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War Room 27 June 2013 China’s Slowing Growth

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. China Boom – History + Current Snapshot China Slowdown – Effect on Macro

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War Room 27 June 2013 China’s Slowing Growth

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  1. War Room 27 June 2013 China’s Slowing Growth

  2. War Room • Monthly macro discussion • Using tools in context • Update on HiddenLevers Features • Your feedback welcome

  3. China’s Slowing Growth • China Boom – History + Current Snapshot • China Slowdown – Effect on Macro • China Slowdown – Effect on Markets • IV. Historical Comparisons + Scenarios

  4. HiddenLevers China Boom – History + Current Snapshot

  5. 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

  6. 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

  7. China – Overtake the USA as #1? China as B-M-O-C Pundits thought China would be on top by 2014. #fail From 2005 source: Economist From 2006 source: akarlin.com

  8. 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 billion government stimulus

  9. China – Current Macro Picture 14.2 below 7 2007 2013 tightening liquidity GDP slowing real estate bubble popping trade deficit

  10. It ain’t over til its over HiddenLevers China Slowdown – Effect on macro

  11. China’s Global Investments China’s global investments (energy is #1) are growing rapidly, and a pullback would be felt on every continent. Source: Heritage Foundation

  12. China’s Trade Balance 2000 – 2008 Steady trade surplus 2008 – present Too many deficits to count consume! Sources: China General Admin of Customs, ZeroHedge

  13. China’s Import Trade Flows Chinese imports are 10% of GDP for South Korea and Taiwan Significant GDP impact on most Asian neighbors and Australia world’s largest importer wheat corn vegetable oil pork cotton rice Source: IMF, UN FAO

  14. Australia: Canary in the Coal mine? bummer -14% Source: HiddenLevers • 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 Source: Heritage Foundation

  15. Industrial Metals: Case of Chinese Bird Flu? 1y -68% • Steel • Copper • Aluminum 1y -20% source: HiddenLevers 1y -11%

  16. HiddenLevers China Slowdown – Effect on markets

  17. China Slowdown – Markets Reacting to Macro China A-Shares 15% down in June Interbank rate 3.30% to 6.97% China A-Shares 70% off since peak Shanghai Index 4.5 year low Monday 24June5.3% down in a day

  18. China Slowdown – Corporates with most exposure Luxury will suffer (party’s over ladies)

  19. China Slowdown – Corporates with most exposure Spirits will suffer (fake bags, fake booze)

  20. China Slowdown – MSG tainting EM funds? EM funds keeping pace with Shanghai Composite. two possibilities PMs overexposed to China PMs unloading all of Asia source: HiddenLevers

  21. China Slowdown – Sectors that will lose most? industrial metals mining + equipment industrial transport solar energy commodities luxury

  22. China Slowdown – US Dollar will gain Man that dollar sure is strong… source: HiddenLevers

  23. HiddenLevers Historical comparisons + scenarios

  24. Historical Comparison: China vs Japan Growth Japan grew explosively from 1960-1995, then flat lined. source: World Bank China grew even faster: 1990-2010 What’s next?

  25. Historical Comparison: China vs Japan Equities China equity market decline mirrors Japan China + Japan face same demographic problems -69% source: HiddenLevers -67%

  26. Historical Comparison: Lehman vs China Similarities to 2008 Differences from 2008 Beijing home value / income = 22.3 NYC home value / income = 5.3 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 China 2013 private credit / GDP = 180% US 2008 private credit / GDP = 195% Chinese equities have already crashed, while US equities were near highs US real estate bubble popped when US entered recession – China GDP is similarly slowing

  27. China Slowdown Scenarios • Good • Soft landing • Bad • Hard Landing • Ugly • Chinese Recession 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

  28. China Scenarios – How priced in? Copper and S&P: Correlated over past decade source: HiddenLevers Breakdown in Feb 2013: Is Dr. Copper right or wrong?

  29. HiddenLevers – Product Update • Envestnet – Launch of Integration • New Homepage + Headers • New Levers – bond spreads • Integration Partners – improved design • Coming soon: • Obamacare Scenarios • Non-correlated securities screener • SMA support

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