Queen’s Global MarketsA PREMIER UNDERGRADUATE THINK-TANK

QGM Predictions 2015

01.14.2015

2QGM

Agenda

1. Evaluation of Last Year’s Prediction

2. Global Overview of 2015

3. Special Prediction by First-Year Analysts

4. Regional Predictionsa) North America

b) Latin America

c) Europe

d) China

e) Middle East and Africa

f) Asia Pacific

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Last Year’s Predictions – North America

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Last Year’s Predictions – Latin America

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Last Year’s Predictions – Europe

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Last Year’s Predictions – China

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Last Year’s Predictions – MEA

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Last Year’s Predictions – Asia Pacific

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The March of the Reformers2015 will be the year where we begin to see significant structural reforms in emerging markets

Narendra Modi Joko Widodo Shinzo Abe

The increasingly strong Prime

Minister of India will continue to

open its economy

He has signaled his plans by

an executive order raising caps

on foreign ownership of

insurance companies

Recently elected as President

of Indonesia, he started his

term with several bold reforms

Within a short time, he

eliminated fuel subsidies and

launched plans for a universal

healthcare scheme

Although the ‘third arrow’ of

Abenomics has been slow to

come, Abe could proceed in

2015 with the TPP

In a recent election, Abe

affirmed his electoral mandate,

giving him leverage for reform

Regionalization in 2015

Queen’s Global MarketsA PREMIER UNDERGRADUATE THINK-TANK

Mark Martone, Tracy Li

January 14, 2015

How a new area of nationalist leaders will sculpt the economic climate in 2015

Prediction:

QGM 11

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6

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

% G

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Global Growth and Trade

Real GDP Growth Trade volume of goods and services

A new era of nationalism fueled by the Chinese Dream and a marginalized Putin

will result in regionalization, leading to decreased global trade during 2015.

Sources: (IMF, 2015)

Prediction:

QGM 12

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USA Japan EU UK China India Brazil Russia

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2015 Outlook for Changes in Regional GDP Growth

2014 2015

Sources: (Goldman Sachs, 2015)

A new era of nationalism fueled by the Chinese Dream and a marginalized Putin

will result in regionalization, leading to decreased global trade during 2015.

QGM

ChinaAs China moves away from its past manufacturing stronghold, it seeks

investment in Asia, stronger alliances with Russia and the “Chinese Dream”

“Goodbye Great

Powers”“The Chinese Dream”

China seeks to create an “Asian

community of shared destiny”

Development of Asian Infrastructure

Investment Bank (AIIB) headed by

China

o $50 billion in capital

o US encouraged allies not to

join AIIB

More trade conducted with East and

Southeast Asia ($1.4 trillion) than US

and EU combined.

Development of the Silk Road, and

Maritime Silk Road

China seeks to strengthen its economic

ties with Russia in addition.

China offered to provide Russia

financial aid to avoid an economic

slowdown.

o East Route Pipeline agreed

with Russia in May 2014

.

A Warm Gesture to

Putin

China’s manufacturing index will see

greater dips in the future, as growth is

generated by innovation and

consumption, rather than exports and

manufacturing. .

Xi Jinping heads an agenda for

“constitutional reform”, tightening “rule

by law”, “ousting corruption”, and

“boosting innovation”, and diplomatic

influence.

Thomson Reuters/INSEAD Asia

Business Sentiment Index indicated

that China’s score slipped from 67 to

50 in 2014 based on a survey of 120

foreign companies.

.

QGM 13Sources: (Engdahl, F., 2015) (Reuters, 2015) (Donnan, 2014)

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Chinese Inward FDI and PMI Trends

40

42

44

46

48

50

52

54

56

58

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Chinese Average Manufacturing PMI 2005-

2015

0

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Chinese Inward FDI 2005-2015

Sources: (World Bank, 2015); (Trading Economics, 2015)

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The Distorted Views of Russian PolicyThe power of Putin and the path of nationalism.

Western Opinion

Russian Media Portrayal

Source: Bloomberg, NORC, BBC News

The economy is in crisis

The Ruble has lost about half its value

GDP decreasing

Aggression in Crimea/Ukraine has turned the country

into an international pariah

Putin is not the cause, he is the solution

Russian opinions driven largely by state television's

carefully constructed version of reality and the

Kremlin's methodical dismantling of every credible

political alternative

Putin will fix Russia’s woes over the next two years

Polls indicate 81% of the population still support him

Confident that the Ruble will recover very soon

Promised to diversify Russia’s economy from energy

USD:RUB Exchange Rate

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Confidence in the Economy is SlippingRussians are no longer getting what they want.

Particularly true in Moscow

Russians have become more accustomed to imported goods and travel

Once-again off limits as a result of Ukraine situation

Source: WSJ, CTV

First Round of

Sanctions

March 2014

In the wake of the annexation

of Crimea by the Russian

Federation

Imposed to prevent certain

Russian officials to travel to

Canada, United States, and the

European Union members

Second Round of

Sanctions

April 2014

United States – imposed ban on

business transactions on multiple

Russian officials and businesses

European Union – further travel

bans on individuals

Issued statement, “sanctions are

not punitive, but designed to bring

about a change in policy or

activity by the target country,

entities or individuals.”

Third Round of

Sanctions

July 2014 – December 2014

Involvement from more

countries

Discontinuation of trade with

Russia

Restrictions related to Russian

energy and defense industries

Further travel bans

Discontinuation of loans/capital

Banning the purchase of

Russian goods

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Relationship with Major Trading PartnersHow the sanctions have caused friction with Russia

Rounds of sanctions against Russia have reduced global trade

The new sanctions are significant because of the extent Europe and Russia depend on one another for trade,

primarily in Russian sourced fossil fuels

Relationship with China:

Both sides are wary about a hostile international environment and oversight dominated by the US

China continues to enjoy the benefits of Russia’s military technology

November 2014 - Resumption of hi-tech arms trade that were suspended several years ago

Non-supportive of sanctions against Russia

New joint naval exercises planned for 2015

Relationship with Germany:

Use of heavier economic sanctions expected in near future

Bring end to Ukraine conflict

Not in Germany's or Europe's interest to bring about a Russian collapse

Source: OEC, Business Spectator,

Russian Import Origins Russian Export Destinations

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China Germany Ukraine Belarus Japan UnitedStates

Italy

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Background: 2014 Recap

Trends and Reasoning

Thesis

National Average Polls Strong Support in Alberta

Small Business Growth Unemployment rate

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11

Jun

-07

No

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Sep

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Jul-

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Dec

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May

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Oct

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Feb

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Jul-

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Dec

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Strong Trajectory

Cuba’s Economy Will Shrink by 2%Old foes become new allies, but can they do it in time?

Trade embargo is actually a set of laws that

will need to be reversed.

Removing embargo will require

congressional approval.

US still has $6.3 Billion in unsatisfied

certified claims and they are unlikely to

relinquish this debt.

Overview

Deal will give Castro much needed sources in

Cash (If it goes through).

Without cheap oil Cuba’s few industries will

falter.

Although Russia has written off 90% of Cuba’s

debt to the country, Cuba is still in a dire

foreign debt situation ($13.6 billion in 2012).

For years, Cuba has relied on Venezuelan oil in exchange for doctors, teachers, and military

advisors.

Their partnership has been soured because of a decline in oil prices and Venezuela’s worsening

debt situation, it is not be possible for Venezuela to continue the deal (especially so close to a

default).

In the wake of all this, Obama has decided to lift trade embargo laws.

USA Cuba

Brazil ForecastA year of social unrest, corruption scandals, social reforms, and fiscal changes

GDP Surplus/Growth Levy’s New Policies

Primary budget surplus is required to be 1.2%

of GDP in 2015 to avoid S&P from dropping

investment grade from BBB- to BB+ (junk bond

status)

QGM predicts that Brazil will not achieve this

requirement as a result of

• Half of all primary public spending moving in

line with the minimum wage which is to rise by

2.5% in 2015 and change on such a short

notice is not possible

• Investment will stall in 2015 after a 7.2% drop

in 2014 as a result of a lack of consumer

confidence coinciding with the Petrobras

corruption scandals

Petrobras – state oil company, kept prices

artificially low to consumers by 20-25% to

provide affordable energy and curb inflation.

In order to meet the surplus needs and in

response to the global oil price, QGM predicts

that new Finance Minister Levy will drastically

reduce the large oil subsidies

Coinciding with the gradual removal of

subsidies, will be a continuation of the increases

in benchmark interest rates to 12.5% in order to

control inflation

Unemployment is currently at a near-record low

of 5% and will rise as a result of Levy’s austerity

measures

New Argentine Presidential ElectionNew President, Same Old Problems

Overview

Current President Cristina Fernandez de Kirchner is not allowed to run; inability to change

constitution due to minority government

QGM is predicting that Sergio Massa of the Renewal Front Party, a breakaway Peronist party, will

win the Presidency

Criticized Kirchner on various economic and social issues

• Kirchner’s stance on business (export tariffs, protectionist policies)

• Doctoring of inflation statistics

• Inability to contain crime (Increase in homicides of 13% 2010-2013, highest rate of theft in S. America)

Needs to enable Argentina to regain access to capital markets and begin negotiating with

American courts to move Argentina out of default.

Argentine public becoming frustrated with ineptitude of current government to create change and

have desire to participate in competitive economy

Venezuela’s Impending DefaultBarring an international bailout or generous aid from supporting states.

Oil prices have fallen

by over 50% since

summer 2013

Vast social programs

keep politicians in

power

Since cuts are unlikely, a

dangerous default looms

Oil prices have plunged

from $100 in summer

2013 to under $50 (2014

beginning).

As of 2013, oil constitutes

96.28% of Venezuela’s

exports.

Venezuela provides oil at

subsidized prices to

ideologically friendly

(socialist) governments in

the region.

Increases in oil prices

over the past decade

allowed Hugo Chavez to

expand social spending

and boost Venezuela’s

international profile.

President Nicolas

Maduro, Hugo Chavez’

successor, narrowly

defeated his opponent on

promises of further

expanding the welfare

state.

Standard & Poor’s cut

Venezuela’s credit rating

to a CCC+.

Venezuela’s debt is now

the most expensive to

insure in the world.

Venezuela’s currency, the

bolivar, has depreciated

from 81 to 178 per dollar.

Venezuela’s ‘official’

inflation rate is at 63.42%.

Prediction

Rational The Bond Market

The European Central Bank will begin quantitative easing in the form of purchasing Italian and

Spanish sovereign bonds and will not raise the main refinancing rate off of 0.15% or the overnight

deposit rate of -0.1% in 2015.

Source: The Economist, The Globe and Mail, Reuters

Near Junk Level Bonds accounting for more than a

quarter of the euro-zone bonds.

ECB’s two main areas of focus, deflation and low

employment

Bond market suggests secular stagnation

Spare capacity in the euro-zone

Greek Hostility

January 22?

Draghi’s “Whatever It Takes”The ECB is on route to quantitative easing

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10-Year Generic Yield

Spain Italy Greece

Prediction

Rationale Eurozone – Loans to Private Sector

A credit slowdown on both the demand- and supply-side will weigh on the Eurozone’s ability to

overcome slow economic growth and deflation and the ECB’s ability to effectively and

permanently inflate its balance sheet.

Source: European Central Bank, Fidelity, Centre for Economic Policy Research, Wall Street Journal

Deleveraging in European banks

Demand-side problems with stimulus

Reduced lending alongside high government debt

Deleveraging done wrong

Expiry of LTROs

Challenges for the ECBGood vs. bad deleveraging

-6%

-5%

-4%

-3%

-2%

-1%

0%

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

Prediction

Rationale Rub/USD – Trailing 6 months

The Russian economy will experience a significant contraction in 2015, upwards of 3% ~ 4%. Russia

faces this narrative for the next two years. Tough economic conditions will undermine President

Vladimir Putin’s high approval rating and could result in Russian actions against Western Sanctions.

Source: The Economist, The Globe and Mail, Reuters

Falling oil prices

- Reliance on tax revenues from the oil industry

- Requires $105 per barrel of Brent Crude oil to

maintain a balanced budget

Economic stress arising from Western Sanctions

- Inability for major Russian companies to access

international financial markets

- Unable to rollover debt, will require governmental

assistance

Futile attempt to prevent Ruble’s fall

- Depleting foreign reserve

- Spike in deposit withdrawals

Recession in Russia in 2015 Russia to experience its first contraction since 2009

0.012

0.016

0.02

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0.028

0.032

Current polls in Greece indicate a threat to EurozoneGreek Election - Greek Political and Economic Crisis?

Rational

Source: Forbes, NBG, Bloomberg

Prediction GDP Annual Growth Rate

The Greek socialist party Syriza, narrowly leading in

the polls to date, will not have the support to win a

majority in the January 2015 election due to the

potential impact of a short-term crisis that will occur in

Greece and the Eurozone.

Risks of adopting a far-left party in Greece outweigh the risks involved with staying with the current government

Re-raises prospect of leaving the Eurozone currency

Immediate term fallouts of a new government would predominantly be around their currency

“An exit from the Euro would lead to a significant decline in the living standards of Greek citizens.” – National Bank

of Greece

Per capita income would fall by 55%

The new national currency depreciate by 65% in comparison to the Euro

Recession which Greece has been in for five years would deepen to 22%,

Unemployment would rise from its current 25% to 34% of the work force

Inflation would soar to 30%.

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Phasing out Western IT InfluenceChina will pass legislative restrictions on Western technology use in its

military, government and SOEs in 2015.

Access Denied

Growth of domestic industries

“Developing domestic technologies and ensuring cyber-security are ‘two wings of a bird’—equally crucial to moving

forward”—Xi Jinping

China will see skyrocketing growth in its Information and Telecommunications Technology Industry in 2015 measured by

increased R&D spending, and greater domestic consumption of Chinese-operated hardware, cloud computing, and

ecommerce firms

Edward Snowden’s leaks solidified Chinese uneasiness about over-reliance on foreign firms like Microsoft and IBM for its

technology needs

Beijing aims to restrict all foreign technology from banks. SOEs and key government agencies by 2020. We will see this

replacement process begin in 2015.

China’s cloud and e-commerce leaders (Alibaba, Tencent,

Baidu) will continue to grow in user outreach.

The young and growing global cloud computing industry rate is

five times higher than the global IT sector growth rate, meaning

space exists to bid for market share.

With the decline of China’s manufacturing sector, we will see the

growth of its technology sector

Sources: (Capgemini, 2012) (World Bank, 2015) (Tiezzi, 2014)

RMB Internationalization to AccelerateIn 2015, payments and trading in RMB will outpace the AUD and CAD to

become the fifth most traded currency

RMB Internationalization

The internationalization of the RMB has been an increasingly important topic in global finance in recent years

As per QGM’s 2014 report, there are three stages: 1) Commercialization of the RMB 2) Structural Economic Changes and

3) Development of an RMB Fund Pool

The evidence suggests that the RMB is undergoing stages (1) and (2):

The RMB was the 8th most traded currency in the world in January 2014, account for 1.38% of global trading, compared

to being the 13th most traded currency in January 2013 (accounting for only .63% of global trading)

Xi Jinping’s government has made economic rebalancing a key priority for their administration; the focus on sustainable

growth is a key step towards true internalization

QGM predicts that the RMB will continue its rapid acceleration in settling global payments, outpacing the AUD and CAD as

these economies face headwinds coming in to 2015

RMB Share of Global Payment Volumes

Sources: (SWIFT, 2014) (QGM Analysis, 2014)

Russian Stalemate Driven into his den, the bear will bide his time

Specifically:

Crimea will remain a permanent part of the Russian Federation

The areas around Donetsk and Luhansk currently controlled by Russian surrogates, will continue to be so held in a state of

frozen conflict

There will be no Russian military adventurism in the Baltic states or in Eastern Poland

At the end of 2015, Vladimir Putin will continue to have a strong grip on power

This status quo will be withheld notwithstanding:

Either the continuation or extension of current sanctions

Continued oil price weakness

Collapse of the Ruble

Strong domestic price inflation

Deep economic recession

During 2015, the disposition of Russian forces will remain frozen

Sources: (Syrian Free Press, 2014)

Oil Prices Will Remain Below $70The price of oil has fallen from $100 plus levels and it will not return to these levels in 2015.

Source: Business Insider, Fortune, Seeking Alpha, Reuters

OPEC

US Oil Supply Demand

US oil production has expanded immensely with

2014 production amounting to 9mm barrels a day

(up 80% from 2007)

US oil is significantly more expensive to produce,

with a break even production above $50

Rig count has continued to fall but output has

remained stable

Any significant effect on supply is not expected to

occur until mid to late 2015

Oil prices crashed in November 2014 following OPEC’s decision to maintain production levels

OPEC has reiterated that they will not cut production, stating that they will and cannot cut production

Saudi Oil Minister stated that “we may not ever see triple digit oil prices again”

There is no longer the belief within OPEC that $100 is the “fair” price for oil as it is encouraging too many new

inefficient producers

OPEC has stated “those who are the efficient producers will rule the market”

The Prevalence of Ebola

Eliminating Ebola by the end of 2015 is not feasible

Drugs and vaccines in development are still a long way from receiving FDA approval

Belief that Ebola is spread by witchcraft and resistance to adopting prevention techniques are hindering

emergency efforts

Heavy handed government initiatives to limit public interaction and spread of Ebola may be slowly lifted for

economic and social purposes (ie. Elections, economy, lack of food and jobs)

Source: Centre for Disease Control and Detection

Cumulative reported case of virus in Guinea, Liberia, and Sierra Leone

UN Ebola Mission Chief’s prediction of Ebola free Africa by end of 2015 is unconvincing.

U.S. will Invade SyriaThe United States will finally acquiesce to international pressure.

Prediction

Russia continues to boost military aid to Syrian

President Bashar al-Assad

Assad continually bombards civilians with

explosive barrels and banned cluster munitions.

Other assaults have killed scores and forced as

many as 500,000 to flee their homes.

The regime's starvation and siege of entire

communities, systematic torture of political

prisoners, and other crimes against humanity

have only worsened

In light of recent terrorist attacks in Canada,

Australia and Paris, the U.S. and other NATO

countries are seeking increasingly aggressive

policies to combat extremism; invading Syria falls

in line with such an agenda

Source: BBC, Huffington Post

Iran will End its Nuclear Program

Source: Bloomberg, Al-Monitor, Institute for International Finance

The Islamic Republic will finally acquiesce to international pressure.

Rouhani rectifies Ahmadinejad's faux pas

Oil price creates pressure Rouhani seeks to alleviate economy

International sanctions permit Iran to export 1mm

barrels of oil per day, resulting in revenue of $52B

Iranian officials have warned citizens regarding

cuts in spending and investment as Iran

reportedly needs around a $100 crude price to

balance its fiscal budget

An ease in sanctions could allow Iran to export

more oil, thus compensating for the fall in price

Efforts to create an agreeable resolution failed in November 2014, prompting a seven month extension

Negotiations will result in a UN-brokered deal between Iran and the international community

Rouhani, feeling pressure from existing sanctions and the slide in oil prices, succumbs to a UN-favored deal

and ends the nuclear program

As a result, sanctions against Iran will be eased, paving the way for further reduction. Iran begins to open up

trade barriers and to permit the flow of investments into and out of the nation

Rouhani gains widespread support from Iranian citizens and from the international community

Indian Economy Will Grow 6%+Modi’s reforms are paving the way for foreign investment that will provide a boost

Modi Reforms

Under Way

Jan Dhan Yojana removing exclusion

from the banking sector

Swachh Bharat Abhiyan, cleaning

India by 2019

Technology for all

Policies in place to attract foreign

investment

Manufacturing hub in the near future

Infrastructure opportunities

Influx of Foreign

Investment

One of the world’s largest net

importers of oil

Removal of the oil subsidy

Consumer spending boost

Falling Commodity

Prices

The AUD will end the year below 0.75 USDWith a slowing a strengthening American economy, Australia will seea weakening of its currency

Source: EIU, Bloomberg, WSJ, BoA Merill Lynch

Australian Central Bank Policy

U.S. Growth China Slowdown

• Interest rates are currently at a record low

of 2.5%

• Projected to remain at this level, or even

lower, for the following year as slowing

Chinese growth has meant lower growth

for Australia

• Lower interest rates means lower demand

for investments in that currency from

financial investors, ceteris paribus

• United States is predicted to grow above 3% in

2015

• Restored faith in the American economy is

leading investors to buy USD

• Chinese economic growth at around 7%, far

lower then historic levels of growth

• Australia is very reliant on Chinese imports, as

China is producing less, it is demanding less

Australian commodities and in turn less AUD

Low oil prices will force down inflation, leading the BOJ to invoke a negative interest rate policy

•

•

•

Source: Financial Times, Bloomberg, Trading Economics, Yardeni Research