Balancing risk and opportunities

Balancing risk and opportunities
Han de Jong Chief Economist May2014

Statement 1. The global economy is set to Strengthen Weaken Continue at its recent pace

Statement 2. In 2014, riskyassetswill provide Above average returns Below average returns Average returns

Statement 3. My biggestworryfor 2014 is: China Ukraine/Russia The ‘vulnerable 5’, (emergingeconomies) Disappointinggrowth in US/UK/Eurozone Deflation Tapering Overvaluedassetmarkets Re-escalation of euro crisis Scottishindependence

Headwinds abating Balance-sheet repair progressing Austerity easing Stress financial sector easing Inflation lower Pent up demand unlocked

DM private sector balance sheets back in health US assets minus liabilities % GDP, 100 = long-term average Source: Thomson Reuters Datastream

Eurozone bank deleveraging Financial institution assets, % yoy Source: Thomson Reuters Datastream

Bank lending survey Source: Thomson Reuters Datastream

World PMI and GDP Source: Thomson Reuters Datastream

Business confidence Index Source: Bloomberg

Signs of moderate recovery of eurozone capex Industrial production of capital goods, % yoy Source: Thomson Reuters Datastream

US: non-defense capital goods, ex-aircraft % yoy Source: Bloomberg

US, eurozone and UK car sales % yoy Source: Bloomberg

Statement 4. The euro crisis is over Yes No

How Europe is beating the crisis SSM European Semester LTRO IDR DGS MIP OMT SMP ESM Two pack SRM Bail-out Bail-in Six pack GLF EFSM EFSF AQR BRRD Fiscal Compact

Portugal: confidence 16

Statement 5. Over the next 24 months, important parts of the globaleconomywill See a significant rise of inflation Fallintodeflation

Inflation % yoy Source: Bloomberg

Statement 6. A hard landing in China is during the next 12 months is: Likely Unlikely

China’s problems Corporatedebtlevels Shadow-banking system Lack of discipline amonginvestors Pollution Corruption Theyneed jobs

China’s solution(s). Xi and Li and their reform agenda Step by step Squeezeshadow banking Allowdefaults New urbanisationapproach Fightcorruption Low level of central-governmentdebt and huge FX reserves My conclusion: slowergrowth, butnotmuchslower, nosystemic shocks

Risks from excessive debt in China Total debt to GDP, % Source: CICC, PBoC, ABN AMRO Group Economics

Corporate debt high compared to other large EMs Corporate debt to GDP, % Source: CICC, PBoC, ABN AMRO Group Economics

China: key indicators point to resilience Electricity production, % yoy Source: Thomson Reuters Datastream

EM exports starting to move higher Index 25 Source: Thomson Reuters Datastream

Positive EM fundamentals: FX reserves FX reserves to short-term external debt Source: IIF, ABN AMRO Group Economics

Statement 7. Tapering and the reversal of monetarypolicywill have a big impact onfinancialmarketsthisyear Yes No

Who is afraid of tapering? Tapering and US 10yr UST Source: Thomson Reuters Datastream

Who is afraid of tapering? Tapering and S&P500 Source: Thomson Reuters Datastream

Who is afraid of tapering? Tapering and VIX Source: Thomson Reuters Datastream

Who is afraid of tapering? Tapering and EM equities Source: Bloomberg

Who is afraid of tapering? Tapering and CRB Index Source: Thomson Reuters Datastream

Who is afraid of tapering? Tapering and EUR/USD Source: Bloomberg

Bonds Monetary policy changing direction Very low inflation Default risk easing Valuation: expensive

Valuation equities PE Source: Thomson Reuters Datastream

Equities Improving growth picture will support earnings Valuation not cheap / not expensive Investors still somewhat cautious What are the alternatives?

Statement 8. Carlo Ancelotti JuergenKlopp Louis van Gaal Diego Simeone Ryan Giggs

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Balancing risk and opportunities