03.2009
29.01.2010
05.07.2010
03.10.2011
25.11.2011
01.06.2012
15.11.2012
24.06.2013
30.08.2013
08.10.2013
03.02.2014
11.04.2014
07.08.2014
15.10.2014
08.07.2015
25.08.2015
SP500 drawdown US 10-year
US 10-year
# calendar
(total return)
bond total
yield variation days
return
in bp
-9.3%
2.6%
-32
27
-17.9%
11.8%
-121
153
-46.6%
9.1%
-70
185
-25.3%
-3.4%
53
83
-4.5%
2.1%
-21
31
-15.6%
7.8%
-83
73
-18.4%
13.4%
-136
88
-9.1%
1.2%
-10
17
-9.6%
7.5%
-73
60
-7.3%
3.2%
-28
62
-5.6%
-5.1%
60
34
-4.3%
-1.1%
15
28
-3.9%
0.8%
-7
20
-5.7%
2.7%
-30
19
-3.9%
1.7%
-19
9
-3.7%
2.2%
-22
34
-7.3%
5.0%
-54
27
-3.7%
0.1%
2
48
-12.0%
2.3%
-24
36
Peak date
16.07.2007
12.10.2007
19.05.2008
06.01.2009
19.01.2010
15.04.2010
07.07.2011
08.11.2011
16.03.2012
14.09.2012
14.03.2013
22.05.2013
28.11.2013
22.01.2014
04.04.2014
10.06.2014
04.09.2014
27.05.2015
20.07.2015
Trough date
16.08.2007
17.03.2008
21.11.2008
09.03.2009
05.02.2010
05.07.2010
22.09.2011
25.11.2011
04.06.2012
16.11.2012
17.04.2013
24.06.2013
13.12.2013
03.02.2014
15.04.2014
08.08.2014
15.10.2014
07.07.2015
24.08.2015
Stoxx Europe
German 10German 10- # calendar
600 drawdown
year bund total year yield
days
(total return)
return
variation in bp
-11.6%
3.0%
-32
31
-25.1%
8.2%
-73
157
-44.5%
9.5%
-87
186
-25.5%
2.2%
-20
62
-8.7%
1.5%
-16
17
-11.8%
5.8%
-58
81
-21.8%
12.2%
-127
77
-7.8%
-3.1%
37
17
-12.7%
8.7%
-83
80
-4.5%
3.4%
-32
63
-4.5%
2.2%
-23
34
-11.0%
-3.4%
43
33
-4.7%
-1.0%
13
15
-5.3%
1.8%
-20
12
-3.5%
0.7%
-8
11
-6.8%
3.5%
-36
59
-10.7%
2.3%
-25
41
-8.6%
-0.8%
9
41
-15.7%
1.7%
-14
35
Average
Average if yield variation >0
Average if yield variation <0
Average if yield variation <0 and
Draw Down >9%
-11.6%
-9.7%
-11.6%
-18.1%
3.6%
-2.4%
5.1%
7.6%
-34
32
-50
-75
56
48
58
86
Average
Average if yield variation >0
Average if yield variation <0
Average if yield variation <0 and
Draw Down >9%
-12.9%
-8.0%
-14.2%
-19.9%
3.1%
-2.1%
4.5%
6.0%
-29
25
-44
-58
55
27
63
83
Median
Median if yield variation >0
Median if yield variation <0
Median if yield variation <0 and
Draw down >9%
-8.2%
-4.9%
-8.2%
-15.6%
2.5%
-2.2%
2.9%
7.8%
-26
34
-31
-73
42
41
33
73
Median
Median if yield variation >0
Median if yield variation <0
Median if yield variation <0 and
Draw Down >9%
-10.7%
-8.2%
-11.6%
-15.7%
2.2%
-2.0%
3.0%
5.8%
-23
25
-32
-58
41
25
59
77
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
Source: Pictet WM - AA&MR, Datastream
56
Equities: systemic risk at levels not seen since 2013
VIX
50
48
Systemic
46
44
risk
42
40
38
36
34
Fed tapering and
32
China credit
30
Argentinianpeso
crunch
fear
28
and EM
26
24
USshutdown
Italian
elections
22
Crimea
Fed tapering:
20
GoldSell-off expectedlaunch
18
Standardvolatility regime
16
14
12
Lowrisk
10
8
Jan 13
Apr 13
Jul 13
Oct 13
Jan 14
Apr 14
Chinese
turmoil
Growth concerns
Russia
Jul 14
Greece
Oct 14
Jan 15
Apr 15
Greece
Jul 15
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
57
Systemic risk regime lasts on average 50 trading days
VIX moved in systemic risk regime on 21 August 2015
State 1
State 2
State 3
VIX behaviour in 1998
VIX
VIX
45
1
50
40
0.9
45
0.8
40
35
30
0.7
0.6
25
Peak 1 : 45
35
30
28 days
0.5
25
20
Average duration
since 1987 20 days
0.4
15
10
Peak 2 : 45
20
0.3
0.2
5
0.1
0
0
15
10
On average beta of Stoxx 600 relative to S&P
500 close to 2
5
0
07/1998
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
08/1998
09/1998
10/1998
11/1998
Source: Pictet WM - AA&MR, Datastream
59
Equities: valuations corrected very quickly, especially in Europe
12-month forward PE for the S&P 500
12-month forward PE for the Stoxx Europe 600
18
18
16
16
long term
average: 13.8
14
Slightly 14
stretched
12
10
8
long term
average 12.2
12
Slightly
stretched
12-month forward PES&P
500 last figure 15.0
12-month forward PE
Stoxx Europe 600 last
figure 13.6
average May 03 Oct 07 :
12.9
10
average May 03 Oct 07 :
14.3
8
average May 10 May 11 :
12.6
average May 10 May 11 :
10.8
6
02 03 04 05 06 07 08 09 10 11 12 13 14 15
6
02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Pictet WM - AA&MR, Datastream
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
Source: Pictet WM - AA&MR, Datastream
60
6.
Wrap-up and conclusions
Pictet Wealth Management | Still on track, despite China; t3he end-game is not here yet
64