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GLOBAL GROWTH ON TRACK LONG TERM CHALLENGES RISING FT FUTURE OF INSURANCE CONFERENCE London, 30 June, 2015 Eric Chaney Chief Economist, AXA Group Head of Research, AXA IM [email protected]
GLOBAL GROWTH ON TRACK
LONG TERM CHALLENGES RISING
FT FUTURE OF INSURANCE CONFERENCE
London, 30 June, 2015
Eric Chaney
Chief Economist, AXA Group
Head of Research, AXA [email protected]
Main global macro themes
2
• Growth rebalancing: China/EMs going slower, US steady, Europe/Japan faster
• Global demand not strong enough to bridge the gap opened in 2008-2009.
• Crude oil price unlikely to rise: there are now 2 competing marginal producers
• Lowflation and still record high private and public debt = sustainability risks
• Monetary policies likely to continue to err on the soft side
• Fed: no more than 4 hikes per year, probably less. ECB’s QE until Sept 2016 at least
• Almost all financial assets are expensive
• No blatant market bubbles (correction in China most welcome)
• Bond prices are high because of monetary policies, not market follies
• The good news: markets have started to price up duration premia
• Short term risks: Greece – Fed hike impact on global capital flows – Geopolitics
• Long term mega-challenges: Ageing societies – Climate change – Technology
Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
Global growth rebalancing in favor of Europe and Japan
3 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• Accelerations are expected but in China, 2015/2014 (decreasing order):
Japan = +1.0pp, Eurozone = +0.4pp, US = +0.2pp, China = -0.4pp
• Mainly the result of diverging monetary policies and, thus, FX movements
• China is different: trend slowdown = -0.5pp each year
Source: Datastream, AXA IM Research
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20
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2010 2011 2012 2013 2014 2015
China*
US
€-area
Manufacturing productionManufacturing productionManufacturing productionManufacturing production3M/3M, annualized rate3M/3M, annualized rate3M/3M, annualized rate3M/3M, annualized rate
%
* YoY for China
Sluggish world trade: paradigm shift and/or demand deficit
4 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• The trend growth of global trade has halved, from a 5-8% range to 3%-ish
• New normal, secular stagnation or long post-debt bubble hangover? We just don’t know
• Unfunded investment in infrastructures in EMs estimated at 1Tn$ per year (World Bank)
Source: Datastream, AXA IM Research
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Global trade of manufactured products, log scaleLong term trend: 6.1%
Log base 2
1 = 1998
Source CPB, AXA IM Research
'Happy
globalisation'
Dotcom
crash
'Supercharged
globalisation'
Endgame
Oil markets: the new normal seems to be a $50--$75 range
5 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• The extreme contango reached in late
January has almost vanished
• Tight oil pumpers are the ‘market
marginal producers’ (in/out),
weakening the market power of the
‘political marginal producer’ (S.A.)
• Conclusions:
* Do not count on S.A. to help;
* Oil won’t lift global inflation
30
40
50
60
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130
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150
30
50
70
90
110
130
150
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Crude oil swapsCrude oil swapsCrude oil swapsCrude oil swaps
1 month
3 year
US$ /bl
ContangoConta
ngo
Backw
ard
ation
Backwardation
Conta
ngo
Source: Datastream, AXA IM Research
ECB’s QE: until September 2016, at least
6 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• The threshold is high for the ECB to end QE. Risks are tilted towards a longer action, even if
commodity prices were to lift headline inflation temporarily
• A fascinating chart borrowed from Draghi’s book: only the ECB’s forecast is in the target range
Inflation still far from destination
-0.5
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1.0
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3.0H
ICP
(6
M a
vg
)
Co
re H
ICP
(6M
av
g)
GD
P d
efl
ato
r (2
Q a
vg
)
Co
mp
pe
r em
plo
ye
e (
2Q
avg
)
Sta
ff f
ore
ca
st
Infl
ati
on
sw
ap
1Y
1Y
Pro
ff f
ore
cas
ters
2Y
Infl
ati
on
sw
ap
1Y
4Y
Pro
ff f
ore
cas
ters
5Y
Infl
ati
on
sw
ap
5Y
5Y
ECB's Inflation Landscape Historical range (10%-90% percentile)
5th percentile
Median
Current
%
Shorter term Longer term
Source : ECB, Eurostat, Bloomberg, AXA IM Research
Taken from Draghi, M., The ECB’s recent monetary policy measures:
Effectiveness and challenges, Camdessus lecture, Washington, DC, 14 May 2015
Equity markets: correction has partly trimmed over-valuation
7 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• The expected Fed hike, the Greek crisis and a clampdown on margin calls in China have taken their toll
on global equity markets
• This is welcome, inasmuch as markets were, overall, slightly over-priced
• Wanted: Euro area-Japan. Unwanted: US, Switzerland, Emerging Markets (Latam and CEE)
Source: Datastream, AXA IM Research
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9MSCI World Equity (US$ based) Index*Annualized real rate of return
*: Total returnAnnualized rate of growth of smoothed (non recursive HP filter, lambda = 10^11) inflation-adjusted total return index.Deflator interpolated from US PCE deflator
Long-term average: 2.5%
1.9
2.0
2.1
2.2
1.9
2.0
2.1
2.2
Log (MSCI - World Equity Index*, inflation adjusted), 1=1970
Bond yields: markets are raising the duration premium
8 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• 10Y Bunds: 80% of the rise (from 19 April) came from the term premium (TP)
• 10Y Treasuries: 100% of the rise (since end-January) came from the term premium
• The term premium encompasses the unexplained part of bond yields. It is thus hard to predict.
• Yet, the TP is influenced by the cycle. In the US at least, it should continue to rise.10Y Treasury
yields should be above 3% next year
Source: Datastream, AXA IM Research
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4.0 Breakdown of 10Y UST yield (zero coupon)
Risk free rate (unbiased market expectations)
Zero coupon yield (actual)
Term premium (actual minus risk free) -1.0
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2.5 Breakdown of 10Y Bund yield (zero coupon)
Risk free rate (unbiased market expectations)
Zero coupon yield (actual)
Term premium (actual minus risk free)
Why Greece matters more than Grexit financial losses
9 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• Greek GDP = €178 bn vs. €-area €10.3 Tn (1.7%). Grexit potential losses circ 200bn
• Yes, but watch the location of Greek islands on the map
Source: Wikipedia, AXA IM Research
Ageing : same trend since 1840 – still not fully acknowledged
10 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• Since 1840, women’s life expectancy in champion countries has steadily increased by 2.9 M per year
• The increase is virtuous (life in good health). Insurers got the point. Not governments
Source: Oeppen – Vaupel – Science, March 2013
Climate change : if it only derailed GDP measures!
11 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• Why are US Q1 GDP readings so weak?
• It could be a change in the regime of jet streams (Jeff Masters, SciAm, Dec 2014)
• 10Y moving average of losses caused by natural catastrophes has more than doubled since 2000
• A potentially explosive mix: climate change and geopolitics
Source: Weather Channel, 10 February, 2015
Tech revolution (AI) : it’s like China, always bigger than thought
12 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• Silicon Valley disrupters blossom where there are market failures and asymmetries of information
• Market failures are the most common thing in the world!
• Banks, Insurers, Asset Managers are very nice and juicy targets.
Source: A.T. Kearney, June 2015
Disclaimer
13 Eric Chaney, Chief Economist AXA Group, Head of Research, AXA IM
• This document is used for informational purposes only and does not constitute, on AXA Investment Managers Paris part, an offer to buy or sell, solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
• Due to the subjective and indicative aspect of these analyses, we draw your attention to the fact that the effective evolution of the economic variables and values of the financial markets could be significantly different from the indications (projections, forecast, anticipations and hypothesis) which are communicated in this document.
• Furthermore, due to simplification, the information given in this document can only be viewed as subjective. This document may be modified without notice and AXA Investment Managers Paris may, but shall not be obligated, update or otherwise revise this document.
• All information in this document is established on data given made public by official providers of economic and market statistics. AXA Investment Managers Paris disclaims any and all liability relating to a decision based on or for reliance on this document.
• Furthermore, due to the subjective nature of these analysis and opinions, these data, projections, forecasts, anticipations, hypothesis and/or opinions are not necessary used or followed by AXA IM Paris’ management teams or its affiliates who may act based on their own opinions and as independent departments within the Company.
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• Editor : AXA INVESTMENT MANAGERS PARIS, a company incorporated under the laws of France, having its registered office located at Cœur Défense Tour B La Défense 4, 100, Esplanade du Général de Gaulle 92400 Courbevoie, registered with the Nanterre Trade and Companies Register under number 353 534 506, a Portfolio Management Company, holder of AMF approval no. GP 92-08, issued on 7 April 1992.
