No boom, no bust

1. No boom, no bust Global Economic & Market Outlook Riga May 15, 2015 Harald Magnus Andreassen +47 23 23 82 60 hma@swedbank.no

2. The global economy: Growth is normal

3. OK, growth in rich countries sligthly below normal … but faster growing EMs are getting larger, lifting the global average to normal

4. Unemployment is soon down to a normal level However: Potential growth has come down: Actual growth is below average, still unemployment is declining

5. And guess what: Inflation is normal as well! (ex the one off impact of a 50% decline in the oil price, which is now strengthening global growth)

6. Wage inflation (not far below) normal And is most likely slowly accelerating. (Wal Mart, US, UK minimum wage, IG Metall, Toyota etc)

7. Even corporate earnings are normal! Rate of return on equity

8. Equity prices at ATH, pricing is still quite normal … on average. The US is probably expensive, Europe & many EM neutral MSCI World vs. CAPE bands CAPE: The Cyclical Adjusted PE ratio, the ‘Siller’ PE

9. Credit spreads are normal 'No' bankrupcies, normal credit spreads. Will narrow Source:

10. So, is everything normal then?

11. No, everything is not normal! Global Short & long-term interest rates Haldane, Bank of England

12. Should you be afraid of the big (bad) bond bull? The ’only’ important question for investors today: What do bond yields say about the future?

13. Bond yields now vs. growth next 5 years Not that impressive?

14. Bond yields now vs. growth previous 5 years A far better correlation!

15. IF the world does not fall apart. Where should you invest?

16. Suddenly, long bond yields rose 50 bps… Without any real trigger – yields were too low?

17. Secular stagnation ahead? Some arguments are OK, but how serious will it be? • Productivity – growth has declined! • Technology (too little of it, the end of history) • Technology (too much of it, ’automatisation’ -> long term, structural unemployment) • Too low investments, private & public (infrastructure) after the financial crisis • Demographics/human capital – growth is declining • Working age population growth slowing & more old, less productive workers • Education (peak/declining) • Inequality (social capital, conflicts)

18. Productivity: Was 2. Is 1. And will stay there? May be. Investments probably the clue Are we measuring output correct (smartphones etc)? By the way: Can you spot Japan’s two lost decades? Sweden has slowed more than others, but the history was nice

19. Debt is being paid back (most places, that is)

20. You know it is possible! Ready for a new try?

21. House prices are in check (most places)

22. Is the Eurozone doomed? New structural problems? Suddenly, in 2011/12?

23. Other, ’cyclical’ explanations? EMU vs. the US - Higher interest rates - No QE - A stronger F/X - More fiscal austerity • No bank cleanup • No shale revolution • Ukraine nearby … as is Russia .. & Greece is a member And everything has changed now? Most of it

24. Two players. Just one left ..but he is a hard player . Still, the game has become (too) expensive for him? However, there are risks left.. Russian exports to EMU: 15% of GDP European exports to Russia: 1% of GDP.. Now down 40%, has cut GDP by 0.5%

25. Even for the largest sinners, there is hope, in the end

26. The credit tide has turned, even in the EMU It took long to clean up the European banks Because they didn’t want to…

27. You will not get this offer everywhere, of course But the average EMU lending rates are now below 2.5%, and falling

28. F/x: I think the EUR is weak enough

29. European consumers upbeat EMU retail sales rose the fastest in 10 years in Q4/Q1

30. European consumers upbeat, even more than the Americans! EMU retail sales rose the fastest in 10 years in Q4/Q1! Norwegians are not as happy as usual, of course

31. The Euro zone: Picking up speed? Seems so

32. Look to Spain! And even Italy

33. Growth almost everywhere in Europe

34. Some are flying higher!

35. CEE: Ok, ex Russia (& Hungary in April)

36. The BRICs not that solid anymore

37. USA: ”Mid-cycle”, no excesses. Low inflation

38. The global economy now: No signs of breakdown Companies have reported decent growth in activity (but April a tad weaker) The decline in the oil price supports growth, most places

39. China: A very special growth story What if…

40. Can China do the ”credit trick” once again? We doubt Thus: There are some downside risks….

41. China: Something has happened

42. China: Decline in demand for steel & cement

43. It’s hard to make predictions, especially about the future Here are the IEA’s forecasts Source: Glenn Stangeland‏@gstangeland ., IEA predictions

44. It’s hard to make predictions, especially about the future Our best guesses: Above 80: Too much supply, too little demand. Below 50: Too little supply, too much dem. Source: Glenn Stangeland‏@gstangeland ., IEA predictions

45. The Saudi problem: Shale in US + Iran + Iraq + Mexico +++ Falling market share, the outlook was not attractive Now: A dramatic decline in oil investments in US (shale). Rig count -50%

46. Other energy prices had fallen a long time ago A Supercycle in reverse. And some alternatives are turning up (og rather falling sharply)

47. Another Supercycle Oversupply, much more than lack of demand – in all markets

48. Energy is becoming Technology Solar is not a supply driven resource, but an improving technology – reducing cost and prices • Energy price developmen (USD/mmbtu), Solar vs. Coal, LNG and Oil Source: Bernstein