Global Outlook 2016 TRAVERSING TURBULENT …...Key global themes...as commodity prices surged in the...
Transcript of Global Outlook 2016 TRAVERSING TURBULENT …...Key global themes...as commodity prices surged in the...
...as commodity prices surged in the second half of 2010
1
Global Outlook 2016
TRAVERSING TURBULENT TIMES
Analysing global growth and inflation
...as commodity prices surged in the second half of 2010
2
Looking back on the state of the world economy as
a backdrop for 2016
Low growth low inflation conditions prevailing globally
...as commodity prices surged in the second half of 2010
3
GDP growth (%)
2014 2015 (f) 2016 (f)
World 3.4 3.1 3.4
Advanced 1.8 1.9 2.1
US 2.4 2.5 2.6
Eurozone 0.9 1.5 1.7
EM economies 4.6 4.0 4.3
China 7.3 6.9 6.3
India* 7.3 7.3 7.5
Brazil 0.1 -3.8 -3.5
Russia 0.6 -3.7 -1.0
* - Fiscal Year, Gross value added
Inflation (%)
2014 2015 (f) 2016 (f)
World 3.5 3.3 3.4
Advanced 1.4 0.3 1.2
US 1.6 0.1 1.1
Eurozone 0.4 0.2 1.0
EM economies 5.1 5.6 5.1
China 2.0 1.5 1.8
India* 5.9 5.4 5.5
Brazil 6.3 8.9 6.3
Russia 7.8 15.8 8.6
* - Fiscal Year
Slowdown in world growth; pockets of recovery witnessed
Divergence in emerging and advanced regions’ growth rates… …with EM contribution to global growth slowing
Source: Bloomberg, ICICI Bank Research
Source: Bloomberg , ICICI Bank Research
China witnessing deceleration while US growth remains robust ...as commodity prices surged in the second half of 2010US to lead global growth and China to continue slowing
Source: Bloomberg, ICICI Bank Research
-4
-3
-2
-1
0
1
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3
4
5
5
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10
11
12
13
14
15
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
China GDP US GDP(% YoY) • Global growth is expected to recover only marginally
over the course of 2016.
• The incremental contribution of emerging markets to
world growth has been reducing of late. The differential
in EM and DM growth is now the lowest since 2001.
• As far as growth engines are concerned, Chinese growth
is likely to be in a secular downtrend going ahead and has
already slipped below 7%.
• US growth is showing robust recovery but will take a few
quarters to be well cemented on account of increased
global volatility.
4
0
1
2
3
4
5
6
7
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Emerging and developing regions growth
Aggregate emerging EM-DM growth differential (RHS)
(% YoY)(pps)
-6
-4
-2
0
2
4
6
8
10
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
World growth rates
Emerging World Advanced(% YoY)
Emerging markets witness slowdown for 5th year in a row
All emerging markets showing slowdown in growth The importance of investment demand for growth is reducing
Source: IMF, ICICI Bank Research
Source: IMF, ICICI Bank Research
...as commodity prices surged in the second half of 2010Fall in commodity prices have helped (Asian) external balances Challenges to EM economies continue to persist
Source: Economist, ICICI Bank Research
5
0.0
2.0
4.0
6.0
8.0
10.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Emerging and developing regions growth
Aggregate emerging (RHS) EM Asia (RHS)
Emerging Europe Latin America(% YoY) (% YoY)
36.0
36.5
37.0
37.5
38.0
38.5
15
16
17
18
19
20
21
22
23
24
200
9
201
0
201
1
201
2
201
3
201
4
201
5E
201
6F
Fixed investment % of GDP
Latam EEMEA Emerging Asia(RHS)
(%)
-4
-3
-2
-1
0
1
2
3
4
5
20
09
20
10
20
11
20
12
20
13
20
14
20
15E
20
16F
Current account % of GDP
Latam EEMEA Emerging Asia Aggregate emerging
(%) • The emerging market region has entered a protracted
slowdown territory.
• Most major EM regions are witnessing sharp deceleration
in growth.
• Chinese growth is likely to continue to slow going ahead.
• Economies such as Brazil and Russia which are large
commodity exporters are facing recession.
• Within EM Asia countries such as India still stand out but
are facing some stress.
• Emerging Europe also seems to be better placed as
compared to Latam economies.
Activity indicators showing muted outturn
Output gap improving only for advanced economies led by US Industrial production trending down globally
Source: Bloomberg, ICICI Bank Research
Source: Bloomberg , ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: Bloomberg, ICICI Bank Research
Sentiment indicators globally remain muted… …manufacturing and services sentiment both trending downward
Source: IMF, ICICI Bank Research
6
51
51.5
52
52.5
53
53.5
54
54.5
55
55.5
56
Ap
r-13
Ju
n-1
3
Aug
-13
Oct-13
Dec-1
3
Fe
b-14
Ap
r-14
Ju
n-1
4
Aug
-14
Oct-14
Dec-1
4
Fe
b-15
Ap
r-15
Ju
n-1
5
Aug
-15
Oct-15
Dec-1
5
Global composite PMI(3m MA)
51
52
53
54
55
56
50
51
52
53
Ap
r-13
Ju
n-1
3
Aug
-13
Oct-13
Dec-1
3
Fe
b-14
Ap
r-14
Ju
n-1
4
Aug
-14
Oct-14
Dec-1
4
Fe
b-15
Ap
r-15
Ju
n-1
5
Aug
-15
Oct-15
Dec-1
5
Manufacturing PMI Services PMI
(3m MA)
-6
-5
-4
-3
-2
-1
0
1
2
3
4
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Output gap
Advanced Asia Latam World
(pp)
-3
-2
-1
0
1
2
3
4
5
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
20
00
20
01
20
02
20
03
20
04
20
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20
06
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07
20
08
20
09
20
10
20
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20
12
20
13
20
14
20
15
Global IP Global growth rate (RHS)(% YoY)
Consumption demand showing a mixed picture
Consumption demand shows strong uptick in DMs… …but retail sales trends not robust yet
Source: Bloomberg, ICICI Bank Research
Source: Bloomberg, ICICI Bank Research
...as commodity prices surged in the second half of 2010Confidence indicators also paint a mixed picture DM consumption likely to improve while EM remains muted
Source: IMF, ICICI Bank Research
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-2
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07
20
08
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20
15, Q
3
EM DM
Retail sales(% YoY)
0.00
0.50
1.00
1.50
2.00
2.50
0
1
2
3
4
5
6
7
8
9
201
1
201
2
201
3
201
4
Q3
, 20
15
Emerging Market Developed Market (RHS)
(% YoY)Private consumption demand
• The world economy is also going through a low inflation
scenario, which in itself should be beneficial for
consumption demand.
• However, a sustained increase in consumption will also
have to be bolstered with an increase in income levels.
• In a world where fixed investment growth is increasingly
trending lower, the driver of global growth is likely to be
consumption.
• From an overall growth perspective global trade remains
at record lows and the space for Government spending
support is also limited.
90
95
100
105
110
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Consumer confidence index
EM DM
Sharp disinflation/deflation conditions prevailing globally
Most of the world economy is witnessing either deflation or sharp disinflationary pressures barring a few outliers
Source: Bloomberg , ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: Bloomberg, IMF, ICICI Bank Research
Deflationary pressures on developed markets continue to intensify Dwindling commodity prices are weighing on inflation
Source: Bloomberg, CEIC, ICICI Bank Research
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0
100
200
300
400
500
600
0
1
2
3
4
5
6
7
20
00
20
01
20
02
20
03
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04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Global Inflation Commodity Price Index (RHS)(% YoY)
0
10
20
30
40
50
60
70
80
90
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
Countries with inflation below 1%
Developed economies Emerging markets(% share of countries in group)
0
5
10
15
20
25
30
35
40
-2 0 2 4 6 8 10 12 14 16 18 20
Sh
are in
wo
rld
GD
P (%
)
Inflation rate (2015, % YoY)
US
CH
EZ
JN
UK
CA
AU MEX
IN
SA
IND TUR
BR
RUARG
Bulk of developed economies
are embroiled in a situation of
low inflation even as labour
market shows signs of
recovery
Disinflation is the theme
for emerging markets too
as global commodity
prices witness a slump
While some continue to face elevated
levels of inflation as domestic
idiosyncratic factors outweigh global ones
US
Commodity prices to keep inflation subdued for a while
Chinese growth deceleration will also have an adverse impact on global commodity prices
Source: Bloomberg , ICICI Bank Research
...as commodity prices surged in the second half of 2010Producer prices are also spiralling downward Commodity price trajectory is likely to keep inflation subdued
Source: UNCTAD, ICICI Bank Research
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-6
-4
-2
0
2
4
6
8
Dec-1
0
Ju
n-1
1
Dec-1
1
Ju
n-1
2
Dec-1
2
Ju
n-1
3
Dec-1
3
Ju
n-1
4
Dec-1
4
Ju
n-1
5
Dec-1
5
Producer prices Index
EU US UK Japan(% YoY)
• Most of the developed economies are now facing very
low inflation levels and most levels are far below their
central bank targets.
• Emerging markets are also facing disinflationary situation
with the sharp fall in oil price leading to correction in fuel
indices.
• Some outliers still remain such as Argentina and Russia,
which are usually high inflation countries, wherein price
pressures are driven by country specific factors.
0.0 10.0 20.0 30.0 40.0 50.0
Primary
energy
Oil
Metals
Grains
Edible oils
1990-94 2010-14
China's share in global consumption of commodities
(%)
Key global themes and their consequences
...as commodity prices surged in the second half of 2010
10
Low commodity
prices
US lift off
Impact of crude
prices
Pressure on global capital flows, currencies and
corporate debt
Divergence in
global monetary
policy
Yuan devaluation
China slowdown
Key global themes
...as commodity prices surged in the second half of 2010
11
Analysing low oil prices
US Federal Reserve initiates policy normalisation
China slowdown to impact global growth
Global themes Consequences Impact
...as commodity prices surged in the second half of 2010
12
US Federal Reserve initiates policy normalisation
Global themes Consequences Impact
US embarks on policy normalization after 10 years
Overall GDP growth remains promising… …and labour market recovery continues
Source: Bloomberg, ICICI Bank Research
Source: Bloomberg , ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: US Federal Reserve documents, ICICI Bank Research
Inflation however remains lower than target Policy normalisation process to be gradual
Source: CEIC, ICICI Bank Research
13Global themes Consequences Impact
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
0
50
100
150
200
250
300
350
400
Feb
-12
Jun
-12
Oct-12
Feb
-13
Jun
-13
Oct-13
Feb
-14
Jun
-14
Oct-14
Feb
-15
Jun
-15
Oct-15
Feb
-16
Change in NFP Unemployment rate (RHS)
('000) (%)
-3
0
3
6
-3
0
3
6
Mar-14
Ju
n-1
4
Sep
-14
Dec-1
4
Mar-15
Ju
n-1
5
Sep
-15
Dec-1
5
Private consumption Investment
Net exports Government
GDP growth (RHS) (% QoQ,saar)(pp)
US GDP growth (contribution)
-1
0
1
2
3
4
Jan
-1
4
Mar-14
May-14
Ju
l-14
Sep
-14
No
v-1
4
Jan
-1
5
Mar-15
May-15
Ju
l-15
Sep
-15
No
v-1
5
Jan
-1
6
CPI-inflation PCE-based inflation
Fed's 2% inflation
target
% YoY
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2016 2017 2018 Long term
FOMC median Fed Funds rate projection
December March(%)
...as commodity prices surged in the second half of 2010
14
China slowdown to impact global growth
Global themes Consequences Impact
China: The economy is moving to a new normal
China’s economic growth is slowing down… …as the focus shifts from investment toward domestic consumption
Source: CEIC, ICICI Bank Research
Source: CEIC , ICICI Bank Research
...as commodity prices surged in the second half of 2010Investment slowdown broad-based The structural slowdown likely to persist in 2016
Source: CEIC, ICICI Bank Research
15
-2
0
2
4
6
8
10
12
14
16
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Consumption Investment
Net exports Real GDP(% YoY)
30
35
40
45
50
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Private consumption GFCF
China GDP break-up
(% of GDP)
• Chinese economy transitioning from an investment led high
growth to a more sustainable growth fuelled by private
consumption
• Consumption has been playing a more important role in
driving growth in recent years.
• The slowdown in fixed asset investment clearly indicates
the rebalancing efforts of the establishment
• The structural slowdown is likely to continue going forward
and headline growth is likely to decelerate further
Global themes Consequences Impact
10
15
20
25
30
35
40
45
Fe
b-05
Fe
b-06
Fe
b-07
Fe
b-08
Fe
b-09
Fe
b-10
Fe
b-11
Fe
b-12
Fe
b-13
Fe
b-14
Fe
b-15
Fe
b-16
FAI (headline) Manufacturing Infrastructure
(% YoY YTD)
China urban fixed assets investment (FAI)
Services sector emerging as a “new” driver of growth
China’s services sector share lowest among major economies Sustained growth in services sector crucial to support growth…
Source:CEIC, ICICI Bank Research
Source: CEIC, ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: CEIC, ICICI Bank Research
..and support employment generation Greater share of investment is also going into tertiary sector
Source: CEIC, ICICI Bank Research
16
40.0%
42.0%
44.0%
46.0%
48.0%
50.0%
52.0%
54.0%
Mar-06
Dec-0
6
Sep
-07
Ju
n-0
8
Mar-09
Dec-0
9
Sep
-10
Ju
n-1
1
Mar-12
Dec-1
2
Sep
-13
Ju
n-1
4
Mar-15
Dec-1
5
China GDP composition
Secondary Tertiary
0
10
20
30
40
50
60
70
80
US Brazil Korea India China World
Service sector's share (2014)(% of GDP)
0
10
20
30
40
50
60
2000 2002 2004 2006 2008 2010 2012 2014
Employment by sectors
Agriculture Manufacturing Services
(% of total employment)
0
5000
10000
15000
20000
25000
30000
35000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Fixed asset investment
Secondary Tertiary(RMB bn)
Global themes Consequences Impact
China’s private sector debt overhang could pose risks
Total debt in China has accelerated significantly Liquidity conditions have tightened on fall in aggregate financing …
Source: CEIC, ICICI Bank Research
Source: CEIC, ICICI Bank Research
...as commodity prices surged in the second half of 2010…with non-bank credit leading the declines Chinese financial sector poses a challenge
Source: CEIC, ICICI Bank Research
17
0
50
100
150
200
250
2007 2008 2009 2010 2011 2012 2013 2014 2015
Total debt as % of GDP
Corporate debt Household debt Government debt
• The rising trend in total debt poses challenge even as the
Chinese economy transitions to a slower growth path
• The country’s total social financing, a broad measure of
overall liquidity in the economy, is witnessing a slowdown
led by non bank credit (primarily trust loans)
• Even the bank loans segment has started to slow down in
recent months
Global themes Consequences Impact
0
6
12
18
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Total bank credit Total social financing(RMB trn)
(annual flow)
10
12
14
16
18
20
22
24
26
Jan
-1
2
Ap
r-12
Ju
l-12
Oct-12
Jan
-1
3
Ap
r-13
Ju
l-13
Oct-13
Jan
-1
4
Ap
r-14
Ju
l-14
Oct-14
Jan
-1
5
Ap
r-15
Ju
l-15
Oct-15
Jan
-1
6
Total Social Financing(%YoY)
...as commodity prices surged in the second half of 2010
18
Analysing slowdown in oil prices
Global themes Consequences Impact
Sharp slowdown in commodity prices has been seen since 2014
Commodity prices have fallen to multiyear lows Crude oil prices have fallen ~ 70% since their peak in June 2014....
Source: Bloomberg, ICICI Bank Research
Source: Bloomberg , ICICI Bank Research
Saudi Arabia continues to keep output elevated to gain share ...as commodity prices surged in the second half of 2010
Source: Bloomberg, ICICI Bank Research
…and is unlikely to cut production in the near term
Source: Bloomberg, ICICI Bank Research
19Global themes Consequences Impact
20
30
40
50
60
70
80
90
100
110
120
Mar-14
Ju
n-1
4
Sep
-14
Dec-1
4
Mar-15
Ju
n-1
5
Sep
-15
Dec-1
5
Mar-16
Brent WTI(USD/bbl)
50
150
250
350
450
550
650
750
Mar-11
Ju
n-1
1
Sep
-11
Dec-1
1
Mar-12
Ju
n-1
2
Sep
-12
Dec-1
2
Mar-13
Ju
n-1
3
Sep
-13
Dec-1
3
Mar-14
Ju
n-1
4
Sep
-14
Dec-1
4
Mar-15
Ju
n-1
5
Sep
-15
Dec-1
5
Mar-16
S&P GSCI Commodity Index Energy
Agri commodities Industrial metals
0
2
4
6
8
10
12
65
70
75
80
85
90
95
Jan
-0
0
Jan
-0
1
Jan
-0
2
Jan
-0
3
Jan
-0
4
Jan
-0
5
Jan
-0
6
Jan
-0
7
Jan
-0
8
Jan
-0
9
Jan
-1
0
Jan
-1
1
Jan
-1
2
Jan
-1
3
Jan
-1
4
Jan
-1
5
Jan
-1
6
Total world Saudi Arabia (RHS)
USA (RHS) Russia (RHS)(mbpd)(mbpd)
Crude oil output
26
28
30
32
34
Fe
b-08
Aug
-08
Fe
b-09
Aug
-09
Fe
b-10
Aug
-10
Fe
b-11
Aug
-11
Fe
b-12
Aug
-12
Fe
b-13
Aug
-13
Fe
b-14
Aug
-14
Fe
b-15
Aug
-15
Fe
b-16
OPEC oil prodution quota Actual oil output(mbpd)
Increase in Iranian oil exports to weigh on oil prices
Iran-Saudi Arabia rivalry hampers OPEC unity Iran is set to increase exports by 0.5-1.0 mbpd…
Source: OPEC, ICICI Bank Research
Source: US Energy Information Administration (EIA), ICICI Bank Research
...as commodity prices surged in the second half of 2010…thereby weighing on oil market balance Crude prices are likely to remain muted in near term
Source:ICICI Bank Research
20
Syria:
Iran supports Bashar
Hafez al-Assad
(Ba’ath party) led
government.
Saudi Arabia
currently backs
Syrian opposition
(rebels).
Yemen:
Iran reportedly
supports Houthi
rebels.
Saudi Arabia
currently backs
President Abd
Rabbuh Mansur
Hadi.
0.0
0.5
1.0
1.5
2.0
2.5
2008 2009 2010 2011 2012 2013 2014 2015
Iranian oil exports
Impact of US-EU sanctions
(mbpd)
sanctions tightened
• Saudi Arabia (current top producer in OPEC) and Iran (the
second largest OPEC producer a couple of years back) are
major geopolitical rivals.
• Given the discord between the OPEC members and aim
to maintain market share, OPEC is expected to continue
producing above its 31.5 mbpd collective target.
• Post the removal of sanctions, Iran is slated to increase its
exports and add to supply pressures.
• However oil prices have seen volatility recently and there
are risks that key oil producers may negotiate some sort
of production changes going ahead in light of growing
stress in their domestic economies.
Global themes Consequences Impact
0.00
1.00
2.00
3.00
4.00
Excess supply Excess supply (with
increased Iran exports)
Global oil market: Excess supply (mbpd)
Lower crude prices to have adverse impact on oil exporters
Saudi Arabia and Iran continue to see low production break evens… …however fiscal and current account break evens have worsened
Source: IMF, ICICI Bank Research
Source: IMF, ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: IMF, ICICI Bank Research
Saudi Arabia and Iraq have posted double digit fiscal deficits Current account balances are also steadily shrinking
Source: Economist, ICICI Bank Research
21
-30
-20
-10
0
10
20
30
Saudi Arabia UAE Kuwait Qatar Iraq
Fiscal Balance (% of GDP)
2014 2015 2016F
-15
-10
-5
0
5
10
15
20
25
30
35
Saudi Arabia UAE Kuwait Qatar Iraq
Current Account Balance (% of GDP)
2014 2015 2016F
Global themes Consequences Impact
0 20 40 60 80 100 120
Kuwait
Qatar
UAE
Saudi Arabia
Oman
Iraq
Algeria
Bahrain
Iran
Breakeven prices (2016F)
External Breakeven Fiscal Breakeven
(USD/bbl)
Current Brent oil price
0 20 40 60 80
Kuwait
Saudi Arabia
Iraq
Iran
Norway
Qatar
Russia
Venezuela
Britain
US
Canada
Nigeria
Production break-even (2015)
(USD/bbl)
Current Brent oil price
Meanwhile, importers have received limited benefits
Most countries have witnessed an increase in consumption Trends in consumption can be attributed to declining inflation..
Source: CEIC, Bloomberg, ICICI Bank Research
Source: CEIC, Bloomberg , ICICI Bank Research
.. and stable policy rates ...as commodity prices surged in the second half of 2010Oil plunge: where is the oil surplus going?
Source: CEIC, Bloomberg, ICICI Bank Research
22
• Oil prices have plummeted over 60% since September
2014
• Net oil importers have gained at the expense of net oil
exporters on account of this crude price slump
• The net benefits can be observed by gauging the trends in
consumption and investment for various countries
• Considering a sample of major EM Asian economies we
find some fillip in consumption and investment demand
between Q3 2014-Q3 2015, however the experience has
been varied
0.00
2.00
4.00
6.00
8.00
10.00
12.00
PH
SG
IN ID
HK
MY
KR
TH
TW
Consumption
Q3 2014 Q3 2015
(% YoY)
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
ID IN
MY
HK
KR
PH
TW
SG
TH
Inflation
Q3 2014 Q3 2015
(% YoY)
0
1
2
3
4
5
6
7
8
9
ID
IN
PH
MY
TW
TH
KR
HK
SG
Policy Rates
Q3 2014 Q3 2015(% YoY)
Tempered gains in consumption and investment
But falling nominal GDP growth arrested further rise in consumption Consumption patterns are mixed but investment uptick is widespread
Source: CEIC, Bloomberg, ICICI Bank Research
Source: CEIC, Bloomberg, ICICI Bank Research
...as commodity prices surged in the second half of 2010
Falling PPI across the board can explain improved investment levels Increased levels of investment also seen in majority of the countries
Source: Bloomberg, CEIC, ICICI Bank Research
23
• Theoretically, net oil exporters (like Malaysia) should have
witnessed a fall in both consumption and investment
• On the other hand, net oil importers (like India and
Singapore) should see a rise in consumption and
investment.
• While most countries seem to follow the above trend, a few
outliers exist, most noticeably India and Taiwan, which saw
a major decline in consumption.
• These patterns persist, perhaps, because oil prices of most
of EM Asia economies are administered by their
governments which prevents a full pass through to retail
consumers.
0.00
2.00
4.00
6.00
8.00
10.00
12.00
PH
SG
IN ID
HK
MY
KR
TH
TW
Nominal GDP Growth
Q3 2014 Q3 2015(% YoY)
-10.00
-5.00
0.00
5.00
10.00
15.00
PH
KR
IN
MY
ID
TW
SG
TH
HK
Investment
Q3 2014 Q3 2015
(% YoY)
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
IN
HK
TW ID
TH
SG
PH
MY
KR
WPI
Q3 2014 Q3 2015
(% YoY)
Oil prices to pick up towards end 2016
US crude oil production to continue to fall as energy companies
reduce their capex plans
US oil rig count has been declining, thereby likely to weigh on future
output
Source: IMF, ICICI Bank Research
Source: US EIA, ICICI Bank Research
...as commodity prices surged in the second half of 2010Oil prices are expected to gradually rise as oil surplus shrinks Brent oil prices to trade in the range of USD 40-45/bbl by end 2016
Source: Economist, ICICI Bank Research
24
• We expect supply pressures to dominate in the near term
in light of OPEC’s stance (i.e. lack of willingness to cut oil
output), OPEC’s disunity (due to geopolitical tensions) and
increase in exports from Iran.
• However, a gradual shrinking in oil market surplus with an
expected fall in output from US and Canada; as well as
gradual rising demand (from US , China, etc) providing
support.
• We expect Brent prices to remain subdued in the near
term and pick up towards end 2016. Consequently, we
expect Brent to trade in the range of USD 40-45/bbl by
end 2016
Global themes Consequences Impact
8.7
8.8
8.9
9.0
9.1
9.2
9.3
9.4
9.5
9.6
9.7
Jan
-1
5
Fe
b-15
Mar-15
Ap
r-15
May-15
Ju
n-1
5
Ju
l-15
Aug
-15
Sep
-15
Oct-15
No
v-1
5
Dec-1
5
Jan
-1
6
US crude oil production(mbpd)
0
500
1000
1500
2000
2500
Sep
-11
Dec-1
1
Mar-12
Ju
n-1
2
Sep
-12
Dec-1
2
Mar-13
Ju
n-1
3
Sep
-13
Dec-1
3
Mar-14
Ju
n-1
4
Sep
-14
Dec-1
4
Mar-15
Ju
n-1
5
Sep
-15
Dec-1
5
Mar-16
Oil rigs Gas rigs Misc
US oil & gas rig count
US oil rig count
US gas rig count
Geopolitical dynamics to pose risks
Geopolitical concerns in the Middle East remains critical… …given the vast reserves it controls
Source: Bloomberg, ICICI Bank Research
Source: ICICI Bank Research
...as commodity prices surged in the second half of 2010Geopolitical tensions: A black swan event
25
North
America
Latin
America
Western
Europe
Eastern Europe and Eurasia
Africa Asia and Pacific
53.8%
22.9%
8.5% 8%
3.2%2.7%
0.8%
Geographical distribution of world oil reserves (proven)
Middle
East
• Geopolitical events have taken a back seat in the recent
months given their muted impact on oil prices of late.
• This is largely due to the fact that reports of possible talks
between key oil players has taken precedence over
geopolitics.
• However, going ahead geopolitical events may contribute
to volatility in oil prices.
Global themes Consequences Impact
Key consequences
...as commodity prices surged in the second half of 2010
26
Slowdown in global capital flows and impact on petrodollars
Divergence in global monetary policy
Yuan devaluation and its impact on currencies
Impact on global trade flows and consequent currency wars
Global themes Consequences Impact
Global monetary policy remains mostly accommodative
Source: Bloomberg, ICICI Bank Research
Source: Bloomberg , ICICI Bank Research
...as commodity prices surged in the second half of 2010Accommodative stance to stay; US to temper its rationalisation
27
Divergence in policy rates within DM Central Banks
• The Federal Reserve has embarked on policy normalization
but the pace of hikes is likely to be very gradual.
• Meanwhile most other Central Banks across DMs and EMs
have an accommodative stance and DM majors have also
adopted negative interest rates.
• Some outliers such as Brazil and other Latin American
countries remain where inflation is a concern.
• Broadly over the course of the year to counteract a tepid
growth expectation we believe this accommodative
monetary policy stance will continue.
Global themes Consequences Impact
Jan-15 (latest)
Poland 2.0 1.5
Russia 17.0 11.0
Turkey 8.25 7.5
Hungary 2.1 1.35
Brazil 11.75 14.25
Chile 3.0 3.5
Peru 3.5 4.25
India 8.0 6.75
China 5.6 4.35
Indonesia 7.75 6.75
Malaysia 3.25 3.25 --
Philippines 4.0 4.0 --
South Korea 2.0 1.5
Thailand 2.0 1.5
US 0.25 0.5
Canada 1.0 0.5
Australia 2.5 2.0
Japan 0.01 -0.01
ECB -0.2 -0.4
Asia
Developed
Country
Policy rate Direction of
change
EEMEA
Latam
-0.5
0.0
0.5
1.0
1.5
2.0
Mar-09
Sep
-09
Mar-10
Sep
-10
Mar-11
Sep
-11
Mar-12
Sep
-12
Mar-13
Sep
-13
Mar-14
Sep
-14
Mar-15
Sep
-15
Mar-16
Fed funds rate ECB main refinancing rate
ECB deposit rate(%)
...as commodity prices surged in the second half of 2010
28
Yuan trajectory to impact global currencies
Global themes Consequences Impact
China has stepped up fx intervention to stabilise the Yuan
China caught between the impossible trinity conundrum Steep interventions have been undertaken to stabilise the Yuan
Source: Bloomberg, ICICI Bank Research
Source: ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: CEIC, ICICI Bank Research
Reserve adequacy ratio has fallen sharply and hovers close to the
prescribed 100-150% limit for EMs
29
110
120
130
140
150
160
170
180
190
200
2011 2012 2013 2014 2015
Reserve adequacy ratio
The policy trilemma illustrated by the Mundell Fleming
model states that an open economy can have at most two of
the following- free capital movement, a stable exchange rate
and an independent monetary policy- at the same time.
1. Stable exchange rate and free capital outflows (No
independent monetary policy as setting an interest
rate would undermine the stable currency by exerting
a depreciation/ appreciation pressure).
2. Independent monetary policy and free capital
outflows (No stable exchange rate possible as (say)
addressing a devaluation pressure will require curbing
capital flows).
3. Stable exchange rate and independent monetary
policy (Capital controls are required under this
regime).
Global themes Consequences Impact
6.0
6.4
6.8
7.2
7.6
8.0-120
-100
-80
-60
-40
-20
0
20
40
60
80
100
Fe
b-07
Fe
b-08
Fe
b-09
Fe
b-10
Fe
b-11
Fe
b-12
Fe
b-13
Fe
b-14
Fe
b-15
Fe
b-16
China
Change in fx reserves USDCNY(RHS)
(USD bn)
China likely to see more depreciation in Yuan
Policymakers allowed gradual depreciation in Yuan…. …to correct for the overvaluation in Yuan
Source: Bloomberg, ICICI Bank Research
...as commodity prices surged in the second half of 2010Persistent capital outflows are likely to weigh… …thereby paving the way for further gradual depreciation
Source: Bloomberg, ICICI Bank Research
30
40
60
80
100
120
140
Dec-9
4
Dec-9
5
Dec-9
6
Dec-9
7
Dec-9
8
Dec-9
9
Dec-0
0
Dec-0
1
Dec-0
2
Dec-0
3
Dec-0
4
Dec-0
5
Dec-0
6
Dec-0
7
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
Dec-1
4
Dec-1
5
REER Long term average(Index; 2010=100)
-40
-20
0
20
40
60
80
-160
-80
0
80
160
No
v-10
May
-11
No
v-11
May
-12
No
v-12
May
-13
No
v-13
May
-14
No
v-14
May
-15
No
v-15
Residual (hot money) Change in FX reserves
FDI + trade surplus (RHS)
(USD bn) (USD bn)
2
4
6
8
10
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
USD/CNY
Phase 1:
(1980s and
early 1990s)
CNY
devaluation
Phase 2: (1990s to 2005)
CNY maintained weak
Phase 3: (post-
2005) CNY
appreciation
• Against the backdrop of capital outflows, maintaining a
fixed exchange rate led to restrictions on monetary easing
by the Central Bank to boost growth. (Impossible Trinity)
• This is because rate cuts aggravated capital outflows,
thereby forcing the PBoC to sell Dollars in order to maintain
a stable Yuan.
• However, the liquidity impact of FX intervention caused
upward pressure on rates, thereby limiting the impact of
monetary policy easing.
• Consequently, continued pressure on the currency (from
capital outflows) and steep drawdowns in FX reserves are
likely to pave the way for further depreciation in the Yuan.
Source: Bloomberg, ICICI Bank Research
Global themes Consequences Impact
...as commodity prices surged in the second half of 2010
31
Global capital flows to face pressure
Global themes Consequences Impact
Global capital flows to remain under pressure
...as commodity prices surged in the second half of 2010
32 Global themes Consequences Impact
Monetary policy
divergence
Capital outflows from EMs
and pressure on currencies
Chinese
slowdown
Low commodity
prices
Rising rate differentials
will impact currencies
Shrinking petrodollars
and SWF withdrawals
Slowdown in
capital flows
Traditional bastions of capital providers are under stress
China continues to bleed reserves in a bid to defend currency… …as do major oil exporters such as Saudi Arabia
Source: Bloomberg, ICICI Bank Research
Source: Bloomberg , ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: Bloomberg, ICICI Bank Research
Accretion to EM reserves has become negative after two decades Capital outflows continue unabated from EM economies
Source: Bloomberg, ICICI Bank Research
33
-400
-200
0
200
400
600
800
1000
1200
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
EM economies' annual accretion to fx reserves(USD bn)
-30
-20
-10
0
10
20
30
40
50
Ju
n 0
5
Dec 0
5
Ju
n 0
6
Dec 0
6
Ju
n 0
7
Dec 0
7
Ju
n 0
8
Dec 0
8
Ju
n 0
9
Dec 0
9
Ju
n 1
0
Dec 1
0
Ju
n 1
1
Dec 1
1
Ju
n 1
2
Dec 1
2
Ju
n 1
3
Dec 1
3
Ju
n 1
4
Dec 1
4
Ju
n 1
5
Dec 1
5
EM Portfolio flows(USD bn, 6mma)
Global themes Consequences Impact
-150
-100
-50
0
50
100
150
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16 (E
')
Saudi FX Reserve accretion(USD bn)
1000
1500
2000
2500
3000
3500
4000
Fe
b-07
Fe
b-08
Fe
b-09
Fe
b-10
Fe
b-11
Fe
b-12
Fe
b-13
Fe
b-14
Fe
b-15
Fe
b-16
FX reserves(USD bn)
SWF withdrawals would impact capital flows as well
SWFs have significant amount of funds under management… …most of which is funded by oil revenues
Source: FT, ICICI Bank Research
Source: Moody’s, ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: ICICI Bank Research
Returns on investments have started to shrink recently
34
73.3
20.55.8
0.4
SWF funding sources
Oil & gas related Trade surplus
Government linked and others Other commodities
SWF (USD bn) end 2014
Total Assets under
management 4,500
of which
Norway 865
Saudi Arabia 762
China 653
UAE 589
Kuwait 548
Global themes Consequences Impact
-10
-5
0
5
10
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
Equity Fixed Income Real-estate Fund
Return on Norway's SWF*
*in international currency terms
(%)
Significant policy shifts for commodity exporters
...as commodity prices surged in the second half of 2010
35
FX reserves:
Saudi alone has seen depletion of ~USD 100 bn to
defend its peg
Growing possibility of Saudi sale of parts of Aramco
Policy rates:
Saudi Arab, Kuwait and Bahrain have raised rates
despite adverse economic conditions
Currency:
Kazakhstan/ Azerbaijan have abandoned their
currency pegs
Venezuela and Ecuador are facing challenges
and the former has devalued its currency
Global themes Consequences Impact
...as commodity prices surged in the second half of 2010
36
Global trade flows and currency wars
Global themes Consequences Impact
Global trade conundrum: Depreciating currencies and muted exports
Global trade volumes have been subdued since last quarter of 2012 Meanwhile, most currencies have depreciated against USD
Source: Bloomberg, ICICI Bank Research
...as commodity prices surged in the second half of 2010Export values have been plummeting across the board Global trade slowdown: Depreciating currencies and muted exports
Source: Bloomberg, ICICI Bank Research
37
• Global trade volumes have witnessed a considerable
decline since 2012
• WTO has revised down its merchandise trade growth
forecast to 2.8% in 2015 from its prior estimate of 3.3%.
• Economic recovery in the US has led to large
depreciation in most currencies
• While traditionally, these exchange rate depreciations
would have led to increased trade volumes, this time
around the link between exchange rates and exports is
not as clear
*For the period Q4 2014-Q3 2015
Global themes Consequences Impact
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Dec-9
6
Dec-9
7
Dec-9
8
Dec-9
9
Dec-0
0
Dec-0
1
Dec-0
2
Dec-0
3
Dec-0
4
Dec-0
5
Dec-0
6
Dec-0
7
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
Dec-1
4
Dec-1
5
World Trade Volume(%YoY)
Asian financial
turmoilUS tech-bubble
burst
Lehman collapse
IN
BR
CH
MEX
RU
SA
TUR
UK
EZ
JN
CAAU
0
5
10
15
20
25
30
35
40
45
-35 -30 -25 -20 -15 -10 -5 0
No
min
al exch
an
ge rate d
ep
recia
tio
n (%
)
Change in export value (%)
Impact of exchange rate depreciation on export value
-10
-5
0
5
10
15
20
25
JP
Y
EU
R
ID
R
HK
D
SG
D
AU
D
CH
F
GB
P
TW
D
PH
P
CN
Y
CA
D
IN
R
KR
W
TH
B
MY
R
TR
Y
BR
L
RU
B
Currrency return (FYTD)(%)
Source: BIS, UNCTAD, Bloomberg, ICICI Bank Research
Incremental gains from currency wars seem limited
Experience with export volumes has not been so uniform Movements in REER can explain some of these differences
Source: CEIC, BIS, ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: UNCTAD, ICICI Bank Research
Plummeting import demand by major importers Global trade slowdown: Impact of weakening import demand
Source: UNCTAD, CEIC, BIS, ICICI Bank Research
38
IN
BZ
CN
MX
RU
SA
TUR
UK
EZJN
CA AU
-20
-15
-10
-5
0
5
10
-15 -10 -5 0 5 10 15 20 25
Ch
an
ge in
RE
ER
(%
)
Change in export volume (%)
Impact of change in REER on export volumes*
IN
BZ
CN
MX
RU
SA
TUR
UK
EZ
JN
CA
AU
0
5
10
15
20
25
30
35
40
45
-15 -10 -5 0 5 10 15 20 25
No
min
al exch
an
ge rate d
ep
recia
tio
n (%
)
Change in export volume (%)
Impact of exchange rate depreciation on export volumes*
• Instead of gaining from large exchange rate depreciations
countries have seen declines in trade values
• The experience with underlying export volumes is less
uniform but the quantum of volume spurts for most
countries remain too modest to compensate for value
declines (Brazil being the only nation where volume
growth has outstripped value decline)
• Exports in nominal terms have taken a major hit from the
on-going slump in commodity prices and weakness in
currencies vs. the USD. Broadly there does not seem to
be significant real gains from competitive devaluation
• Plunging import demand from major economies, on the
other hand, has put a drag on export volumes.
*For the period Q4 2014-Q3 2015 *For the period Q4 2014-Q3 2015
*For the period Q4 2014-Q3 2015
Global themes Consequences Impact
-30
-25
-20
-15
-10
-5
0
5
10
RU BR TUR EZ CH CA UK SA JN IN US AU MEX
Change in import volumes*(%)
Trans Pacific Partnership: A structural change in trade flows
...as commodity prices surged in the second half of 2010
39
Trans-Pacific Partnership agreement (TPP) was recently signed in Auckland.
It is a major trade deal encompassing 12 nations whose current share in global trade
stands at 40%.
Countries included are:
US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada,
Mexico, Chile and Peru.
Amid an environment of dwindling global trade volumes, the TPP strives to foster
trade between the participating nations by
• Bringing down barriers to trade and investment
• Streamlining the ground rules on intellectual property rights
• Other trade related issues
However, civilians in the US fear loss of jobs, others criticize the TPP for giving
major corporations the right to sue sovereigns for their vested interests in the event
the terms of the deal are not met with.
Bottom Line
This very ambitious deal is thus likely to see a rocky path ahead but long term
implications of the deal would be extremely significant
Global themes Consequences Impact
Impact on key asset classes
...as commodity prices surged in the second half of 2010
40
DM fixed income will continue to find favour
US policy stance will lead to Dollar strength
Currencies and Dollar debt would be under pressure
Negative interest rate regime will impact currencies as well
Yuan devaluation and slowdown in oil prices will impact assets
Global risk aversion to remain high and cause asset volatility
Shift from EMs to DMs to continue
Global themes Consequences Impact
...as commodity prices surged in the second half of 2010
41
Global risk aversion and portfolio shifts
Global themes Consequences Impact
Risk aversion tendencies have increased sharply globally
Our risk appetite index shows significant risk aversion in the system and significant changes in global portfolio allocation patterns
...as commodity prices surged in the second half of 2010Allocation has been shifting from EM to DM in bond markets… …as well as in equity markets
Source: Bloomberg, ICICI Bank Research
42
-0.4
-0.35
-0.3
-0.25
-0.2
-0.15
-0.1
Ja
n-15
Feb
-1
5
Mar-15
Ap
r-1
5
May
-15
Ju
n-1
5
Ju
l-1
5
Ju
l-1
5
Au
g-15
Sep
-15
Oct-1
5
No
v-15
Dec-1
5
Ja
n-16
Global Risk Appetite Index
Greece related
uncertainty
China
related
uncertainty
Generic global
uncertainty
mainly on
crude
80
80.5
81
81.5
82
82.5
83
18
18.2
18.4
18.6
18.8
19
19.2
19.4
19.6
19.8
20
No
v-11
Feb
-1
2
May
-12
Au
g-12
No
v-12
Feb
-1
3
May
-13
Au
g-13
No
v-13
Feb
-1
4
May
-14
Au
g-14
No
v-14
Feb
-1
5
May
-15
Au
g-15
No
v-15
Developed markets (RHS) Emerging markets(%) (%)
Portfolio allocation to equity markets
Source: Bloomberg, ICICI Bank Research
Source: Bloomberg, ICICI Bank Research
87
87.5
88
88.5
89
89.5
10.5
11
11.5
12
12.5
13
No
v-1
0
Mar-11
Ju
l-11
No
v-1
1
Mar-12
Ju
l-12
No
v-1
2
Mar-13
Ju
l-13
No
v-1
3
Mar-14
Ju
l-14
No
v-1
4
Mar-15
Ju
l-15
No
v-1
5
Developed markets (RHS) Emerging markets(%) (%)
Portfolio allocation to bond markets
13.0
14.0
15.0
16.0
17.0
18.0
81.0
82.0
83.0
84.0
85.0
86.0
2008 2009 2010 2011 2012 2013 2014 2015
Portfolio allocation
Developed markets Emerging markets (rhs)
(% to total
equity/debt)
Global themes Consequences Impact
Source: Bloomberg, ICICI Bank Research
...as commodity prices surged in the second half of 2010
43
Dollar strength and impact of policy divergence
Global themes Consequences Impact
44
Monetary policy
divergence
Capital outflows from EMs and
pressure on Dollar debt
Dollar strength
Depreciation bias for most currencies
and worsening of credit spreads
Rising rate differentials
will impact currencies
Impact of Dollar strength and policy divergence
Dollar to continue to strengthen on policy stance
Dollar index has almost always strengthened during hiking cycles Most currencies have depreciated against the Dollar over last year
...as commodity prices surged in the second half of 2010Stronger Dollar will impact major risk assets negatively Dollar to impinge on currencies, capital flows and Dollar debt
45
0
2
4
6
8
10
12
60
70
80
90
100
110
120
130
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
DXY index Fed funds rate (RHS)
(%)
• Three key themes will impact currencies throughout the
world this year viz. China, oil and US tightening.
• On a broader basis, most currencies are likely to depreciate
in nominal terms against the Dollar as the US monetary
policy diverges from the rest of the world.
• Strength in Dollar will also impact Dollar denominated
corporate debt especially in emerging markets.
• The adoption of negative interest rates recently by major
Banks such as BoJ and ECB will also play a role.
• However global risk aversion will remain high and safe
haven assets will continue to find support
Source: Bloomberg, ICICI Bank Research Source: Bloomberg, ICICI Bank Research
Source: Bloomberg, ICICI Bank Research
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
MS
CI E
M
CN
Y
SP
X
LM
EX
In
dex
Nik
ke
i
Yen
Eu
r
Bre
nt
US
AA
A c
orp
US
hig
h y
ield
Eu
ro
sto
xx
EM
FX
2003-2015 2016YTD
Correlation with Dollar index
Global themes Consequences Impact
-10
-5
0
5
10
15
20
25
JP
Y
EU
R
ID
R
HK
D
SG
D
AU
D
CH
F
GB
P
TW
D
PH
P
CN
Y
CA
D
IN
R
KR
W
TH
B
MY
R
TR
Y
BR
L
RU
B
Currrency return (FYTD)(%)
Corporate debt to face pressures in 2016
Corporate Dollar issuances have started falling as Dollar strengthens Ratio of upgrade/downgrade has worsened in the EM region
Source: FT, Rencap, ICICI Bank Research
Source: CEIC, ICICI Bank Research
...as commodity prices surged in the second half of 2010Dollar debt has risen to unsustainable levels in some EM economies Credit conditions have deteriorated across EM economies
Source: IMF, Bloomberg, ICICI Bank Research
46
0
50
100
150
200
250
300
350
400
20
11
20
12
20
13
20
14
20
15 E
EM corporate hard currency issuance
Latam EEMEA Asia
0
5
10
15
20
2008 2009 2010 2011 2012 2013 2014 2015 2016F
EM credit rating changes
upgrades downgrades
A rating scale from 15 (for AAA rating) to 6 (for a Baa3 or BBB-); 5 for the highest non-
investment grade (Ba1 or BB+), 0 for lowest rating at which a country is able to manage
debt (B3 or B-), -1 for Caa1 or CCC+ and -7 for actual default is used. For each country,
the scores from all rating agencies is averaged.
• According to Standard and Poor’s 2015 would have
finished with the highest number of worldwide defaults
since 2009.
• Against the backdrop of Federal Reserve policy
tightening, EM corporates will continue to face stress and
accordingly the quantum of hard currency issuances have
also been reducing over the past year.
• According to industry estimates the number of
downgrades vs. upgrades for most EM regions is likely to
increase sharply in 2016.
Global themes Consequences Impact
0
2
4
6
8
10
12
14
16
18
20
Arg
en
tin
a
Cze
ch
Po
lan
d
Isra
el
Me
xic
o
Ch
ina
Sau
di A
rab
ia
Ind
on
esia
So
uth
Afric
a
Ind
ia
Th
ailan
d
Bra
zil
Tu
rkey
Ru
ssia
Hu
ng
ary
Mala
ysia
Ko
re
a
Dollar denominated debt (end - 2015)(% of GDP)
Corporate debt to face pressures in 2016 (contd.)
Corporate debt issuances remain elevated AAA rated corporates are dwindling in the US
Source: FT, ICICI Bank ResearchSource: Bloomberg, ICICI Bank Research
...as commodity prices surged in the second half of 2010Lending standards have tightened across DMs as well Estimates suggest that downgrades are likely to accelerate this year
47
40
43
46
49
52
55
58
Q3
-20
10
Q3
-20
11
Q3
-20
12
Q3
-20
13
Q3
-20
14
Q3
-20
15
US Eurozone Japan
Lending Survey
0
20
40
60
80
100
120
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Number of US companies rates 'AAA' by Standard & Poor's
Currently there are only
three AAA US companies
• Corporates in the US are also facing pressure as
estimates suggest that over USD 1 tn worth of corporate
debt has been downgraded over the course of 2015.
• As per the S&P only 3 companies have a AAA rating in
the US and credit as an asset class is likely to come under
pressure across most regions globally over the course of
the year.
• Most ratings agencies have forecasted that downgrades
are likely to go up especially in the commodity segment.
• Bank lending conditions are tightening across regions.
0.0
20.0
40.0
60.0
80.0
100.0
120.0
US Eurozone Japan UK
Corporate debt outstanding
2013 2014 2015(% of GDP)
Global themes Consequences Impact
Source: Bloomberg, ICICI Bank Research
Indebtedness to remain source of vulnerability for EMs
Fiscal deficits rising across regions although public debt not a worry High levels of Dollar debt is a concern for EM-ex-Asia economies
Source: IIF, ICICI Bank Research
Source: IIF , ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: IIF, ICICI Bank Research
Private credit has risen across EM economies Credit standards are tightening across the board
Change over 2009 to 2015
Source: IIF, ICICI Bank Research
48
0
20
40
60
80
100
120
20
10
20
11
20
12
20
13
20
14
20
15 E
EM sovereign hard currency issuance
Latam EEMEA Asia
38
42
46
50
54
58
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Q2
2015
Q3
2015
EM bank lending standards
Emerging markets Latam Emerging Europe Asia
Easing standards
Tightening standards
Global themes Consequences Impact
0
20
40
60
80
100
120
140
160
200
9
201
0
201
1
201
2
201
3
201
4
201
5E
201
6F
Private credit % of GDP
Latam EEMEA Emerging Asia Aggregate emerging
(%)
-4
-2
0
2
4
6
8
10
12
Latam EEMEA Asia Aggregate
Change in public debt Change in fiscal deficit(% of GDP)
Credit as an asset class to face pressures this year as well
The US HY corporate spreads have witnessed recent increases …as the energy companies bear the brunt of falling oil prices
Spreads across the Atlantic have risen sharply as well Credit spreads to remain volatile over the course of 2016
49
• According to market estimates trading volume in European
CDS markets were at a 3 year high recently and spreads all
across the board have been tightening for HY and IG alike.
• The fall in oil along with the rising threat of growing
downgrades and defaults all across the developed and
emerging world are also aggravating credit spreads.
Source: Bloomberg, ICICI Bank Research Source: Bloomberg, ICICI Bank Research
Source: Bloomberg, ICICI Bank Research
Global themes Consequences Impact
40
50
60
70
80
90
100
200
250
300
350
400
450
500
Fe
b-15
Mar-15
Ap
r-15
May-15
Ju
n-1
5
Ju
l-15
Aug
-15
Sep
-15
Oct-15
No
v-1
5
Dec-1
5
Jan
-1
6
Fe
b-16
CDS for Corporate sector (EUR)
High Yield Investment grade (RHS)
0
20
40
60
80
100
120
140
80
90
100
110
120
130
140
150
160
Fe
b-10
Ju
n-1
0
Oct-10
Fe
b-11
Ju
n-1
1
Oct-11
Fe
b-12
Ju
n-1
2
Oct-12
Fe
b-13
Ju
n-1
3
Oct-13
Fe
b-14
Ju
n-1
4
Oct-14
Fe
b-15
Ju
n-1
5
Oct-15
Fe
b-16
USD HY Energy bond index Brent Crude (RHS)
(USD/bbl)
200
300
400
500
600
700
800
Mar-10
Ju
l-1
0
No
v-10
Mar-11
Ju
l-1
1
No
v-11
Mar-12
Ju
l-1
2
No
v-12
Mar-13
Ju
l-1
3
No
v-13
Mar-14
Ju
l-1
4
No
v-14
Mar-15
Ju
l-1
5
No
v-15
Mar-16
US HY CDS Index
...as commodity prices surged in the second half of 2010
50
Yuan devaluation and falling oil prices to impact assets
Global themes Consequences Impact
Asset classes have been affected by China and oil as well
Changes in Yuan policy to impact EM fx significantly Correlation of assets with China has spiked recently
...as commodity prices surged in the second half of 2010Falling crude prices will affect portfolio flows and in turn currencies Oil prices are now impacting assets more sharply than before
51
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
KR
W
AU
D
ID
R
SG
D
PH
P
TH
B
IN
R
TW
D
TR
Y
CA
D
MY
R
BR
L
RU
B
Sensitivity to Yuan movement(%)
Source: Bloomberg, ICICI Bank Research Source: Bloomberg, ICICI Bank Research
Source: IIF, ICICI Bank Research
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
MS
CI E
M
CN
Y
SP
X
LM
EX
In
dex
Nik
kei
Do
llar
Yen
Eu
r
Bre
nt
US
AA
A c
orp
US
hig
h y
ield
Eu
ro
sto
xx
EM
FX
2003-2015 2016YTD
Correlation with Chinese A shares
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
MS
CI E
M
CN
Y
SP
X
LM
EX
In
dex
Nik
ke
i
Do
llar
Yen
Eu
r
US
A
AA
co
rp
US
h
igh
yie
ld
Eu
ro
sto
xx
EM
FX
Sh
an
gh
ai c
om
p
2003-2015 2016YTD
Correlation with Brent
Global themes Consequences Impact
Source: Bloomberg, ICICI Bank Research
-20
0
20
40
60
80
100
120
140
60
65
70
75
80
85
90
95
100
105
110
Aug
-10
Fe
b-11
Aug
-11
Fe
b-12
Aug
-12
Fe
b-13
Aug
-13
Fe
b-14
Aug
-14
Fe
b-15
Aug
-15
Fe
b-16
JP EM FX index EM portfolio flows (RHS) Brent prices
(USD bn) (Index, USD/bbl)
...as commodity prices surged in the second half of 2010
52
DM fixed income to continue to find favour
Global themes Consequences Impact
Fixed income in DMs continue to fare well on risk aversion
DM sovereign bonds have seen sharp declines in bond yields Nearly 80% of global fixed income yields are 3% or lower
...as commodity prices surged in the second half of 2010Yields have hardly moved over the year except in high stress
countries such as Brazil
Over the course of 2016, DM bond yields are likely to stay low and
outflows from EM bonds would be expected
53
0
5
10
15
20
25
30
35
40
>=5% 3-5% 1-3% 0-1% -1-0% <-1%
Proportion of bonds outstanding by yield brackets(%)
• Bond yields in developed markets have declined
significantly and recently the JGB 10Y yield has turned
negative for the first time for G7.
• Going ahead, ultra accommodative monetary policy in
major CBs except US and an increase in global volatility will
keep DM bonds supported.
• Pricing for incremental Fed rate hikes have been scaled
down and US Treasury yields are unlikely to increase
sharply.
• On the other hand, there are likely to be capital outflows
from EMs, which will adversely impact EM yields.
Source: Bloomberg, ICICI Bank Research Source: Bloomberg, ICICI Bank Research
Source: Bloomberg, ICICI Bank Research
Global themes Consequences Impact
2Y 5Y 10Y
Switzerland -1.02 -0.82 -0.34
Denmark -0.37 -0.04 0.48
Sweden -0.65 -0.12 0.54
Germany -0.48 -0.30 0.21
Finland -0.40 -0.17 0.51
Netherlands -0.48 -0.32 0.31
Austria -0.43 -0.28 0.42
France -0.43 -0.17 0.55
Belgium -0.43 -0.24 0.59
Japan -0.24 -0.23 -0.10
UK 0.47 0.87 1.45
US 0.86 1.37 1.90
Snapshot: sovereign bond yields (%)
-300
-250
-200
-150
-100
-50
0
50
100
150
Gree
ce
Jap
an
Ind
ia
UK
Italy
US
1
0 Y
r
Ire
lan
d
Germ
an
y
Fran
ce
Sp
ain
Ind
on
esia
US
3
M
US
2
Yr
Bra
zil
Po
rtu
gal
Movement in bond yield (March-2016 over March 2017)(bps)
US 5YR IRS are an attractive buy at current levels
5YR IRS have fallen steeply while the 3M month LIBOR has edged up Cost of hedging is below historical average
Source: Bloomberg, ICICI Bank Research
Source: Bloomberg, ICICI Bank Research
...as commodity prices surged in the second half of 2010
Source: ICICI Bank Research
Gap between the average Fed funds rate over the next five year and
5YR IRSs caps the downside risk to IRS
3M LIBOR, following the Fed Funds rate trajectory, is expected to
reach ~3.89% levels by 2019
54
Source: Bloomberg, ICICI Bank Research
Global themes Consequences Impact
1.0
1.2
1.4
1.6
1.8
2.0
2.2
0.21
0.26
0.31
0.36
0.41
0.46
0.51
0.56
0.61
0.66
Jan
-15
Feb
-15
Mar-15
Ap
r-15
May-15
Jun
-15
Jul-1
5
Aug
-15
Sep
-15
Oct-15
No
v-15
Dec-15
Jan
-16
Feb
-16
Mar-16
3-m USD Libor 5-yr IRS (RHS)(%)
(%)
-4
-3
-2
-1
0
1
2
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Spread(3M Libor-5Yr IRS) Average(%)
Calender
year
Projected
3M Libor
(basis
points)
2016 1.14
2017 2.14
2018 3.14
2019 3.39
Overall Libor
increase 3.89
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Ap
r-15
Ju
l-15
Oct-15
Jan
-1
6
Ap
r-16
Ju
l-16
Oct-16
Jan
-1
7
Ap
r-17
Ju
l-17
Oct-17
Jan
-1
8
Ap
r-18
Ju
l-18
Oct-18
Jan
-1
9
Ap
r-19
Ju
l-19
Oct-19
Jan
-2
0
Ap
r-20
Fed funds rate Average
Asset market summary
55 Global themes Consequences Impact
Key themes for asset markets:
• Dollar strength
• Volatile risk sentiment
• Yuan depreciation
• Negative policy rates
• Changes in capital flows
Currencies
• EM currencies will be vulnerable
• Safe haven currencies to get support
Fixed income
• DM fixed income markets to find favour
relative to EM bonds
Equities
• To remain volatile
• To be driven by global growth, risk
sentiment and flows
56
Treasury Research Group
Economics Research
Sunandan
Chaudhuri
Senior
Economist
(+91-22) 2653-
1414 (ext 7525) [email protected]
Kamalika Das Economist
(+91-22) 2653-
1414 (ext 6280) [email protected]
Samir Tripathi Economist
(+91-22) 2653-
1414 (ext 7233) [email protected]
Niharika Tripathi Economist
(+91-22) 2653-
1414 (ext 2195) [email protected]
Sagrika Gogia Economist
(+91-22) 2653-
1414 (ext 8981) [email protected]
Sonal Surana Economist
(+91-22) 2653-
1414 (ext 7243) [email protected]
Radhika Wadhwa Economist
(+91-22) 2653-
1414 (ext 7206) [email protected]
57
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