Bbbs presentation global perspectives march 26 2014 tsetsekos final

DREXEL UNIVERSIY

LeBow College of Business

The Global Economy and the US Markets

PRESENTED BY

GEORGE TSETSEKOS Dean Emeritus and Francis Professor of Finance March 26, 2014

“Linked” Markets…Amplify Crisis

US Subprime Crisis

EZ Sovereign Debt Crisis

Global Crisis

Global and U.S. GDP Growth 2000-16 Annual %

Transition: From Crisis to Stability Crisis in US ďƒ Global Amplification Policy Responses

Stability Transition

Challenges during the transition

ďƒźNormalize monetary conditions ďƒźHandle risk/volatility

Transition in USA: From Crisis to Stability Crisis in US ďƒ Financial Crisis ďƒ Low Growth and Unemployment Policy Responses Monetary Easing

Stability Transition

Home Prices Rise, Helped by Low Inventory

Auto Sales on the Rise

Core Inflation Remains Contained

Net Worth Climbs as Debt Burden Plummets

S&P Index Performance 2013

Overall Market Performance

Unemployment is Declining

Slow Recovery in USA Spending Levels still Low

Stalled Velocity of Money Supports Low Inflation Outlook

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

Transition: From Crisis to Stability EU response

Crisis in US  Banking Crisis in EU  Sovereign CrisisAusterity Policy Responses

Stability Transition

Common Currency EuroZone 17 Countries

Transitional Issues in the EZ 1. Core Countries vs. Periphery 2. Excessive Corporate Debt 3. Developing Institutions/Architecture of EU

EU: High Unemployment is problematic

Unemployment and domestic demand in the periphery Unemployment Rate (%)

Domestic Demand (volume)

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• Capital flight to safer Euro-zone countries • Private capital has been replaced by public sector flows • Liquidity in the core is not recycled in the periphery • Funding asymmetries (corporate costs are very high) • Current account imbalances

Flows in Euro Zone Area Cumulative from 2009Q4 in % of GDP

Challenges for the Corporate Sector in the Eurozone

• • • •

High Corporate Leverage Credit Tightening Revenue and profits contraction Global Competitiveness

Corporate Debt

Debt - 2002Q1=100

Debt as % of GDP

Corporate Fundamentals

Real Long-term Rates are still high in the EZ

Real Progress in the Euro Zone?

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 CONSOLIDATED PRIVATE DEBT, % OF GDP EUROSTAT MACROECONOMICS IMBALANCE PROCEDURE SCOREBOARD

•GREECE’S ANNUAL GDP GROWTH FORECAST

•Source: GK Research, “Ideas,” September 20, 2013 , World Bank and European Commission (Greece GDP)

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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

Emerging Markets and China

Interest Rates and Capital Flows to EM

Volatility and EM Capital Flows

High Volatility

Low Volatility

EM Growth has decelerated

Growth Forecast for China Average 7% in next 5 years

China Exports Have NOT Recovered

China’s Consumption is lower than BRICs/EM

Leverage is Concentrated in a Few Sectors in China

Emerging Markets

Potential Risks • • • •

Bond outflows will place at risk corporate borrowing Financial stability concerns Economic growth is slowing Market liquidity is at risk

The Japanese experiment (Abenomics)

• Japan has enacted its stimulus/QE • Fiscal and structural reforms • The risk of deflation is persistent

JAPAN: Money Supply and GDP

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

Rising rates Led to Sideways Market

Sector Allocation Considerations for Rising Interest Rate Environments •During Periods of Rising Interest Rates…

•Cyclical sectors •historically outperform defensive sectors

•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.

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Cointegrated Global Markets

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