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Transcript of PRESENTED BY GEORGE TSETSEKOS Dean Emeritus and Francis Professor of Finance March 26, 2014 DREXEL...
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PRESENTED BY
GEORGE TSETSEKOS
Dean Emeritus and Francis Professor of Finance
March 26, 2014
DREXEL UNIVERSIY
LeBow College of Business
The Global Economy and the US Markets
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“Linked” Markets…Amplify Crisis
Global Crisis
EZ Sovereign Debt
Crisis
US
Subprime
Crisis
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Global and U.S. GDP Growth 2000-16 Annual %
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Transition: From Crisis to Stability
Policy Responses
TransitionStability
Crisis in US Global Amplification
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Challenges during the transition
Normalize monetary conditionsHandle risk/volatility
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Transition in USA: From Crisis to Stability
Policy Responses
Monetary Easing
TransitionStability
Crisis in US Financial Crisis Low Growth and Unemployment
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Home Prices Rise, Helped by Low Inventory
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Auto Sales on the Rise
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Core Inflation Remains Contained
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Net Worth Climbs as Debt Burden Plummets
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S&P Index Performance 2013
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Overall Market Performance
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Unemployment is Declining
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Slow Recovery in USASpending Levels still Low
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Stalled Velocity of Money Supports Low Inflation Outlook
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US Monetary transition and global impact
Possible Risks with the reduction of the Fed’s buying program in the near term:
Long-term rates could overshoot Sharp increases in Bond yields Volatility Higher rates may impact investment vehicles
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Transition: From Crisis to Stability
Policy Responses
TransitionStability
Crisis in US Banking Crisis in EU Sovereign CrisisAusterity EU response
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Common CurrencyEuroZone 17 Countries
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Transitional Issues in the EZ
1. Core Countries vs. Periphery
2. Excessive Corporate Debt
3. Developing Institutions/Architecture of EU
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EU: High Unemployment is problematic
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Unemployment and domestic demandin the periphery
Unemployment Rate (%) Domestic Demand (volume)
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Key Concerns for the Corporate Sector
• Capital flight to safer Euro-zone countries• Private capital has been replaced by public
sector flows • Liquidity in the core is not recycled in the
periphery • Funding asymmetries (corporate costs are very
high) • Current account imbalances
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Flows in Euro Zone AreaCumulative from 2009Q4 in % of GDP
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Challenges for the Corporate Sector in the Eurozone
• High Corporate Leverage• Credit Tightening • Revenue and profits contraction• Global Competitiveness
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Corporate Debt
Debt - 2002Q1=100 Debt as % of GDP
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Corporate Fundamentals
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Real Long-term Ratesare still high in the EZ
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» Tail risk of break-up/FRAGEMTATION appears very low » Euro zone recovery VERY SLOW in light of persistently high unemployment and
structural imbalances» Greece is moving into recovery, encouraging market optimism and foreign
investment
Real Progress in the Euro Zone?
•GREECE’S ANNUAL GDP GROWTH
28•Source: GK Research, “Ideas,” September 20, 2013 , World Bank and European Commission (Greece GDP)
CONSOLIDATED PRIVATE DEBT, % OF GDP EUROSTAT MACROECONOMICS IMBALANCE PROCEDURE SCOREBOARD
FORECAST
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Euro Area
Increases in interest rates in US• Credit is hindered by financial fragmentation• Corporate debt is owned by firms with weak
debt servicing capacity; debt overhang• Banking system will experience loan losses• Need for Bank Re-Capitalization• Weak corporate and bank balance sheets• Asymmetric impact
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Emerging Markets and China
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Interest Rates and Capital Flows to EM
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Volatility and EM Capital Flows
Low Volatility
High Volatility
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EM Growth has decelerated
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Growth Forecast for China Average 7% in next 5 years
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China Exports Have NOT Recovered
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China’s Consumption is lowerthan BRICs/EM
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Leverage is Concentrated in a Few Sectors in China
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Emerging Markets
Potential Risks
• Bond outflows will place at risk corporate borrowing• Financial stability concerns• Economic growth is slowing• Market liquidity is at risk
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The Japanese experiment (Abenomics)
• Japan has enacted its stimulus/QE• Fiscal and structural reforms • The risk of deflation is persistent
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JAPAN: Money Supply and GDP
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Global Outlook: Cautiously Optimistic
US: Economic Recovery Poised to Continue at Moderate Pace» A number of important metrics beat expectations last week
• Strength in job growth, GDP, auto sales, manufacturing while unemployment fell below 7.0%
» FOMC has decided to begin tapering
» Grand rotation may have begun; money flowing out of bonds and into equities – RISK ON!
» A resilient consumer is well positioned to support recovery
Euro zone: GDP Growth Improving, More Work Ahead» Promising strides for EU, structural imbalances remain
» Valuations in Europe compelling; pointing toward economic improvement
EMs: Still a Source of Global Growth» Near-term growth has slowed, but secular stories remain intact
» Growth of EM middle class important long-term theme
Global: Dominant Theme of Synchronized Global Expansion» Global manufacturing numbers improved significantly
» Recent positive data for Eurozone, Spain, UK, Japan, Indonesia, India, Canada, Australia, Malaysia and Taiwan
» Global economic growth; good for the U.S.!
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US Equity Market Performance
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Rising rates Led to Sideways Market
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Sector Allocation Considerations for Rising Interest Rate Environments
•Past performance is no guarantee of future results. Source: Wells Capital “Confidence Runs Through Stock Market. Sectors shown have material differences and represent segments of the S&P 500. Daily fluctuations in specific market sectors are often more extreme than fluctuations in the overall market.
•During Periods of Rising Interest Rates… •Cyclical sectors•historically outperform defensive sectors
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Cointegrated Global Markets
GlobalDynamics
USA Eurozone
Emerging Markets
China
Abenomics
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