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Please refer to page 60 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
GLOBAL
Inside
Key Recommendations & Portfolios 2
Executive Summary 3
Secular stagnation = no productivity 6
No Productivity = No deleveraging 16
Low Stall Speed Equilibrium = Public
sector activism 22
Low Stall Speed + State activism =
Unpredictable Volatility 26
No productivity + Low rates = No EPS
growth 33
Secular stagnation = 1930s low returns 39
Investment Allocation – countries &
markets 42
Quality Growth remains our key theme 48
Appendices 56
MQ – Asia ex Quality & Stability Portfolio
Source: Bloomberg; Macquarie Research, April 2016. Refer Fig.135
13 April 2016 Macquarie Capital Limited
Rights, Wrongs & Returns Year of Living dangerously – sequel The first quarter has thus far lived up to our description of 2016 as a Year of
Living dangerously (Nov’15). What will the next 12 months hold in store?
We continue to expect return of disruptive volatilities driven by
unpredictable public policy cross-currents. As the private sector refuses to
multiply money and CBs engage in more extreme and unpredictable policies, the
net outcome is likely to be the re-emergence of powerful volatilities; low/declining
trading volumes and perpetuation of current low investor conviction levels.
We maintain this largely precludes ‘normalization of monetary policy’. Given
current levels of leverage/overcapacity and deep productivity retarding secular
shifts, any normalization is socially unacceptable. A far more likely outcome is
creeping nationalization of capital markets. As remaining free market signals
degrade, the public sector will have little choice but to eventually direct
allocation of credit via mix of fiscal & monetary policies, such as consumption
supports and public sector sponsored capital formation, with Japan arguably in
the vanguard. We maintain that investors, CBs and the public sector will
unequivocally cross this Rubicon in the next 12-18mths. The objective will be for
public sector to replace non-multiplying private sector and resolve the Mexican
stand-off where the public sector feels it is being held hostage by the market.
Meanwhile, low (or negative) rates are likely to keep the global economy in low
(stall-speed) equilibrium. While investors are concerned about recession, we
maintain the real danger is not recession but rather volatility associated with
stall-speeds. Unless public sector strategies are finally able to re-ignite private
sector multiplication (thus accelerating real & nominal GDP), the best that can be
expected is maintenance of low equilibrium. Unfortunately, in our view, the
pervasive impact of secular stagnation largely rules-out private sector escape
velocity whilst low cost of capital makes it even less likely that the adjustments
required to re-build economies will eventuate.
What does it mean for investment strategies over the next 12 months? We
maintain the US$ is the world’s single-most important price, impacting
almost all other outcomes as it is the key contributor to market volatilities; ebbs &
flows of liquidity and other signals (from PMIs to commodities).
We view Fed’s recent ‘dovish tilt’ as recognition that it is essentially a Global
Central Bank and hence it must avoid adding fuel to the fire by minimizing policy
divergences. However the Fed faces a ‘Catch 22’. Currency devaluation is the
only transmission channel available to Euro and Japan. China and EMs on the
other hand, prefer a weaker US$ and stronger ¥ whilst the US economy might be
already growing above the trend line. Therefore only QE4 or a much more robust
private sector recovery would align Fed with other CBs. Given that we view
neither event as likely, we have difficulty seeing ‘Plaza Accord’ currency stability
and maintain that a stronger US$ and weaker €, ¥ & Rmb are far more likely.
This macro uncertainty (exemplified by FX) is likely to be compounded by
virtually non-existent EPS growth rates across most markets. The protracted
stall-speeds are starting to catch up with corporates. Thus, despite recent the
‘trash’ rally, our key investment thesis remains - the non-mean reversionary
importance of quality growth, as it is likely to become ever more valuable in
the world of no growth. The same applies to our country selections. We value
growth & fiscal/monetary flexibility whilst avoiding commodities. This continues to
tilt us to India, Phil, China, Korea & Taiwan. Globally, we think Japan is reaching
an inflection point and we remain concerned that US equities are vulnerable.
95
100
105
110
115
120
125
130
135
Mar
-13
May
-13
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
Mar
-14
May
-14
Jul-
14
Sep
-14
No
v-1
4
Jan
-15
Mar
-15
May
-15
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Mar
-16
"Quality and Stability" portfolio (rel to MSCI ASXJ, $ TR basis)
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 2
Key Recommendations & Portfolios
Fig 1 MQ ASXJ ‘Quality/Stability’ Portfolio (April 16) Fig 2 MQ ASXJ ‘Sustain. Dividend’ Portfolio (Apr 16)
Source: Macquarie Research, April 2016 Source: Macquarie Research, April 2016
Fig 3 MQ ASXJ ‘Thematics’ Portfolio (April 16) Fig 4 Global ‘Quality/Stability’ Portfolio (April 16)
Source: Macquarie Research, April 2016 Source: Macquarie Research, April 2016
Fig 5 Global ‘Sustain. Dividends’ Portfolio (April 16) Fig 6 MQ Asia ex JP – Country Allocation (%)
Source: Macquarie Research, April 2016 Source: Macquarie Research, April 2016
Code Company Name Reco. Analyst Name Country
700 HK Tencent O/P Wendy Huang China
2330 TT TSMC O/P Patrick Liao Taiwan
ST SP SingTel O/P Prem Jearajasingam Singapore
INFO IN Infosys Technologies O/P Nitin Mohta India
ITC IN ITC O/P Amit Mishra India
000333 CH Midea Group (A-Share) O/P Terence Chang China
035420 KS NAVER O/P Kwang Cho Korea
1044 HK Hengan O/P Linda Huang China
288 HK WH Group N/R Not Rated China
EIM IN Eicher Motors Ltd. O/P Amit Mishra India
2313 HK Shenzhou International O/P Terence Chang Hong Kong
669 HK Techtronic Industries Co. N/R Not Rated Hong Kong
GCPL IN Godrej Consumer Products Ltd. O/P Amit Mishra India
600066 CH Zhengzhou Yutong Bus (A-Share) O/P Zhixuan Lin China
1193 HK China Resources Gas Group N/R Not Rated China
1316 HK Nexteer O/P Leo Lin Hong Kong
5347 TT Vanguard O/P Patrick Liao Taiwan
1999 HK Man Wah O/P Jake Lynch China
HTHT US China Lodging Group O/P Jake Lynch China
MSIL IN Maruti Suzuki India O/P Amit Mishra India
Code Company Name Reco. Analyst Name Country DY '16E
600104 CH SAIC Motor (A-Share) O/P Zhixuan Lin China 7.1
2333 HK Great Wall Motor Company O/P Janet Lewis China 5.8
5347 TT Vanguard O/P Patrick Liao Taiwan 5.5
600741 CH Huayu Automotive (A-Share) O/P Zhixuan Lin China 5.3
ST SP SingTel O/P Prem Jearajasingam Singapore 5.0
600066 CH Zhengzhou Yutong Bus (A-Share) O/P Zhixuan Lin China 4.7
GLO PM Globe Telecom O/P Kervin Sisayan Philippines 4.7
000333 CH Midea Group (A-Share) O/P Terence Chang China 4.5
2020 HK Anta Sports O/P Terence Chang China 4.3
2317 TT Hon Hai Precision O/P Allen Chang Taiwan 4.2
DELTA TB Delta Electronics (Thailand) Public Co.N/R Not Rated Thailand 4.1
1999 HK Man Wah O/P Jake Lynch China 3.8
2330 TT TSMC O/P Patrick Liao Taiwan 3.6
TLKM IJ PT Telkom O/P Prem Jearajasingam Indonesia 3.5
T MK Telekom Malaysia O/P Prem Jearajasingam Malaysia 3.4
1216 TT Uni-President Enterprises O/P Dexter Hsu Taiwan 3.4
1044 HK Hengan O/P Linda Huang China 3.4
021240 KS Coway Neutral HongSuk Na Korea 3.4
Ticker Name Reco. Country Ticker Name Reco. Country
Security, Prisons and Bullets Robots, Industrial, Automation and Technology
2357 HK AviChina N/R China 300124 CH Shenzhen Inovance N/R China
002415 CH Hikvision O/P China HOLI US HollySys Automation Technologies N/R China
2634 TT Aerospace Industrial Development CorpO/P Taiwan 002241 CH GoerTek O/P China
047810 KS Korea Aerospace Industries O/P Korea 2049 TT Hiwin Technologies U/P Taiwan
079550 KS LIG NEX1 O/P Korea 2308 TT Delta Electronics N Taiwan
STE SP ST Engineering U/P Singapore 1590 TT AirTAC O/P Taiwan
Educational & Training services Shifts in manufacturing migration/competitiveness
EDU US New Oriental Education & Technology O/P China 2333 HK Great Wall Motor Company O/P China
XRS US TAL Education Group N/R China 600066 CH Zhengzhou Yutong Bus (A-Share) O/P China
NORD US Nord Anglia Education N/R China 600031 CH Sany Heavy Industry N/R China
Environmental Constraint 425 HK Minth Group O/P China
2208 HK Xinjiang Goldwind O/P China 2382 HK Sunny Optical O/P China
2688 HK ENN Energy N/R China 1766 HK CRRC Corp Ltd O/P China
3800 HK GCL-Poly Energy O/P China 2313 HK Shenzhou International O/P China
257 HK China Everbright International O/P China 1476 TT Eclat Textile U/P Taiwan
1193 HK China Resources Gas N/R China 600741 CH Huayu Automative O/P China
958 HK Huaneng Renewables O/P China 3606 HK Fuyao Glass O/P China
SIIC SP SIIC Environment N/R Singapore Demographics
EDC PM Energy Development O/P Philippines 2628 HK China Life Insurance O/P China
MWC PM Manila Water N/R Philippines 300015 CH Aier Eye Hospital Group Co. Ltd. N/R China
Entertainment Services GE SP Great Eastern Holdings Ltd O/P Singapore
1970 HK IMAX China N/R China RFMD SP Raffles Medical Group N/R Singapore
002739 CH Wanda Cinema N/R China BDMS TB Bangkok Dusit Medical Services N Thailand
700 HK Tencent O/P China BH TB Bumrungrad Hospital U/P Thailand
NTES US Netease.com O/P China IHH MK IHH Healthcare Bhd O/P Malaysia
GENM MK Genting Malaysia O/P Malaysia KPJ MK KPJ Healthcare N Malaysia
079160 KS CJ CGV O/P Korea FORH IN Fortis Healthcare O/P India
Ticker Company Name Reco. Ticker Company Name Reco.
MSFT US Microsoft Corporation Neutral CON GR Continental AG N/R
JNJ US Johnson & Johnson N/R ADP US Automatic Data Processing N/R
FB US Facebook, Inc. O/P INFO IN Infosys Technologies O/P
700 HK Tencent Holdings Ltd. O/P WPP LN WPP Plc O/P
ORCL US Oracle O/P 4503 JP Astellas Pharma Inc. N/R
7203 JP Toyota Motor Corp. O/P 4452 JP Kao Corp. N/R
DIS US Walt Disney Company Neutral 6981 JP Murata Manufacturing Co. O/P
V US Visa Inc. O/P ADS GR adidas AG O/P
2330 TT TSMC O/P TEL NO Telenor ASA N/R
AMGN US Amgen Inc. N/R EA US Electronic Arts O/P
NOVOB DC Novo Nordisk N/R HO FP Thales SA N/R
MA US MasterCard Incorporated O/P MSIL IN Maruti Suzuki O/P
OR FP L'Oreal SA N/R CAP FP Cap Gemini SA N/R
ABBV US AbbVie, Inc. N/R 7741 JP HOYA CORPORATION O/P
BAYN GR Bayer AG N/R COLOB DC Coloplast A/S N/R
MC FP LVMH O/P ITV LN ITV plc O/P
NKE US NIKE, Inc. Class B O/P 8035 JP Tokyo Electron Ltd. O/P
AIR FP Airbus Group SE N/R IPG US Interpublic Group O/P
BN FP Danone SA N/R EIM IN Eicher Motors O/P
ST SP SingTel O/P 2313 HK Shenzhou International O/P
FDX US FedEx Corporation O/P 669 HK Techtronic Industries Co. N/R
Ticker Company Name Reco. Ticker Company Name Reco.
NXT LN Next plc Neutral ABBV US AbbVie, Inc. N/R
BKG LN Berkeley Group Holdings N/R 7202 JP Isuzu Motors N/R
TEL NO Telenor ASA N/R MO US Altria Group, Inc. N/R
2333 HK Great Wall Motor O/P KNEBV FH Kone Oyj N/R
TW/ LN Taylor Wimpey plc N/R 2330 TT TSMC O/P
DAI GR Daimler AG N/R ROG VX Roche Holding Ltd Genusssch. N/R
ST SP SingTel O/P 9201 JP Japan Airlines Co. O/P
BMW GR Bayerische Motoren Werke N/R PAYX US Paychex, Inc. N/R
2020 HK ANTA Sports Products O/P DRI US Darden Restaurants, Inc. N/R
2317 TT Hon Hai Precision O/P ELUXB SS Electrolux AB Class B N/R
SKAB SS Skanska AB N/R WPP LN WPP Plc O/P
7270 JP Fuji Heavy Industries Neutral ULVR LN Unilever PLC N/R
7203 JP Toyota Motor Corp. O/P GIVN VX Givaudan SA N/R
RAND NA Randstad Holding NV N/R UPS US United Parcel Service, Inc. Neutral
SIE GR Siemens AG N/R TGT US Target Corporation O/P
EZJ LN easyJet plc O/P JNJ US Johnson & Johnson N/R
SAN FP Sanofi N/R PUB FP Publicis Groupe SA O/P-2 -1 0 1 2 3
India
Philippines
Taiwan
China
Korea
Malaysia
Singapore
Thailand
Hong Kong
Indonesia
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 3
Executive Summary “Eat, drink and be merry, for tomorrow we die”, Kurt Vonnegut, American novelist
As anticipated in our preview, 2016 is turning up to be a year of ‘Living Dangerously’, as
increasing impotent conventional (and unconventional) monetary policies are starting to
translate into unpredictable and violent volatilities. As expected, currency markets are the
‘canary in the coalmine’ and the key transmission channel. Given that FX is the only
market that is not fully controlled by Central Banks (CBs) and public authorities, it is hardly
surprising that investors are eagerly anticipating some form of New ‘Plaza Accord’, whereby
the Fed agrees to delay and slow tightening whilst the ECB, BoJ and PBoC promise to under-
play currency implications of their policies. Investors (particularly equities) are hoping that this
will restore currency stability and allow them to get back to ‘kicking tires’ and selecting well-
positioned equities whilst assuming that the macro backdrop has been fixed.
Unfortunately this is an illusion (or delusion), in our view. The macro backdrop cannot be
fixed, and rising currency volatility is the canary that has just stopped singing. Japan and the
Eurozone cannot hope to ever reflate and exit their respective liquidity traps until and unless
both ¥ and € were to fall significantly below current levels. At the same time, whilst the US
domestic economy is doing reasonably well, it is not injecting sufficient demand and US$
liquidity into the global economy to support global reflation and avoid a potentially highly de-
stabilising rise in the US$. An appreciating US$ will in turn accelerate US domestic
deflationary pressures, raise real interest rates and potentially send the US economy into
recession. At the same time, China would like to have a relatively steady global outlook and
would like everyone to discontinue their attempts to cheapen currencies. This would help
China to maintain stability and slowly devalue the RMB to gradually adjust their economy. A
sharp depreciation of ¥ and € and sharp appreciation of US$ would prompt uncontrolled
depreciation of RMB, and would cause a massive global deflationary wave.
It seems like check mate. In our view, there are two alternatives courses that decision
makers are likely to adopt over the next 12 months.
The first alternative would involve the Fed joining other CBs in much more robust
monetary policies (such as QE4) and, as we have discussed in the past, the Fed is the only
CB that can reflate the global economy, with all other CBs being essentially deflationary.
However, given that even at ~3% nominal GDP growth rates, the US economy might be
already growing above the trend line, any further stimulus could tip the US economy into at
least mild stagflation (zero or negative real GDP but rising inflation). This in turn could force
the Fed to re-discover its Paul Volcker style strength of character and embark on robust
tightening, irrespective of consequences. This would likely return the US to deflation, with
volatile and unpredictable global consequences. Therefore whilst investors’ initial reaction to
change in the Fed’s policy would be exuberant happiness, it is unlikely to last.
The second alternative, involves the public sector embarking on active nationalization of
capital markets and gross capital formation, involving a significant rise in fiscal spending
as well as artificial support for consumption (such as rebates; vouchers; minimum income
guarantees) and more aggressive policies in the areas of infrastructure investment and other
spending, ranging from R&D to support for increasingly deficient pension and insurance
schemes. We maintain that this is the most likely outcome and that incremental spending
would be financed directly by CBs (creating a more potent version of QE). Ultimately, it would
lead to further misallocation of resources and a decline in ROEs but the price for this policy
would arrive later. In the meantime (the first 2-3 years), it could have a significant impact of
stimulating aggregate demand and reflating the global economy and would be
wholeheartedly welcomed by all growth-starved investors, despite obvious negative LT
implications. This is the reason we have chosen the above quote as our header.
Which countries are likely to be the first to embark on these policies?
Theoretically, the countries in the deepest liquidity trap (i.e. Japan, Eurozone and China)
should be the first-movers. However, we believe that political complexities of Eurozone fiscal
and financial systems make it hard to arrive at the necessary compromise. China on the other
hand is fully aware of the negative aspects of proactive fiscal and monetary policies (after all
that is what China has been doing for the last decade). Hence we believe that there would be
reluctance to embrace a policy that already caused explosion in China’s debt and ICOR rates.
FX is a canary in a
coalmine,
highlighting...
...impotence of
conventional QE
based monetary
policies and inability
to arrive at Plaza
Accord style
arrangements...
...as Fed cannot
reconcile conflicting
objectives of
Eurozone, Japan,
China, EMs and
domestic agenda
In the absence of
QE4, the only
alternative is
effective
nationalization of
capital markets via
aggressive
monetary and fiscal
policies,
underwritten by CBs
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 4
This essentially leaves Japan as the most likely candidate for this policy alternative. Japan
is rapidly running out of options and negative interest rates are not going to allow Japan to
reflate or exit its long-standing deflationary trap. Only a mixture of even more aggressive
monetary policies when combined with exceptionally aggressive fiscal spending (in particular
consumption and pension supports) and some structural reform has any chance of altering
Japan’s trajectory. These policies would involve driving ¥ much lower (it is really anyone’s
guess how low it could go), leading ultimately to uncontrolled inflation, elimination of debt
burden and re-setting of the entire economy (potentially at much lower real levels).
In our view, it is a toss-up whether the US or China would be the next to follow a similar
path of reflation. Theoretically, it should be China, but we believe that post US election, it is
quite likely that a stagnating economy with high volatility could quickly coalesce (a la TARP
rescue in ‘08/09) into a meaningful shift in the US policy settings. It would take the form of
indirect (rather than direct) supports and would have wholesome names, such as ‘Giving our
Economy a competitive edge’ or perhaps ‘New deal for hardworking American families’.
Finally, we believe that the Eurozone might be the last major region to cross the line.
What about timing? It is likely that investors will witness a shift in Japan’s settings sometime
in 2016, whilst China and the US might probably embrace it in 2017 and the Eurozone might
come through in 2017/18. We continue to believe that by 2017/18, what is now believed
to be a ‘fringe idea’ would become conventional (just like QEs or negative rates have
become over the last seven years).
What does it mean for investment strategies?
1. First, we believe that current phase of secular stagnation (characterized by low
productivity gains, stagnating real incomes, rising income and wealth inequalities
and compressing global demand and trade) cannot be reversed. Indeed current
monetary policies by keeping cost of capital low (or negative) are making it worse
by precluding market clearance and eroding returns on productive investment.
2. Second, we believe that this implies that until we have more substantive changes
in policy settings (either to allow the business cycle to work via market clearance
or by embarking on far more aggressive strategies of direct Government control
over credit and investment), the high returns (both equities and bond market)
that were achieved in the first seven years of QE policies would fade over
the next 12-18 months, and investors would be stuck in a purgatory of low or
negative real returns (a la 1930s).
3. Third, the change in policy settings towards significantly more proactive public
policy in directly driving investment, consumption and credit decisions, would
force investors to at least temporarily relocate funds towards reflating
economies and sectors that are likely to be direct beneficiaries of
Government largesse (such as low cost/end consumption beneficiaries;
infrastructure players; quite possibly commodities). In other words, investment
style would return to the type of investment that prevailed in China in ‘90s, where
the only question was what would the Government do and how investors would
benefit from these policies, either indirectly or through various asset injections.
4. Fourth, as we saw in Japan over the last 25 years or in the US in late 1960s-mid
1970s, in the world of no growth and no mean-reversion, ability to grow earnings
and returns without excessive reliance on revenue growth or leveraging, is likely
to continue to be highly prized. Until there is a significant shift towards what
consensus currently assumes to be ‘fringe-socialist’ ideas, we believe that
‘Quality-Sustainable Growth’ should remain the basis for any equity
portfolio. Indeed, even on the long-term basis (for small minority of investors who
still have flexibility of maintaining a longer-term outlook), this portfolio would
deliver strong returns over exceptionally extended periods (including ultimate
destruction of debt), although during shifts towards ‘socialism’, it is likely to
underperform government connected and poor quality stocks.
5. Five, under almost any conceivable scenario, we believe that the US$ is likely to
be stronger rather than weaker (indeed the more aggressive Japan, China and
Eurozone become), the higher US$ is likely to go. Another asset class that we
believe wins under almost any scenario (bar normality) is gold.
Current appreciation
of ¥ and € are
driving both regions
towards this answer
but...
...Japan is far more
likely to cross the
Rubicon first
However, China, US
and Eurozone would
eventually join
Japan
Investment
conclusions: (a) low
real returns a la
1930s and 1868-
1980...
...(b) temporary
reallocation of funds
towards government
sponsored entities
but...
....(c) longer-term
Quality and
Sustainable growth
would win as
would...
....(d) initially US$
and later gold
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 5
What are our current recommendations for the next 6-to-12 months?
1. In terms of choice between DM and EM equities, in our view there is no
overwhelming evidence that either asset class would outperform in the short-to-
medium term (though EM equities are poorly positioned over LT). There are
currently far too many unpredictable macro cross-currents to make a definitive
judgement over shorter-term horizon.
However, so long as currencies are hedged, we believe that Japan should deliver
much better returns than either the US or Eurozone. This is premised on our
view that Japan has no choice but to embark on a much more robust combination of
monetary and fiscal stimulus. Whilst it is true that the period of current ¥
strength could continue, we believe that ultimately it is not sustainable, as it
assumes perpetual failure of policy measures, which we believe is unrealistic.
Although the Eurozone is also in the same camp, we feel that it will take longer for
this block to re-coalesce. In our view, the US equities are vulnerable to any EPS
pull-back. As discussed (here), we believe that most LT valuation measures indicate
potential downside on SPX to as low as 1,500 (although we admit that the Fed
cannot allow this to happen; hence any abrupt downward shift in SPX could lead to
accelerated policy changes).
2. In terms of our home turf (i.e. MSCI Asia ex Japan) we continue to emphasize
countries with stronger (and more believable) growth profiles (with contained
inflationary pressures) and good selection of local stocks. Despite recent
underperformance, this tilts us towards India and, despite recent strong
outperformance, towards the Philippines. We also remain neutral or slightly O/W
countries where the growth profile is either much more subdued or not fully
believable but those countries that have a greater-than-average control over
monetary and fiscal policies (China, Korea and Taiwan). However, we are reluctant
to back countries that are commodity driven, have limited (if any) domestic structural
reform agendas and/or are facing political risks (Indonesia, Malaysia and
Thailand). In this review, we have added to our position in the Philippines and China
but slightly reduced our weighting in India, Korea and increased U/W position in
Indonesia.
3. As far as stock portfolios are concerned, we continue to believe that in a world of no
growth and non-mean reversion, portfolios structured to highlight ‘Quality and
Sustainable Growth’ almost irrespective of price, will regain their footing. We
currently run a number of Asia ex and Global Portfolios that accord with these
criteria (refer discussion below and summary of stocks on page 2). Whilst in the last
two months, the flight to ‘trash’ has led to some degree of underperformance we
believe that either over six to twelve months or long-term (three to five years), these
portfolios should remain the core of any investment style. Although investors always
try to mix styles (in an attempt to maximize returns), we are doubtful whether
injection of ‘trash’ into quality portfolios or neutralizing sector bets would help much.
Another two sets of portfolios that we think will do well, both short-term and longer-
term are: (a) ‘Sustainable Dividends’ (yield driven version of our quality Portfolios);
and (b) pure ‘Thematics’ (which play on long-term structural shifts, which are
largely independent of Government and Central Bank policies). Unlike our Quality
Portfolios, we do not have any quality criteria or screen, as Thematics portfolio is
solely designed to capture the key long-term themes (refer discussion below).
However, as a counterbalance, we also run what we describe as ‘Anti Quality
Portfolio’, (only Asia ex not Global) which as the name suggests is reverse of
‘Quality Portfolios’, trying to catch stocks with high leverage, negative cash flow and
low ROEs. It is hardly surprising that over the last two months this portfolio
significantly outperformed MSCI Asia ex Japan. This portfolio could become the
core position, if and when the global economy moves into ‘socialist paradise’.
We maintain that the next twelve months could represent a critical global ‘watershed’ as
both economies and policy makers convulse and start contemplating exits and strategies that
would have been unthinkable in the past. The year is just starting...
Until new
Government
policies are
established, the
cross-currents are
too strong to make
macro calls
We think Japan is
approaching
inflection point. We
also like countries
with reasonable
growth visibility and
contained inflation
Our stock portfolios
continue to
highlight quality-
sustainable growth
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 6
Secular stagnation = no productivity “We face a severe dilemma. We seem to need credit to grow faster than GDP to keep
economies growing at a reasonable rate, but that leads inevitably to crisis, debt
overhang, and post-crisis recession. We seem condemned to instability in an economy
incapable of balanced growth”, Adair Turner, ‘Between debt and the devil’, (2016) p19
Adair Turner, in his latest book, asked the key question that we have been asking since GFC.
Why the global economy in the 1950s-80s could grow without generating a de-stabilizing level
of debt whilst over the last 25 years, the global economy could only grow through increasingly
robust financialization (i.e. rising debt to GDP ratios), with leveraging roughly doubling
between the early 1990s and 2007 and continuing to rise post GFC?
Whilst Turner highlighted various aspects of the economy that have changed over the last
several decades and hence led to a much higher level of unproductive debt (such as de-
regulation of banking sector and rise of unproductive financialization; role of real estate in the
modern economy; importance of rising income and wealth inequality), we continue to believe
that there is essentially only one reason that underlines all of the above manifestations.
As discussed in the past, we assign the ‘blame’ for current instability on declining global
productivity growth rates and related social/political responses to low productivity.
Essentially societies over the last three decades seem to have decided that even though they
no longer can maintain past productivity growth rates, neither income nor wealth incremental
gains should drop (in line with lower productivity run rates). The contradiction was reconciled
by bringing future consumption to the present via leveraging. In other words, our answer to
Adair Turner is that global economy has experienced a secular decline in trajectory of
productivity and we are resorting to leveraging in order to ‘juice up’ income and wealth levels.
The mechanics of this compromise involved accelerated de-regulation of capital markets as
well as acceptance of much higher than hitherto degree of labour mobility (greater part-time
and double/triple employment and higher levels of female participation rates). As wages in
most developed markets stagnated (reflecting lack of productivity growth), households were
encouraged to work multiple jobs and consume their entire incomes (thus supporting GDP
growth rates) with net ‘savings’ being an outcome of leverage and rising asset prices.
Given that the US has a deeper and broader historical statistical data base than any other
country it is the most obvious starting point in illustrating and assessing these changes.
As can be seen below, whether we use traditionally-defined labour productivity growth rates
(i.e. output per employee or hour) or a much more meaningful Total Factor Productivity (TFP),
it is clear that the US productivity growth rates were on a declining curve for quite some time.
TFP growth rates started to de-accelerate in late 1970s and apart from a short-lived IT-driven
pick-up in late 90s-early 00s, TFP growth rates have been hugging zero levels for more
than three decades, with the average TFP clip dropping from ~140bps achieved in 1950-80
to ~25bps in the 1980-2015 period. Similarly, conventional measures of labour productivity
decelerated from ~250bps per annum in ‘50-‘80 to ~190bps in ‘80-‘15 and to less than
100bps in the last five years (vs. ~250bps between 1901 and 1970).
Fig 7 US – TFP Average Growth Rates (%) Fig 8 US – Labour Productivity (Output per Hour) (%)
Source: SF Fed; Macquarie Research, April 2016 Source: CEIC; Macquarie Research, April 2016
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1950
-1955
1956
-1960
1961
-1965
1966
-1970
1971
-1975
1976
-1980
1981
-1985
1986
-1990
1991
-1995
1996
-2000
2001
-2005
2006
-2010
2011
-2015
TFP Growth Rates (%) Average 1950-1980
Average (1980-2015)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1901
-10
1911
-20
1921
-30
1931
-40
1941
-49
1950
-54
1955
-59
1960
-64
1965
-69
1970
-74
1975
-79
1980
-84
1985
-89
1990
-94
1995
-99
2000
-04
2005
-09
2010
-15
Productivity Average (1970-2015) Average (1901-70)
Illusion?
Current instability
and secular
stagnation is
caused by lack of
productivity...
...in some cases
(like the US) since
1980’s whilst...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 7
A similar picture emerges if we examine UK productivity statistics.
Although underlying data base is not as extensive, nevertheless, it is clear that the UK
delivered ~50bps TFP growth rates between 1971 and 2000 however in the last decade TFP
growth rates turned negative. The same is evident when one examines Labour Productivity
(defined as output per hour), with productivity growth rates slowing from a robust 260bps
between 1960 and 1980 to ~150bps in 1980-2014 and ~50bps between 2005 and 2014.
Fig 9 UK – TFP Average Growth Rates (%) Fig 10 UK – Labour Productivity (Output per Hour) (%)
Source: ONS; Macquarie Research, April 2016 Source: ONS; Macquarie Research, April 2016
Whilst not wanting to belabour the point, most other developed countries have also reported
(over the last 10-20 years) lower levels of productivity, whether measured as output per hour
or TFP. If we take an average of Germany, France, Italy and Japan, TFP growth rates are
down from an already low 60bps in 1990s to only 20bps over the last decade, with countries
like Italy not having any visible TFP productivity gains since at least the late-1980s and
delivering negative labour productivity since the late 1990s.
Fig 11 Key DMs – TFP Average Growth Rates (%)
Fig 12 Key DMs – Labour Productivity (Output per Employee) (%)
Source: TED; Macquarie Research, April 2016 Source: TED; Macquarie Research, April 2016
The same trend of declining productivity growth rates is becoming evident across most
emerging markets, with the only exceptions being some of the lowest income and least
developed economies (such as the Philippines or India). Unfortunately, as we discussed in
our prior notes (refer), these economies account for only ~10% of global demand.
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
1971
-1975
1976
-1980
1981
-1985
1986
-1990
1991
-1995
1996
-2000
2001
-2005
2006
-2010
2011
-2014
Average 1971-2000
Average 2000-2014
-
0.5
1.0
1.5
2.0
2.5
3.0
1960
-1964
1965
-1969
1970
-1974
1975
-1979
1980
-1984
1985
-1989
1990
-1994
1995
-1999
2000
-2004
2005
-2009
2010
-2014
Labour Productivity Average(1960-1980)
Average(1980-2014)
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1990-1994 1995-1999 2000-2004 2005-2009 2010-2014
Germany Italy
Japan France
Average (1990-2000) Average (2000-2014)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1991-1995 1996-2000 2001-2005 2006-2010 2011-2015
Germany Italy
France Japan
Average(1991-2000) Average (2001-15)
...other countries
joined stagnating
productivity class
over the last 10-20
years...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 8
Fig 13 Key EMs – Average TFP Growth Rates (%)
Source: TED, Macquarie Research, April 2016
Fig 14 Key EMs – Average Labour Productivity Growth Rates (Output per Employee) (%)
Source: TED, Macquarie Research, April 2016
In summary, it appears that over the last several years global TFP growth rates have gone
negative vs. the average growth rate in 1999-2006 of 1.3%. The largest deceleration
occurred in emerging markets where TFP growth rates are now also negative, even if we
ignore adjustments to China’s productivity estimates.
In the case of labour productivity (i.e. output per employee), global productivity gains are now
closer to a 1.5%-2.0% per annum trajectory vs. the historical pace of ~3%-4% and (again)
even emerging market economies are now reporting sharply lower productivity run rates.
1990-1994 1995-1999 2000-2004 2005-2009 2010-2014 2013 2014
China - official 2.7 -0.5 4.9 3.6 1.1 0.4 -0.1
China - Wu Alternative 0.9 -1.2 1.7 1.0 -1.3 -2.1 -2.7
Korea 2.7 2.1 2.1 1.8 1.2 2.5 -1.2
Taiwan 2.4 1.1 1.3 1.2 2.3 0.7 1.4
India 1.0 1.1 0.1 2.8 1.3 0.5 0.8
Philippines -1.4 -0.1 1.6 0.8 1.9 3.2 1.4
Indonesia 2.8 -3.6 1.2 0.7 1.3 -0.1 2.1
Malaysia 1.7 -2.6 1.8 0.7 0.9 0.0 0.6
Thailand 0.6 -2.8 2.7 -0.5 1.3 0.4 -0.3
Brazil 0.1 -0.2 0.5 -1.0 -0.9 -0.4 -2.8
Turkey -2.7 -1.1 1.1 -3.0 -0.3 -1.3 -2.5
South Africa -2.3 -0.4 1.0 -1.5 -2.1 -3.5 -3.1
1991-1995 1996-2000 2001-2005 2006-2010 2011-2015 2013 2014 2015
China - official 9.0 3.5 10.8 10.6 7.4 7.3 7.0 6.7
China - Wu Alternative 6.8 3.6 7.1 8.3 3.9 4.1 3.4 3.9
Korea 5.3 4.5 3.1 3.3 1.2 1.4 1.2 1.2
Taiwan 5.4 4.2 2.7 3.1 1.3 1.5 2.7 0.7
India 2.6 3.7 2.4 8.6 5.0 4.5 5.0 4.4
Philippines -0.5 2.0 1.2 2.8 4.8 6.3 6.2 4.0
Indonesia 5.9 -1.3 3.8 2.8 4.8 2.8 7.8 3.3
Malaysia 6.6 0.9 3.1 1.0 2.0 0.8 3.3 2.3
Thailand 8.6 0.5 3.0 2.2 2.7 2.4 3.1 2.6
Brazil 2.4 0.6 -0.1 2.4 -0.3 1.8 0.3 -3.0
Turkey 1.5 3.3 4.1 0.8 0.8 1.3 1.2 0.5
South Africa -1.1 1.3 2.9 2.4 -0.2 -1.1 -0.4 1.0
...including EMs,
driving global TFP
into negative
territory
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 9
Fig 15 Global TFP Growth Rates (%)
Source: TED; Macquarie Research, April 2016
Slowing (or stagnant) productivity growth rates have inevitably led to stagnating real
household income levels.
As can be seen below, the US current (2014) median real household income is ~US$53,000
vs. the peak of US$58,000 in 1999-2000 and it is broadly at the same level as it was in 1996.
Indeed, apart from a short-lived burst in the 1996-2000 period (coinciding with what now looks
like a temporary upward blip in productivity growth in the late 1990s), the stagnating/negative
trend has been well-imbedded in the US since the 1980s.
A similar message comes from UK statistics, with average real household income per capita
remaining on a broadly flat to declining curve since 2007, corresponding with a considerable
drop in most labour productivity ratios over the last decade. Perhaps, one difference vs. the
US is that the UK real household income remained relatively firm through the entire period
until 2007, whereas US household income levels have been signalling a structural weakness
for decades.
Fig 16 US – Median Real Household Income (US$) 3YMMA (%)
Fig 17 UK – Real Household Income per Capita (£) 3YMMA (%)
Source: US Census; Macquarie Research, April 2016 Source: ONS; Macquarie Research, April 2016
The challenge facing both the US and the UK is that despite rapidly tightening labour
markets, there is no sign of any significant acceleration in wage outcomes whilst overall
household real incomes continue to stagnate.
The same trend is prevalent across most other DMs and increasingly it is starting to emerge
in EMs. Whilst in some emerging markets, it is still regarded as conventional to expect at
least 10% pay rise per annum (e.g. India), this is becoming far less prevalent in countries like
China, Brazil, Thailand or Indonesia.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1999-2006 2007-2012 2012 2013 2014
-Global -Developed -Emerging
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
35,000
40,000
45,000
50,000
55,000
60,000
69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14
Median Household Income (Real) 3Y MMA
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
62 64 67 69 72 75 77 80 82 85 88 90 93 95 98 00 03 06 08 11 13
UK Real Household Income per Capita 3Y MMA
Stagnating
productivity =
stagnating &
declining real wages
as well as...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 10
Fig 18 Thailand – Real Wages – 3MMA (%) Fig 19 Indonesia – Real Wage Increase (%)
Source: CEIC; Macquarie Research, April 2016 Source: CEIC; Macquarie Research, April 2016
Fig 20 China – Real & Nominal Wages (%) Fig 21 Brazil – Real wages – 3MMA (%)
Source: CEIC; Macquarie Research, April 2016 Source: CEIC; Macquarie Research, April 2016
The message is simple: if productivity stagnates/declines then ultimately there would be
no increases in wages. Although the relationship is not perfect and there are leads and lags,
nevertheless, there is ample evidence to suggest that it reflects real underlying drivers (see
relationship between labour productivity and hourly earnings of US non-supervisory
employees below).
Fig 22 US – Labour Productivity vs. Hourly Earnings (%)
Source: CEIC; Macquarie Research, April 2016
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Ma
r-1
2
Ma
y-1
2
Ju
l-1
2
Se
p-1
2
No
v-1
2
Ja
n-1
3
Ma
r-1
3
Ma
y-1
3
Ju
l-1
3
Se
p-1
3
No
v-1
3
Ja
n-1
4
Ma
r-1
4
Ma
y-1
4
Ju
l-1
4
Se
p-1
4
No
v-1
4
Ja
n-1
5
Ma
r-1
5
Ma
y-1
5
Ju
l-1
5
Se
p-1
5
No
v-1
5
Ja
n-1
6
Real Wages (3MMA)
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2009
2010
2011
2012
2013
2014
2015
Real wage Increase
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Real Wage (%) Wages (%)
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Jan-0
6
Jun-0
6
Nov-0
6
Ap
r-0
7
Se
p-0
7
Feb-0
8
Jul-0
8
Dec-0
8
May
-09
Oc
t-0
9
Mar-
10
Au
g-1
0
Jan-1
1
Jun-1
1
No
v-1
1
Ap
r-1
2
Se
p-1
2
Feb-1
3
Jul-1
3
De
c-1
3
May
-14
Oc
t-1
4
Mar-
15
Au
g-1
5
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Mar-
83
Se
p-8
5
Mar-
88
Se
p-9
0
Mar-
93
Se
p-9
5
Mar-
98
Se
p-0
0
Mar-
03
Se
p-0
5
Mar-
08
Se
p-1
0
Mar-
13
Se
p-1
5
Productivity (4QMMA)
Hourly Earnings-Non-Supervisory (4QMMA), rhs
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 11
Low productivity growth rates and stagnating incomes almost always coincide with rising
income (and often wealth) inequalities. Again, as in the case of relationship between
income and productivity, causality clearly runs in both directions, nevertheless, it does make
intuitive sense that period of broad-based productivity improvements should coincide with
wider social income participation. On the other hand, stagnating productivity usually implies
significant technological and/or other shifts that tend to disproportionately favour certain
industries and occupations, thus widening income and wealth inequalities.
As can be seen below, the last 25-30 years witnessed some of the strongest upticks in
income inequality in the US, since the ‘gilded age’ of the early 1900s. The increase in income
inequality was particularly pronounced in the case of the top 1% and, even more importantly,
the top 0.1% and 0.001% of the population. As at 2013, the top 0.01% of the population (or
less than 10,000 families) controlled ~5%-6% of national income whilst 0.1% of the population
controlled ~11%-12% and the top 1% were commandeering ~22%-23%.
The situation is even more extreme when we examine control of wealth rather than income.
On current estimates (2012-13), the top 0.1% of the population controls 22% of assets (and
11% of income) whilst the top 0.01% owns 11% of the nation’s wealth (vs. 5%-6% of income).
On the other side of the coin, the bottom 90% own less than 23% of national assets (vs an
historical high of 36% in 1980s) and even a moderately successful professional and business
class (which tends to be in the top 1%-10%) lost share over the last several decades from the
peak of ~44% in the 1970s to less than 35% of the nation’s wealth currently.
Fig 23 US – Top 0.01% of Income (%) – 2012/13 Fig 24 US – Top 0.1% of Income (%) – 2012/13
Source: Saez;-Zucman 2015 Macquarie Research, April 2016 Source: Saez-Zucman 2015; Macquarie Research, April 2016
Fig 25 US – Top 0.01%-0.1% of Wealth Control (%) – 2012/13
Fig 26 US – Bottom 90% and top 1%-10% Wealth Control (%) – 2012/13
Source: Saez-Zucman 2015; Macquarie Research, April 2016 Source: Saez-Zucman 2015; Macquarie Research, April 2016
The same trends (though not as extreme) are evident in other key economies, with rising
share of income and wealth attributable to the top 0.1% and top 1%. This applies even to
some of the traditionally much more egalitarian nations, such as Japan, Sweden and France.
0%
1%
2%
3%
4%
5%
6%
7%
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
P99.99-100 Excluding capital gains
P99.99-100 Including capital gains
0%
2%
4%
6%
8%
10%
12%
14%
19
13
19
17
19
21
19
25
19
29
19
33
19
37
19
41
19
45
19
49
19
53
19
57
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97
20
01
20
05
20
09
P99.9-100 Excluding capital gains
P99.9-100 Top 0.1% income share (incomes above $1.91m in 2012)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Top 0.1% Top 0.01%, rhs
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Bottom 90% Top 1%-10%, rhs
...rapidly rising
income & wealth
inequalities
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 12
Fig 27 UK, France & Italy – top 0.1% Income share (%) Fig 28 Japan & Korea – top 0.1% Income Share (%)
Source: Saez-Zucman 2015; Macquarie Research, April 2016 Source: Saez-Zucman 2015; Macquarie Research, April 2016
Fig 29 UK, France & Sweden – top 1% wealth share (%)
Fig 30 UK, France & Sweden – bottom 90% wealth share (%)
Source: IMF; Macquarie Research, April 2016 Source: IMF; Macquarie Research, April 2016
As a recent IMF report highlights (‘Causes & Consequences of Income Inequality’, Jun 2015),
there are multiple reasons for stagnating incomes and rapidly rising inequality levels (which,
as suggested above, have morphed into a global rather than just local or regional
phenomenon) ranging from productivity changes; differences in distributional policies to
technological evolution. We maintain that the key explanation for both stagnating incomes
and rising inequalities is to be found in the concept of secular stagnation.
As discussed in our past reports, we view most of the current challenges (including why the
global economy is stuck in low equilibrium) through the prism of secular stagnation which
from our perspective is a complex interrelationship between two powerful forces:
1. The above described over leveraging and over capacity which depresses demand;
reduces investment flow and lowers the private sector’s velocity of money.
In other words, in its desire to achieve growth rates at a faster clip than productivity
rates would allow, Central Banks and the public sector are now achieving the
opposite, depressing rather than accelerating growth. If indeed the global economy
settled for slower growth rates from the late 1980s to 2007, it would now be a smaller
but arguably more sustainable global economy. Japan (circa 1990-91) and the rest of
the world (circa 2008) had an opportunity to allow excess capacity to exit (at the
expense of much a deeper recession and a possibly unpredictable decline in
demand). However neither the public nor decision makers were willing to run the risk.
As soon as policy drift is established, it becomes an orthodoxy and largely
unalterable. Hence lack of evidence of any global policies to foster reduction in
capacity; instead the global economy is subjected to constant (and, in our view,
fruitless) attempts to accelerate demand to match excess capacity.
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
UK France, rhs Italy, rhs
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Japan Korea, rhs
0%
5%
10%
15%
20%
25%
30%
UK France Sweden
1980 2010
0%
10%
20%
30%
40%
50%
60%
UK France Sweden
1980 2010
Stagnating
productivity is
caused by
combination of over
leveraging and over
capacity (caused by
attempts to find low
productivity) and...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 13
2. Third Industrial Revolution and its impact on productivity growth rates.
As discussed in our various reviews, we tend to agree with Professor Gordon that
the Second Industrial revolution1 (i.e. chemical and pharmaceutical industries;
combustion engine; electricity, air conditioning and refrigeration; indoor plumbing;
mass communications) was the single most profound event in human history, with
inventions occurring between the 1870s and 1920s with most largely commercialized
by the 1970s.
In other words, the massive productivity boost arising from these inventions was far
more significant than anything that occurred before or since (certainly until we
experience the full impact of the robotics age). However, by the 1980s, the
incremental productivity benefits of the Second Industrial revolution were largely
exhausted (just like the incremental benefits of the First Industrial Revolution were
largely captured by the 1870s-80s). Hence, it is not surprising that the US (the
country on the cutting edge) was the first to start experiencing a productivity growth
rate slow-down from the late 1970s onward and this slow-down gradually went global
through the 1980s-90s.
At the same time, the commencement of the Third Industrial Revolution (or some call
it the Machine Age) can be dated to the first proliferation of computers in the 1970s
but the process of replacement of humans with computer power, robotics and
automation accelerated significantly into the 1990s-00s and the global economy has,
over the last decade, entered the sharp end of the S curve, with technology
accelerating at a much faster rate than in previous decades. Experience of the first
two industrial revolutions shows it takes ~50-70 years to align humans with
new processes.
Each Industrial revolution redefined the relationship between humans; humans and
machines and humans and society. The Third Industrial Revolution is not any
different and arguably is far more destructive than the preceding two revolutions, as it
aims to completely displace rather than just augment humans. In the middle of this
transition, productivity growth rates tend to decrease, as the new economy (highly
productive) tends to cannibalize the old economy and hence aggregate nation-wide
productivity growth rates decline (as the new economy initially constitutes a small
portion of the overall output). Eventually, each industrial revolution leads to a
significant rise in productivity growth rates but it occurs decades later.
As discussed in our prior reviews, destruction of older industries and occupations
(ranging from pilots to accountants and paralegals; from logistics employees to
traders; from car drivers to investment advisors) is likely to continue for at least
another several decades2. This would have an impact of further dislocating and
distorting global labour markets, making it impossible for Central Bankers to assess
the degree of labour market slack or explain why there is no wage acceleration at
exceptionally low levels of unemployment.
We believe that structural rather than cyclical reasons explain why US labour
participation rates have been generally declining for the prime cohort (i.e. 35Y-54Y
olds) but increasing for older cohorts (particularly for males). The juniorization and
seniorazation of the labour force that is occurring in the US labour market is
reflective, in our view, of deep structural changes, which is distorting and ‘liquefying’
the labour market by fracturing traditional occupations and creating an economy that
is dominated by contingent (as defined by the Government Accountability Office) and
‘fissured’ workplace where 65-year olds are competing against 45-year olds and 25-
year olds in various temporary and multiple job occupations.3
1 Robert Gordon, “Is US economic growth over? Faltering innovation confronts the siz headwinds”,
working paper 18315, NBER, August 2012) 2 Michael Ford, “Rise of Robots”, 2015; Eric Brynjolfsson & Andrew McCaffe, “The Second
Machine Age”, 2014 3 David Weil, “The Fissured workplace”, 2014; GAO “Contingent Workforce: Size, Characteristics,
Earnings & Benefits”, April 2015
...structural changes
caused by Third
Industrial
Revolution and...
...declining return
on humans
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 14
Fig 31 US – Labour Participation (65Y-69Y) Fig 32 US – Labour Participation Rate (55Y-64Y)
Source: CEIS; Macquarie Research, April 2016 Source: CEIC; Macquarie Research, April 2016
Fig 33 US – Labour Participation (35Y-44Y) Fig 34 US – Labour Participation Rate (45Y-54Y)
Source: CEIS; Macquarie Research, April 2016 Source: CEIC; Macquarie Research, April 2016
Fig 35 US – Private sector Hourly Comp (% YoY) – slow despite low unemployment levels
Fig 36 US – Employment Cost Index - stagnating
Source: CEIS; Macquarie Research, April 2016 Source: CEIC; Macquarie Research, April 2016
16
18
20
22
24
26
28
30
32
34
Jan-8
2
Ju
n-8
3
Nov-8
4
Ap
r-8
6
Se
p-8
7
Feb-8
9
Jul-9
0
De
c-9
1
May
-93
Oc
t-9
4
Mar-
96
Au
g-9
7
Jan-9
9
Jun-0
0
Nov-0
1
Ap
r-0
3
Se
p-0
4
Feb-0
6
Ju
l-0
7
Dec-0
8
May
-10
Oc
t-1
1
Mar-
13
Au
g-1
4
Ja
n-1
6
65-69
42.0
44.0
46.0
48.0
50.0
52.0
54.0
56.0
58.0
60.0
62.0
64.0
66.0
68.0
70.0
72.0
74.0
76.0
Mar-
82
Oc
t-8
3
Ma
y-8
5
Dec-8
6
Jul-8
8
Feb-9
0
Se
p-9
1
Ap
r-9
3
Nov-9
4
Jun-9
6
Ja
n-9
8
Au
g-9
9
Mar-
01
Oc
t-0
2
May
-04
Dec-0
5
Jul-0
7
Feb-0
9
Se
p-1
0
Ap
r-1
2
No
v-1
3
Ju
n-1
5
55-59 60-64, rhs
79.0
80.0
81.0
82.0
83.0
84.0
85.0
86.0
87.0
Mar-
82
Se
p-8
3
Mar-
85
Se
p-8
6
Mar-
88
Se
p-8
9
Ma
r-9
1
Se
p-9
2
Mar-
94
Se
p-9
5
Mar-
97
Se
p-9
8
Ma
r-0
0
Se
p-0
1
Mar-
03
Se
p-0
4
Mar-
06
Se
p-0
7
Mar-
09
Se
p-1
0
Mar-
12
Se
p-1
3
Ma
r-1
5
35-39 40-44
76.0
78.0
80.0
82.0
84.0
86.0
88.0
Mar-
82
Au
g-8
3
Jan-8
5
Ju
n-8
6
Nov-8
7
Ap
r-8
9
Se
p-9
0
Feb-9
2
Jul-9
3
Dec-9
4
Ma
y-9
6
Oc
t-9
7
Mar-
99
Au
g-0
0
Jan-0
2
Ju
n-0
3
Nov-0
4
Ap
r-0
6
Se
p-0
7
Feb-0
9
Ju
l-1
0
Dec-1
1
Ma
y-1
3
Oc
t-1
4
45-49 50-54, rhs
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Ja
n-0
0
Oct-
00
Ju
l-01
Apr-
02
Ja
n-0
3
Oct-
03
Ju
l-04
Apr-
05
Ja
n-0
6
Oct-
06
Ju
l-07
Apr-
08
Ja
n-0
9
Oct-
09
Ju
l-10
Apr-
11
Ja
n-1
2
Oct-
12
Ju
l-13
Apr-
14
Ja
n-1
5
Oct-
15
Private Sector
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Ma
r-0
2
De
c-0
2
Se
p-0
3
Ju
n-0
4
Ma
r-0
5
De
c-0
5
Se
p-0
6
Ju
n-0
7
Ma
r-0
8
De
c-0
8
Se
p-0
9
Ju
n-1
0
Ma
r-1
1
De
c-1
1
Se
p-1
2
Ju
n-1
3
Ma
r-1
4
De
c-1
4
Se
p-1
5
Private Cost Private Wages
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 15
Fig 37 US – New Jobs Created since low of payroll cycle in Feb 2010 (‘000)
Fig 38 UK – similar trend of employment growth with limited wage bargaining power
Source: CEIS; Macquarie Research, April 2016 Source: CEIC; Macquarie Research, April 2016
In this environment, demographics also cease to function as an explanatory variable.
As production and trading links change; the need and employment of labour alters
and as we described in our note (refer Barbarians at the gate), it is likely to turn
demographic dividends of regions like Africa, Middle East and South/South East Asia
into demographic curses. The global economy increasingly would not require the
same linkages and hence most of the younger generation might no longer be
utilized, even at a low per-hour cost. As in the first two industrial revolutions this
would cause significant intra/inter regional social and geopolitical tensions.
We maintain that the above described combination of self-inflicted wounds of over-
leverage and overcapacity with longer-term structural technological shifts is
exceptionally powerful and is likely to continue retarding productivity growth rates, impairing
aggregate demand, causing further acceleration in income & wealth inequalities. It is likely to
become a largely self-re-enforcing feedback loop.
Whilst we do not fully agree with Piketty’s Marxist view that the creation of monopolistic rents
and associated high income and wealth inequalities are endemic to the functioning of the
capitalist economy and can be only resolved through wars and conflicts, nevertheless, there
is ample evidence of capture of institutional settings by vested interests (refer Olson,
Huntington and Fukuyama) that do contribute to the decay of institutions and creation of
monopolistic returns.4However, in our view, the above technological factors are probably far
more important, at least as medium-term explanatory drivers.
On the other side of the argument, we also tend to be sceptical of investors’ views that
current estimates understate productivity gains (as we do not properly account for new
technologies). We have two objections. First, in order to be consistent one also needs to
assume that in the midst of prior industrial revolutions, technologies (cotton/steam/railways in
the First or chemical/electricity in the Second) were properly measured and it is some unique
feature of the IT/robotics revolution that makes it harder this time around. Second, even if we
assume that we are mismeasuring productivity, why are wages stagnating? If productivity
rates are higher than we should have low measured productivity coinciding with rising wages.
We maintain that investors’ burning desire to see higher productivity growth rates and
faster private sector escape velocity, whilst understandable, is highly unlikely. Instead
secular stagnation cross-winds are likely to preclude any meaningful acceleration in private
sector multiplication of money and demand. As velocity of money continues to fall and
sectoral balances refuse to normalize, there is no possibility for any deleveraging and indeed
ongoing leveraging is the only way to avoid compression of aggregate demand.
Thus, to answer Adair Turner’s question, we continue to believe that the global economy
cannot grow without generating destabilizing levels of debt. Indeed, we go beyond that
by arguing that the next stage in the current saga would be not de-leveraging or accelerating
spontaneous recovery but rather the gradual nationalization of capital markets, as the
public sector attempts to replace the non-multiplying private sector (refer discussion below).
4 Thomas Piketty, “Capital in the 21
st Century”, 2015; Mansur Olson, “The Rise & Fall of Nations”,
1982; Francis Fukuyama, “Political Order and Political Decay”, 2014
-
1,000
2,000
3,000
4,000
5,000
6,000
(16-24) (25-34) (35-54) (55-69) (70-74) (Above 75)
Net Change (Feb 10-Feb 16)
Replacement? Beyond Baby boomers
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Ja
n-0
1
Se
p-0
1
Ma
y-0
2
Ja
n-0
3
Se
p-0
3
Ma
y-0
4
Ja
n-0
5
Se
p-0
5
May
-06
Ja
n-0
7
Se
p-0
7
Ma
y-0
8
Ja
n-0
9
Se
p-0
9
May
-10
Ja
n-1
1
Se
p-1
1
Ma
y-1
2
Ja
n-1
3
Se
p-1
3
Ma
y-1
4
Ja
n-1
5
Se
p-1
5
Regular Wages
These two powerful
forces would
preclude
productivity
acceleration
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 16
No Productivity = No deleveraging “Ultimately declining TFP prevents companies from improving their competitiveness
and profitability, and threatens the ability of countries to maintain or better people’s
standards”, The Conference Board, Productivity Brief 2015, p5
The above described inability grow productivity implies that countries and regions can only
deliver rising incomes from either temporary shifts in terms of trade or from a continuing
leveraging (i.e. bringing future consumption forward). The basic idea is that the current
generation steals from the next one, expecting the next one to just continuously roll into the
following generation and so on, ad infinitum.
As McKinsey and BIS keep highlighting there has been no de-leveraging (since ‘07), indeed,
on the contrary, leveraging levels have increased across both developed and in particular
emerging markets. According to the BIS data base, the global total debt for non-financial
sectors (i.e. households, non-financial corporates and government) currently exceeds
US$155 trillion. If one were to add financial sector debt, the overall debt burden is ~US$200-
220 trillion, which is broadly in line with McKinsey’s global debt estimate as at the end of 2014
and represents ~3x global GDP (double the relative levels prevailing in early 1990s).
Whilst both developed and emerging markets continued to leverage through the entire period,
it was emerging markets that were particularly active borrowers, with non-financial debt rising
from US$6 trillion in 2001 to ~US$43 trillion in 2015 or ~15% CAGR per annum clip. This
raised non-financial sector debt to GDP for EM economies from 112% to 175%. If one
includes financial sector, EMs are currently leveraged ~2x, up from ~1x in the early 1990s (vs
a global average that currently approximates 3x and a DM leverage that is closer to 3.5x-4x).
As can be seen below, the onset of GFC was the period of significant acceleration in EM debt
levels, with China being the primary driver. Also, unlike many DMs, non-financial corporates
was the key leveraging sector within the emerging market universe.
Fig 39 Estimates of Global Debt (US$ trillion) Fig 40 Emerging Markets – Debt Level (US$ bn)
Source: McKinsey; Macquarie Research, April 2016 Source: BIS; Macquarie Research, April 2016
Fig 41 Emerging Markets–NF Corporate Debt (US$bn) Fig 42 China – Debt to GDP (%)
Source: BIS; Macquarie Research, April 2016 Source: CEIC; BIS; Macquarie Research, April 2016
Non-Financial Financial Government Total
Households Corporates Corporates
US$ trillion
2000 19 26 20 22 87
2007 33 38 37 33 141
2014 40 56 45 58 200
% of GDP
2000 54% 73% 56% 62% 246%
2007 62% 72% 70% 62% 266%
2014 58% 81% 65% 83% 287%
80
90
100
110
120
130
140
150
160
170
180
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
31.1
2.2
001
30.0
9.2
002
30.0
6.2
003
31.0
3.2
004
31.1
2.2
004
30.0
9.2
005
30.0
6.2
006
31.0
3.2
007
31.1
2.2
007
30.0
9.2
008
30.0
6.2
009
31.0
3.2
010
31.1
2.2
010
30.0
9.2
011
30.0
6.2
012
31.0
3.2
013
31.1
2.2
013
30.0
9.2
014
30.0
6.2
015
US$ bn % of GDP
40
50
60
70
80
90
100
110
-
5,000
10,000
15,000
20,000
25,000
30,000
31.0
3.2
008
30.0
9.2
008
31.0
3.2
009
30.0
9.2
009
31.0
3.2
010
30.0
9.2
010
31
.03
.20
11
30
.09
.20
11
31
.03
.20
12
30.0
9.2
012
31.0
3.2
013
30.0
9.2
013
31.0
3.2
014
30.0
9.2
014
31.0
3.2
015
30.0
9.2
015
US$ bn % of GDP
0%
50%
100%
150%
200%
250%
300%
350%
2000 2007 2008 2009 2010 2011 2012 2013 2014 2015
Public Sector Non-Financial Corporates Household Financial
In the absence of
productivity there
can be no
deleveraging
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 17
Fig 43 China – Estimated Debt Level (US$ bn)
Fig 44 China – Share of Global Debt & Incremental Debt (%)
Source: CEIC; BIS; Macquarie Research, April 2016 Source: CEIC; BIS; Macquarie Research, April 2016
As can be seen above between ‘07 and ‘14, China accounted for ~40% of the entire global
net incremental debt and indeed China’s relative share was probably even higher in ‘15.
However, other key EMs have also been leveraging, though clearly not anywhere to the same
degree. In many ways, EMs did not have a choice as slowing global economy and contracting
global trade, implied that leveraging was the only growth mechanism available to them. Whilst
most EMs assumed that this would be just a temporary phenomenon to tie them over the
‘hump’ of global dislocation, it is likely to have become a permanent feature. The private
sector leveraging has been particularly pronounced in the case of Thailand and Malaysia; and
from a relatively low base in countries like Brazil and Turkey.
A number of EMs have now exceeded what we usually describe as an efficiency frontier of
leveraging (i.e. point beyond which finance turns from a support to an increasingly
destabilizing ‘poison’). Whilst countries clearly have different structures of the economy and
can tolerate a different degree of leveraging (indeed even in developed markets there has
been over the last decade a vigorous discussion as to what is the optimum level of economy’s
financialization), as a rule of thumb, we tend to assume that ~40%-50% leverage for each of
the four sectors of the economy is probably about the right mix (i.e. say 150%-200% of GDP),
so long as of course the pace of debt accumulation is not too rapid.
As can be seen below, some EMs like China or Korea have by now significantly exceeded
that optimum frontier whilst others are rapidly racing towards it (such as Malaysia and
Thailand) but other EMs (such as Indonesia and the Philippines) remain quite significantly
under financialized. Although India as an economy is also under financialized, it does carry a
significant level of corporate and government debt.
Fig 45 EMs – Credit to Private Sector (%) Fig 46 EMs – Credit to Private Sector (%)
Source: World Bank; Macquarie Research, April 2016 Source: World Bank; Macquarie Research, April 2016
0%
50%
100%
150%
200%
250%
300%
350%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2000 2007 2008 2009 2010 2011 2012 2013 2014 2015
US$ bn % of GDP
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
1995-00 2000-07 2007-14
Total Debt Incremental Debt
80.0
90.0
100.0
110.0
120.0
130.0
140.0
150.0
160.0
170.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Thailand South Africa
Korea Malaysia
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Brazil Turkey Russia
Indo Philippines
...on the contrary
leveraging levels
need to continue
going up as...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 18
Fig 47 EM – Debt to GDP (%) – 2014-15
Source: BIS; McKinsey; Macquarie Research, April 2016
The ongoing leveraging is required by weakness in velocity of money across most
economies. As velocity falls, leveraging and injection of hard cash is the only way to avoid
compression of aggregate demand and at this stage, there is no evidence of any recovery in
velocity of money either in developed or (increasingly) most of the emerging markets.
Fig 48 US – Velocity of Money (GDP/M2) (x) Fig 49 Japan – Velocity of Money (GDP/M2) (x)
Source: Bloomberg; CEIC; Macquarie Research, April 2016 Source: Bloomberg; CEIC; Macquarie Research, April 2016
Fig 50 Eurozone – Velocity of Money (GDP/M2) (x) Fig 51 Korea – Velocity of Money (GDP/M2) (x)
Source: Bloomberg; CEIC; Macquarie Research, April 2016 Source: Bloomberg; CEIC; Macquarie Research, April 2016
0%
50%
100%
150%
200%
250%
300%
350%
Chin
a
Kore
a
Mala
ysia
Taiw
an
Thaila
nd
Bra
zil
Ind
ia
Tu
rke
y
Rus
sia
Phili
ppin
es
Indonesia
Public Households Non-Financial Corporates Financials
Efficiency frontier
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
De
c-5
9
Ma
y-6
2
Oc
t-6
4
Mar-
67
Au
g-6
9
Ja
n-7
2
Jun-7
4
Nov-7
6
Ap
r-7
9
Se
p-8
1
Feb-8
4
Jul-8
6
Dec-8
8
Ma
y-9
1
Oc
t-9
3
Mar-
96
Au
g-9
8
Jan-0
1
Ju
n-0
3
Nov-0
5
Ap
r-0
8
Se
p-1
0
Fe
b-1
3
Jul-1
5
Velocity Average (1990-2013)
Average (1960-1990)
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
Mar-
57
Se
p-5
9
Ma
r-6
2
Se
p-6
4
Ma
r-6
7
Se
p-6
9
Ma
r-7
2
Se
p-7
4
Ma
r-7
7
Se
p-7
9
Ma
r-8
2
Se
p-8
4
Ma
r-8
7
Se
p-8
9
Ma
r-9
2
Se
p-9
4
Ma
r-9
7
Se
p-9
9
Ma
r-0
2
Se
p-0
4
Mar-
07
Se
p-0
9
Mar-
12
Se
p-1
4
Velocity Average (1957-1987) Average (1988-2014)
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
Mar-
95
Jun-9
6
Se
p-9
7
Dec-9
8
Mar-
00
Ju
n-0
1
Se
p-0
2
Dec-0
3
Mar-
05
Jun-0
6
Se
p-0
7
Dec-0
8
Mar-
10
Ju
n-1
1
Se
p-1
2
Dec-1
3
Ma
r-1
5
Velocity Average (1995-2013)
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
Mar-
90
Ap
r-9
1
May
-92
Jun-9
3
Jul-9
4
Au
g-9
5
Se
p-9
6
Oc
t-9
7
No
v-9
8
Dec-9
9
Jan-0
1
Feb-0
2
Mar-
03
Ap
r-0
4
Ma
y-0
5
Ju
n-0
6
Jul-0
7
Au
g-0
8
Se
p-0
9
Oc
t-1
0
Nov-1
1
De
c-1
2
Ja
n-1
4
Feb-1
5
Korea Average (1990-2013)
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 19
Fig 52 China – Velocity of Money (GDP/M2) (x) Fig 53 Key EMs – Velocity of Money (GDP/M2) (x)
Source: Bloomberg; CEIC; Macquarie Research, April 2016 Source: Bloomberg; CEIC; Macquarie Research, April 2016
Stagnant and/or declining velocity of money implies that economies require an ever
greater infusion of money & credit to maintain growth. Although (again) the relationship is
not perfect, there is a clear correlation between the overall level of leveraging and the velocity
of money (i.e. higher leverage and/or faster accumulation of debt tends to coincide with lower
velocity of money). Whilst there are a number of less developed countries that have not yet
financialized their economies, these countries represent only ~10% of global demand (refer)
with the rest of the global economy having either already crossed the Rubicon of declining
efficacy of incremental monetary stimulus or are about to cross this efficiency frontier.
This lack of desire of the private sector to multiply money is reflected in sectoral balances,
with the private sector insisting on maintaining a high level of savings and it is then entirely up
to the public sector to decide whether it wishes to ‘spend’ these savings. The degree to which
the public sector utilizes private sector savings determines whether a country or a region runs
current account surpluses.
For example, Eurozone’s high private sector savings are not ‘spent’ by the public sector (due
to the region’s pre-occupation with fiscal deficits) and hence the Eurozone generates
considerable surplus funds that it cannot productively invest and hence it exports funds to
other regions (such as the US or UK); similarly for Japan, exceptionally high and persistent
private sector savings are not absorbed by the public sector and hence Japan’s rising current
account surpluses. The same applies to countries like China, Korea or Taiwan. However, the
key challenge for exporting nations is that deficit nations (such as the US, UK or Australia) or
former deficit nations (like Spain, Italy or Greece) are no longer able and/or willing to run
higher deficits. This in turn, causes considerable currency angst, as surplus capital
countries compete for higher share of static and/or diminishing global pie.
As can be seen below there is absolutely no evidence that either the Eurozone’s or Japan’s
private sector is returning back to investment and spending. Whilst the US and the UK
sectoral balances are normalizing, in the case of the US, private sector continues to save (i.e.
refuses to return to the type of multiplication that it used to do in prior decades) and in the
case of the UK, current account deficits are becoming threatening. There is also no evidence
of any re-balancing for countries like Korea, Taiwan or China, whilst in the former deficit
running countries (such as Spain or Italy), private sector savings remains high, thus
preventing these countries from injecting incremental demand into the global economy.
Essentially, we believe that global re-balancing (if it were to happen) would probably
take the form of contracting global trade and demand, rather than increasing
consumption in surplus countries and increasing investment in deficit nations driving larger
overall economic and trade cycles.
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
China Velocity
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Dec-9
6
Oct-
97
Au
g-9
8
Jun-9
9
Apr-
00
Feb-0
1
De
c-0
1
Oct-
02
Au
g-0
3
Jun-0
4
Apr-
05
Feb-0
6
Dec-0
6
Oct-
07
Au
g-0
8
Jun
-09
Apr-
10
Fe
b-1
1
Dec-1
1
Oct-
12
Au
g-1
3
Jun-1
4
Apr-
15
Brazil Russia Malaysia, rhs Thailand, rhs
...private sector
velocity of money
continues to fall
At the current
juncture there is no
consistent evidence
of improvement in
velocity or
normalization of
sectoral balances
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 20
Fig 54 Leveraging (Debt/GDP %) vs Velocity of Money Fig 55 Eurozone – Sectoral Balances (% of GDP)
Source: Bloomberg; CEIC; Macquarie Research, April 2016 Source: ECB; Bloomberg; Macquarie Research, April 2016
Fig 56 Spain – Sectoral Balances (% of GDP) Fig 57 Italy – Sectoral Balances (% of GDP)
Source: ECB; Bloomberg; Macquarie Research, April 2016 Source: ECB; Bloomberg; Macquarie Research, April 2016
Fig 58 UK – Sectoral Balances (% of GDP) Fig 59 US – Sectoral Balances (% of GDP)
Source: CEIC; Bloomberg; Macquarie Research, April 2016 Source: Federal Reserve; Bloomberg; Macquarie Research, April 2016
-
0.5
1.0
1.5
2.0
2.5
3.0
0% 100% 200% 300% 400% 500% 600%
Brazil
JapanChina
US
Indo
Russia
UKEuro
Kor
Mal-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
20
15
Q3
201
5Q
1
201
4Q
3
20
14
Q1
201
3Q
3
201
3Q
1
201
2Q
3
20
12
Q1
201
1Q
3
201
1Q
1
20
10
Q3
201
0Q
1
200
9Q
3
20
09
Q1
200
8Q
3
200
8Q
1
200
7Q
3
20
07
Q1
200
6Q
3
200
6Q
1
20
05
Q3
200
5Q
1
200
4Q
3
200
4Q
1
200
3Q
3
200
3Q
1
Private Sector Government ROW
Saving
Spending
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
De
c-0
0
Sep
-01
Ju
n-0
2
Ma
r-03
De
c-0
3
Sep
-04
Ju
n-0
5
Ma
r-06
De
c-0
6
Sep
-07
Ju
n-0
8
Ma
r-09
De
c-0
9
Sep
-10
Ju
n-1
1
Ma
r-12
De
c-1
2
Sep
-13
Ju
n-1
4
Ma
r-15
Private Sector Government ROW
Saving
Spending
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
Private Sector Government ROW
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
Dec-9
7
Dec-9
8
De
c-9
9
Dec-0
0
Dec-0
1
Dec-0
2
De
c-0
3
Dec-0
4
Dec-0
5
Dec-0
6
De
c-0
7
Dec-0
8
Dec-0
9
Dec-1
0
De
c-1
1
Dec-1
2
Dec-1
3
Dec-1
4
Private Sector Government ROW
CA DeficitSaving
Spending
-15.0%
-12.5%
-10.0%
-7.5%
-5.0%
-2.5%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
1997Q
1
1997Q
4
19
98
Q3
19
99
Q2
2000Q
1
2000Q
4
2001Q
3
2002Q
2
2003Q
1
20
03
Q4
2004Q
3
2005Q
2
2006Q
1
2006Q
4
2007Q
3
20
08
Q2
20
09
Q1
2009Q
4
2010Q
3
2011Q
2
2012Q
1
2012Q
4
20
13
Q3
2014Q
2
2015Q
1
Private sector Public Sector ROW
Saving
Spending
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 21
Fig 60 Japan – Sectoral Balances (% of GDP) Fig 61 Korea – Sectoral Balances (% of GDP)
Source: CEIC; Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
Fig 62 China – Sectoral Balances (% of GDP) Fig 63 Taiwan – Sectoral Balances (% of GDP)
Source: CEIC; Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
We maintain our view that if the private sector refuses to spend and multiply money then
it would be only a matter of time before consensus (both investment and policy-
makers) swings towards much more proactive public sector activism. Whilst we tend to
describe it as ‘British Leyland or Cuba alternative’ (indicating that as public sector gets far
more involved in capital allocation, the longer-term returns are likely to fall), in the short to
medium term, there is an unquestioned ability of public sector to support and improve
aggregate demand.
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Dec-9
8
Se
p-9
9
Jun-0
0
Mar-
01
Dec-0
1
Se
p-0
2
Ju
n-0
3
Ma
r-0
4
Dec-0
4
Se
p-0
5
Jun-0
6
Mar-
07
De
c-0
7
Se
p-0
8
Jun-0
9
Mar-
10
Dec-1
0
Se
p-1
1
Ju
n-1
2
Mar-
13
Dec-1
3
Se
p-1
4
Jun-1
5
ROW Private Sector Public Sector
Saving
Spending
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Private Public ROW
1997 Crisis GFC
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Households Business Government ROW
Saving
Spending -20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
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
Government ROW Private Sector
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 22
Low Stall Speed Equilibrium = Public sector activism “We used to think that you could spend your way out of recessions and increase
employment by boosting Government spending...I tell you in all candour that this
opinion no longer exists and in so far it ever did exist, it only worked on each
occasion...by injecting a bigger doze of inflation into the economy, followed by a
higher level of unemployment as the next step”, James Callaghan, left-leaning UK
Labour Prime Minister in a speech (1976) that signalled the end of Government-
sponsored spending and investment that dominated British economy in the 1950s-70s.
“Government’s view of the economy could be summed up in few sentences: If it
moves, tax it. If it keeps moving regulate it. And if it stops moving, subsidize it”,
“Government programs, once launched, never disappear...it is the nearest thing to
eternal life we’ll ever see on this earth”, Ronald Reagan
As we highlighted in several of our recent reviews, we believe that over the next 12-18
months, voices in support for higher level of Government spending and what would be termed
‘proactive fiscal policies’ are likely to multiply. Indeed, we have already been surprised to
witness over the last six months, the pace and vigour of support for much stronger fiscal
policies, not just from Paul Krugman but also increasingly from other commentators and
former (and potentially future) decision makers, ranging from Larry Summers and Adair
Turner to FTs Martin Wolf, Mohammed Al-Arian etc.
In our view, the intellectual case in favour of more proactive Government policy can be
distilled to two key messages:
1. If the private sector refuses to multiply money, it is the responsibility of the public
sector to stimulate and grow aggregate demand; and
2. Given that interest rates are so low (courtesy of secular stagnation and Central
Banks’ fight against it) the Government can borrow almost unlimited funds to fund
investment and various projects.
It seems puzzling to us that the same commentators who advocate stronger and more robust
Government spending do not ask why the private sector refuses to spend, consume and
invest. Our answer has consistently been that it is the aggressive public sector posture which
is (in large part) responsible for reducing the private sectors’ visibility by distorting prices and
compressing business cycles (hence we view most private sector-survey based forward
indicators as almost useless, i.e. what is the point of asking private sector participants what
they think, when the public sector largely decides the price of the most important
commodities, such as cost of money – refer What caught my eye? v.11 - Leading
indicators and ‘blind alleys’, 28 October 2013).
The combination of post-war re-building and the consensus view at the time that the key
Government’s responsibility is to ensure ongoing economic expansion with fair distributional
outcomes led to exceptionally hyperactive Government and public policies in the 1960s-70s
(ranging from LBJ’s Great Society in the US to the nationalization of industries and banks in
Britain and Sweden to Communist-style planning by MITI in Japan). The end result across
most Western economies were rising stagflationary pressures that were undermining the
private sector, even prior to the increase in oil prices in 1973.
As can be seen below, the US economy was already in deep stagflation by 1968, at least four
or five years before rise in oil prices. Robust increase in base money supply (to pay for the
Great Society and Vietnam War) through 1960s, eventually percolated into high inflation rate
(reaching 5%-7% by late 1960s from steady and flat inflationary outcomes of ~2% that
prevailed through 1950s and most of 1960s) whilst GDP growth rates slumped and
unemployment rate jumped to the highest levels since the Great depression. The outcomes
were even more extreme in the UK.
No productivity &
falling velocity of
money = public
sector activism
We believe that the
pendulum is
swinging strongly in
favour of
Government and
state policies...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 23
Fig 64 US Money Supply & CPI (%) Fig 65 UK Money Supply & CPI (%)
Source: CEIC; Bloomberg; Macquarie Research, April 2016 Source: FRED; Bloomberg; Macquarie Research, April 2016
However by late 1970s the tide had turned and ushered the new era of Ronald Reagan and
Margaret Thatcher and as the pendulum swung in reverse, it inevitably led to far deeper-than-
initially-expected retrenchment of the Government’s supervisory and investment role. For
example, the key Government role in directing theoretical science and basic research (areas
where private sector tends to deliver poor track record), have been cut dramatically. Similarly,
Government’s oversight of anti-trust policies and financial sector regulation has been
arguably cut back too far in 1980s-00s.
In our view, the pendulum is definitely swinging back towards Government
involvement.
We believe that the new Government activism would start to take over from conventional
monetary policies (which we believe are running out of both efficacy and ammunition, with
negative interest rates being the ‘last gasp’ of hyper active monetary policy or as we call it the
Russian roulette stage of monetary activism).
We expect that over time, investors are likely to witness three types of strategies:
1. Direct state support for consumption via minimum income (rather than wage)
guarantees, short-dated vouchers and rebates;
2. Government’s participation in various investment and infrastructure projects, through
a mix of guarantees to private sector; direct participation and funding; and
3. Long-term commitment to increasing spending on R&D; space exploration,
education, skilling etc. We also expect greater state role in underwriting of pension
and retirement shortfalls, which are likely to become more pronounced, as
investment returns decline.
We have also traditionally identified four ‘door stop’ conditions that we believe would be
necessary to allow for such a significant shift in public policies:
1. Acceptance (by principal players and investors) that monetary policies have come to
an end. The volatilities in response to ECB and Fed decisions (or non-decisions as in
the case of BoJ) over the last two months, seem to indicate that neither the principals
nor investors have yet fully abandoned hope that monetary policies, (if allowed time),
could yield desired results;
2. Acceptance (principal players and investors) that global economy is stuck in low
equilibrium stall speed trajectory with no conceivable exit. Our current impression is
that whilst this ‘realization’ is gradually dawning on investors and bureaucrats, it is far
from being embraced as the core belief. Instead there is still a lot of discussion
regarding possibilities of escape velocity and whether by 2017-18 the global
economy and trade would enjoy some meaningful acceleration;
3. Strong intellectual argument made in favour of different policy setting, i.e. why a
different (non-monetary) policies might have a better impact in stimulating aggregate
demand whilst reducing probabilities of financial dislocation. As highlighted above,
we have already seen a meaningful acceleration in articles and discussion
papers/books regarding benefits of an alternative policy;
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Ma
r-6
3
Ju
l-63
No
v-6
3
Ma
r-6
4
Ju
l-64
No
v-6
4
Ma
r-6
5
Ju
l-65
No
v-6
5
Ma
r-6
6
Ju
l-66
No
v-6
6
Ma
r-6
7
Ju
l-67
No
v-6
7
Ma
r-6
8
Ju
l-68
No
v-6
8
Ma
r-6
9
Money Supply, rhs
CPI , lhs
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Ma
r-6
4
Au
g-6
4
Ja
n-6
5
Ju
n-6
5
No
v-6
5
Ap
r-6
6
Se
p-6
6
Fe
b-6
7
Ju
l-6
7
De
c-6
7
Ma
y-6
8
Oc
t-6
8
Ma
r-6
9
Au
g-6
9
Ja
n-7
0
Ju
n-7
0
No
v-7
0
Ap
r-7
1
Se
p-7
1
Money Supply CPI, rhs
...focusing on
consumption and
income supports; as
well as investment
and supports for
pensions and social
security
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 24
4. In order for points (1)-(4) above to coalesce, we believe that much higher level of
asset class volatilities is required. Whilst Dec’15-Jan’16 reminded us of the types of
volatilities that investors experienced in the lead up to Bear Stearns in early 2008,
the combination of aggressive response by the Fed and ECB as well as some
degree of stabilization in China has eroded some of that volatility. In our view we
need to experience much more robust dislocation.
As discussed (here), we believe that the Fed is focusing on a series of liquidity and stress
indicators. Domestic employment and inflation mandates whilst important are (in our view)
subordinated to far more significant issues of financial and liquidity volatility. Indeed, given
that the US$ is a global currency and that US domestic leverage is ~3.5x GDP (and global
leverage approximates 3x) it cannot be any other way (refer).
We believe that four key variables are on the Fed’s permanent dashboard (irrespective of
public emphasis on labour market slack and domestic growth):
The degree of financial and monetary tightening. Whilst we do not know whether Fed
prefers one of a dozen different indices (it is quite possible that individual members have
a slight preference for one or another, possibly in line with their geographic residence).
We tend to prefer St Louis Fed Financial Stress Index (STLFSI). As a composite index
it gives a reasonably good snapshot of overall tightness;
TED and OIS spreads. Although part of broader indices, these spreads attempt to
measure credit risk of lending as well as difference between overnight and longer-term
unsecured lending between the banks (OIS) and are quite often an early warning signal
of rising credit uncertainty and drying up of liquidity in intra-bank market;
Lower end credit spreads. We tend to look at the high yield market (i.e. CCC and
below) as well as the lowest tiers of high grade debt. Again, as in the case of TED-OIS,
these spreads tend to be early indicators of tightening monetary and financial conditions.
DXY (US$) and volatility of equity market (SPX). As discussed in our prior reviews,
although equity is clearly not as large or economically systemic asset class (as say bond
or currency markets), it has acquired a symbolic value, way beyond its real economic
impact. US$ on the other hand is the key measure of global liquidity and growth.
In other words, we believe that the Fed has a relatively low degree of tolerance for
volatility and/or significant correction in any of these key variables. In our view, the
reason for this is simple. If no one can deleverage, then the only way forward is a continuing
leveraging, which requires ongoing liquidity flows and avoidance of significant asset class
volatilities. At 3.5x leverage, confidence is the key and nothing destroys confidence more
comprehensively than decline in liquidity and asset price corrections.
As can be seen below, the jump in volatilities that occurred at the end of 2015 and early part
of 2016 has been (partially) brought under control. In other words, instead of continuing
tightening conditions (as seemed likely in late Jan’16-early Feb’16), the market has generally
stabilized and pulled back from the precipice.
Fig 66 St. Louis Fed Financial Stress Index Fig 67 TED & IOS Spreads
Source: St. Louis Fed; Macquarie Research, April 2016 Source: FRED; Bloomberg; Macquarie Research, April 2016
-1.80
-1.60
-1.40
-1.20
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
Ja
n-1
2
Ap
r-1
2
Ju
l-1
2
Oc
t-1
2
Ja
n-1
3
Ap
r-1
3
Ju
l-1
3
Oc
t-1
3
Ja
n-1
4
Ap
r-1
4
Ju
l-1
4
Oc
t-1
4
Ja
n-1
5
Ap
r-1
5
Ju
l-1
5
Oc
t-1
5
Ja
n-1
6
STLFSI
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Jan-1
3
Mar-
13
May-1
3
Jul-13
Sep
-13
No
v-1
3
Jan-1
4
Mar-
14
May-1
4
Jul-14
Sep
-14
No
v-1
4
Jan-1
5
Mar-
15
May-1
5
Jul-15
Sep
-15
No
v-1
5
Jan-1
6
Mar-
16
Ted Spread Libor OIS Spread
However, investors
need to see greater
degree of volatility
and final
abandoning of hope
for growth
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 25
Fig 68 CCC (and below) spread (%) Fig 69 DXY (US$) Index
Source: St Louis Fed; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
In our view, it is highly likely that all four conditions would be satisfied over the next 12-
18 months (in other words, there would be growing recognition of impotence of monetary
policies, coinciding with dislocation in some and perhaps most of these variables). In our
view, this could have a significant impact on investment strategy, including stock/sector and
country selections (refer discussion below).
How would Governments finance incremental expenditure?
Although most commentators correctly highlight that roughly one-third of global sovereign
debt is now in negative territory (refer) whilst the rest is either rapidly approaching zero or is
currently residing at historically low levels, we would be against borrowing to fund an
investment spending spree. Most economists tend to be ‘flow’ rather than ‘balance sheet’
experts, and hence there is little understanding that even at zero rates, any country (or
company) could become bankrupt beyond certain absolute level of debt. Also, as example of
Japan illustrates as well as studies on public debt by Kenneth Rogoff highlights, beyond
certain level of debt, there is a significant negative impact and quite often there is no longer
any way to normalize policy.
If indeed, we were to witness a significant shift towards fiscal and proactive state policies, we
would prefer that it is directly funded by Central Banks (as just another form of QE –
albeit a much more potent version). Whilst we recognize that it is technically illegal now for
Central Banks to directly finance projects or capitalize investment vehicles, there were many
issues that were technically illegal, that were successfully overcome over the last seven to
eight years (just witness ECB’s QE program).
We also fully recognize that as in Britain, US or Sweden of the 1960s-70s, this strategy would
ultimately lead to further misallocation of resources as well as either stagflation (à la Britain in
the 1960s-70s) or deflation (à la China today). However, so long as there is lack of political
and social will to shut down excess capacity and as long as structural pressures remain, it
seems inevitable that ultimately destructive policies would be embraced by both
investors (who are desperate for growth) and politics/populace.
Which countries are likely to be the first to embark on this potentially deadly mix of monetary
and fiscal policies? In our view the most likely candidates are Japan, China and the US,
whilst the Eurozone is facing too many political constraints to accommodate such a proactive
policy of direct monetization of debt and fiscal spending (refer discussion below).
We believe that it is quite possible that Japan would have no choice but to embark on this
policy within 2016. A consistent failure of monetary policy to drive down ¥ implies the onset
of complete impotence of conventional monetary policy and either the Government abandons
completely any further thoughts of extricating Japan from a liquidity trap (unlikely) or it adopts
far more aggressive policy of mixing monetary and fiscal stimulus (highly likely). The net
outcome would be steeper devaluation of ¥ and greater support for aggregate demand.
In our view, China would be initially reluctant to embrace the course, as within living
memory, Chinese leadership is aware of the consequences of hyperactive monetary and
fiscal policies. However, in many ways, China might not have much of a choice but to join
in, probably sometime in 2017. Finally, we believe that the US (post-elections and a
sequence of volatility episodes) might also embrace this policy shift.
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
20
12-0
1-0
3
20
12-0
4-0
3
20
12-0
7-0
3
20
12-1
0-0
3
20
13-0
1-0
3
20
13-0
4-0
3
20
13-0
7-0
3
20
13-1
0-0
3
20
14-0
1-0
3
20
14-0
4-0
3
20
14-0
7-0
3
20
14-1
0-0
3
20
15-0
1-0
3
20
15-0
4-0
3
20
15-0
7-0
3
20
15-1
0-0
3
20
16-0
1-0
3
20
16-0
4-0
3
BAMLH0A3HYC Average (1996-2015)
70
75
80
85
90
95
100
105
Ma
r-1
4
Ma
y-1
4
Ju
l-1
4
Se
p-1
4
No
v-1
4
Ja
n-1
5
Ma
r-1
5
Ma
y-1
5
Ju
l-1
5
Se
p-1
5
No
v-1
5
Ja
n-1
6
Ma
r-1
6
DXY (US$)
In our view,
aggressive fiscal
policies backed by
Central banks are
coming within 12-18
months
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 26
Low Stall Speed + State activism = Unpredictable Volatility We maintain that combination of low stall-speed equilibrium and excessive levels of state
activism implies that a period of ongoing and unpredictable volatility would continue.
As highlighted in our recent notes, most investors have now evolved into trend following fast
movers (here). In many ways it is a justifiable response to the markets where most
conventional signals have been extinguished and replaced by Government fiat. Given that
state actions by definition are largely unpredictable and are subject to significant political and
social constraints, which do not always correspond to free market signals (indeed free
markets seldom coexist with politicly and state-motivated actions), there is increasingly no
conventional basis for making investment judgements. Hence (understandably) most
investment styles are now converging on some form of momentum and delta type investment.
It also explains why phrases like, ‘it has been the biggest rise since lunch last Tuesday,’ have
become the key market driving force.
Does it mean that fundamentals are no longer relevant and do investors need to get
used to living in an ‘artificial’ world of conflicting public sector signals?
In the case of traders and short-term investors, the answer is affirmative (even more so than it
was a decade ago). However, we maintain that fundamentals never go away, just that
there are periods of time when fundamentals do not work or at the very least have limited
impact. Whilst this statement has a permanent validity, it becomes particularly important in
times when free markets give way to what Martin Wolf of FT described as ‘managed
capitalism’ (and he meant it as a positive not a negative!).
As described above, the hyper active public sector has gradually (over the last thirty years)
compressed business cycles to an extent that private sector is losing its remaining visibility in
respect of either demand, supply or price of the key commodities and mediums of exchange.
Whilst on fundamental basis, business cycles never truly disappear, there are periods (and
we are now living through one of these time zones) when business cycles are so distorted
that they become meaningless. If there are no business cycles, then by definition there are no
conventional capital market cycles.
Absence of both conventional business and capital market cycles remains the basis
for our macro outlook and the single most important idea that shapes our investment
strategies.
US$ & Interest rates – remains the single most important price and...
However, if we were to nominate one factor and one price that is far more important than
anything else globally, then it has to be US$ and associated interest rates. Cost of money has
always been the most important price in any economy and at any time (apart from an earlier
batter stage of evolution) and the price of exchanging one currency for another is the single
most important price that determines global liquidity, growth as well as the rise and fall of
nations and regions.
We maintain our view that the global economy is currently residing on a US$ standard,
as it is the currency responsible for ~80% of trade; ~75% of cross-border finance and ~40%-
45% of global SWIFT transactions. Neither € nor ¥ nor Rmb come anywhere near close to
the importance of US$ in providing global economy with a standardized medium of
exchange with sufficient depth and efficiency to satisfy its function as the global currency. It is
a similar position that the £ occupied in the late 19th century and until World War II or indeed
gold when the bulk of the world was on a gold standard.
Most investors tend to get confused between the role that a given country plays in trade with
its importance as a provider of global medium of exchange. In the late 19th to the early part of
the 20th centuries, both Germany and the US by-passed Britain as the largest manufacturing
nations and also as larger economies and in the case of the US as a larger trader but it was
London and £ that were the global financial centres. Whilst eventually money does follow
economic size and trade, it usually takes decades (and often wars and other dislocations) to
make this transition (as indeed happened after World War II, when US$ replaced £).
Stall speeds and
state activism is a
recipe for disruptive
and unpredictable
volatilities
The currency
market (FX) would
remain the key
conduit as...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 27
Fig 70 SWIFT Transaction share (by value) (%) Fig 71 Global Trade Finance Share (%)
Source: SWIFT; Macquarie Research, April 2016 Source: SWIFT; Macquarie Research, April 2016
Fig 72 Cross-Border Non-Resident Finance (%) Fig 73 US$ Non-resident finance as % of Non-US GDP
Source: BIS; Macquarie Research, April 2016 Source: BIS; Macquarie Research, April 2016
The pivotal role of US$ in driving global liquidity, demand and trade becomes obvious when
we re-base global GDP into US$, instead of using some form of average national growth
rates. As we consistently highlighted over the last six months, appreciation of US$ had the
impact of compressing global demand (as denominated in US$); depressing commodity
prices and eroding prices paid in various supply and value chains as well as massively
eroding global trade values.
Whilst there are many structural reasons (such shrinkage of supply and value chains) as to
why global merchandise trading volumes are now growing at only 1.5% clip (vs. growth rates
of ~6% between 1991 and 2007), the appreciation of US$ has led to deeply negative value of
global trade. Although it is true that services trade has been growing faster than merchandise,
it remains less than 15% of global merchandizing trade and value of services is also impacted
by US$ (as apart from electronic currencies, it is the major service medium of exchange).
Fig 74 Global GDP Growth Rates (US$) – flat to contracting in US$ terms
Fig 75 Global Merchandise Trade volume (% YoY) – hugging 1%-2% vs. historic average of ~6%
Source: Oxford Economics; Macquarie Research, April 2016 Source: CPB; Macquarie Research, April 2016
Jan-12 Jan-13 Jan-14 Jan-15 Sep-15 Feb-16 Average
USD 44.0% 40.2% 38.7% 44.6% 43.3% 41.4% 42.0%
Euro 29.7% 33.5% 33.5% 28.3% 28.6% 31.4% 30.8%
GBP 9.0% 8.6% 9.4% 7.9% 9.0% 8.8% 8.8%
JPY 2.5% 2.6% 2.5% 2.7% 2.9% 3.1% 2.7%
CNY 0.3% 0.6% 1.4% 2.2% 2.5% 1.8% 1.5%
CAD 1.8% 1.8% 1.8% 1.9% 1.8% 1.7% 1.8%
AUD 2.1% 1.9% 1.8% 1.8% 1.5% 1.5% 1.8%
CHF 1.4% 1.8% 1.4% 1.4% 1.6% 1.5% 1.5%
HKD 1.0% 1.1% 1.1% 1.3% 1.1% 1.0% 1.1%
Other 8.3% 7.9% 8.4% 7.9% 7.7% 7.8% 8.0%
Jan-12 Dec-13 Jan-15
USD 85.0% 81.0% 79.8%
CNY 1.9% 8.7% 9.4%
EUR 7.9% 6.6% 6.5%
JPY 1.9% 1.4% 1.4%
GBP 0.4% 0.3% 0.3%
Other 2.9% 2.0% 2.7%
58.0%
60.0%
62.0%
64.0%
66.0%
68.0%
70.0%
72.0%
74.0%
76.0%
78.0%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Mar.
00
Dec
.00
Sep.0
1
Ju
n.0
2
Mar.
03
Dec
.03
Se
p.0
4
Jun.0
5
Mar.
06
Dec
.06
Sep.0
7
Jun.0
8
Mar.
09
De
c.0
9
Sep.1
0
Jun.1
1
Ma
r.1
2
Dec
.12
Sep.1
3
Jun.1
4
Mar.
15
Non-Resident US$ Credit Non-Resident Euro Credit
Non-Resident Yen Credit US$ %, rhs
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
De
c-0
0
Dec-0
1
Dec-0
2
Dec-0
3
De
c-0
4
Dec-0
5
Dec-0
6
De
c-0
7
Dec-0
8
Dec-0
9
Dec-1
0
De
c-1
1
Dec-1
2
Dec-1
3
De
c-1
4
Non-Resident US$ Credit
70
80
90
100
110
120
130
140
150
160-10
-5
0
5
10
15
20
25
Q1
198
1
Q3
198
2
Q1
198
4
Q3
198
5
Q1
198
7
Q3
198
8
Q1
199
0
Q3
199
1
Q1
199
3
Q3
199
4
Q1
199
6
Q3
199
7
Q1
199
9
Q3
200
0
Q1
200
2
Q3
200
3
Q1
200
5
Q3
200
6
Q1
200
8
Q3
200
9
Q1
201
1
Q3
201
2
Q1
201
4
Q3
201
5
Global GDP (US$) YoY DXY, rhs, reverse
Contraction-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
19
92
m0
11
99
2m
11
19
93
m0
91
99
4m
07
19
95
m0
51
99
6m
03
19
97
m0
11
99
7m
11
19
98
m0
91
99
9m
07
20
00
m0
52
00
1m
03
20
02
m0
12
00
2m
11
20
03
m0
92
00
4m
07
20
05
m0
52
00
6m
03
20
07
m0
12
00
7m
11
20
08
m0
92
00
9m
07
20
10
m0
52
01
1m
03
20
12
m0
12
01
2m
11
20
13
m0
92
01
4m
07
20
15
m0
5
YoY Average 1992-2014
...stagnating supply
of US$ is combined
with...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 28
Fig 76 Global Merchandise Trade Value (% YoY) – reflects lower volumes & US$
Fig 77 Cross-Border Lending (US$ trillion) (% YoY) – declining four quarters in a row
Source: WTO; Macquarie Research, April 2016 Source: CPB; Macquarie Research, April 2016
The recent pull back by US$ (orchestrated by the Fed) provides some relief. It confirms our
view that the Fed is the only Central Bank that is able to reflate global economy whilst other
Central Banks (including ECB, BoJ and PBoC) are essentially deflationary (refer What
caught my eye? v.47- The more they do; the worse it gets, 27 October 2015). To put it
another way, global economy can only expand when supply of US$ is high and US$
exchange rate is low.
However, the difficulty facing global economy and investors is that current supply of US$
remains exceptionally low (thus providing a durable support for US$) whilst at the same time,
the only transmission mechanism available for the Eurozone and Japan is via currency
devaluation. Also we maintain that the US economy could encounter a spell of (at least) mild
stagflation before returning to deflationary purgatory. This, in our view, implies that current
consensus of diminishing divergence of monetary policies is nothing more than illusion. There
are substantive differences in the monetary trajectories of the key Central Banks, which are
likely to be reflected in a higher US$ and lower ¥ and € exchange rates as investors
progress through 2016-17.
...its supply remains low whilst spreads are close to historic highs & monetary policies remain divergent, implying...
We use two different definitions of global US$ supply. The narrower definition combines US
Monetary base and the US Treasuries owned by the foreigners, whilst the wider definition
adds to the US Monetary base (adjusted for ON RRP), all global FX reserves. The broader
definition attempts to assess response of other Central Banks to changes in the US monetary
policies (i.e. whether other countries are liquefying or sterilizing the flows).
Between 2001 and 2013/14, supply of global US$ was generally strong (mostly in double
digits), as first US ballooning current account deficits and later QEs kept supply of US$ high.
Hence through bulk of the period, US$ was a relatively weak currency, supporting global
growth and liquidity. However, over the last two years, supply of US$ has plummeted, as
neither the US current account deficits nor QEs were any longer supporting global demand
and liquidity.
On our latest estimates (Feb 2016), the growth in supply of the US$ on both definitions is
currently somewhere between positive 2% and negative 3-4% vs. the historic growth of
~14%-15% per annum, hence regular reporting of the shortage of US$ in various
transmission channels.
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20
12
m3
20
12
m5
20
12
m7
20
12
m9
20
12
m1
1
20
13
m1
20
13
m3
20
13
m5
20
13
m7
20
13
m9
20
13
m1
1
20
14
m1
20
14
m3
20
14
m5
20
14
m7
20
14
m0
9
20
14
m1
1
20
15
m0
1
20
15
m0
3
20
15
m0
5
20
15
m0
7
20
15
m0
9
20
15
m1
1
20
16
m0
1
Global DM EM Average (1990-2013)
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
(2.0)0.5 3.0 5.5 8.0
10.5 13.0 15.5 18.0 20.5 23.0 25.5 28.0 30.5 33.0 35.5
Ju
n.0
2
Ma
r.0
3
De
c.0
3
Se
p.0
4
Ju
n.0
5
Ma
r.0
6
De
c.0
6
Se
p.0
7
Ju
n.0
8
Ma
r.0
9
De
c.0
9
Se
p.1
0
Ju
n.1
1
Ma
r.1
2
De
c.1
2
Se
p-1
3
Ju
n-1
4
Ma
r-1
5
Stock of Cross-Border Lending Growth (%)
...conflicting
monetary and fiscal
objectives...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 29
Fig 78 US$ Global Supply – Narrow Definition (% YoY) Fig 79 US$ Global Supply – Wide Definition (% YoY)
Source: Bloomberg; CEIC; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
One of the ways to judge the underlying demand for US$ (particularly from corporate sector)
is to assess swap rates between various currencies. As we highlighted on numerous
occasions, swap rates in a highly liquid markets should be measured in pennies. However,
since 2007/08, investors have witnessed periods of swap rates ballooning even beyond the
Fed’s theoretical limits (i.e. there is an unlimited supply of US$ available from the Fed at ~50-
75bps). As can be seen below, over the last 12 months, there was a considerable rise in
swap rates (against both € and ¥), with current basis swap rates at ~40bps-45bps.
Fig 80 US$/Euro Basis Swaps (bps) – daily Fig 81 US$/Euro Basis swaps (bps) – weekly
Source: Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
The pressure for US$ to appreciate comes from various sources (such as limited supply) but
also from elevated levels of real bond spreads. We estimate (using 12 months average
inflationary outcomes) that currently US10Y treasuries have a real yield of around 150bps
higher than German Bunds and ~140bps higher than JGBs of equivalent duration. If we
adjust bond yields by using inflationary breakeven rates (rather than actual outcomes), Bunds
(which have longer history than Japanese breakeven rates) are currently trading at ~100bps
discount against Treasuries, one of the highest spreads ever.
Fig 82 US vs Bund vs JGB – Real Bond Spread (%) Fig 83 US vs Bunds – Real Bond Spreads (%)
Source: Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Jan-1
0
May
-10
Se
p-1
0
Jan-1
1
May
-11
Se
p-1
1
Ja
n-1
2
May
-12
Se
p-1
2
Jan-1
3
Ma
y-1
3
Se
p-1
3
Jan-1
4
Ma
y-1
4
Se
p-1
4
Jan-1
5
May
-15
Se
p-1
5
Jan-1
6
World US$ (US M0+US Treasuries owned by Foreigners)
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Jan-0
4
Au
g-0
4
Ma
r-0
5
Oc
t-0
5
May
-06
Dec-0
6
Jul-0
7
Fe
b-0
8
Se
p-0
8
Ap
r-0
9
Nov-0
9
Jun-1
0
Ja
n-1
1
Au
g-1
1
Mar-
12
Oc
t-1
2
Ma
y-1
3
De
c-1
3
Jul-1
4
Feb-1
5
Se
p-1
5
US Monetary Base + Global FX Reserves
-60
-50
-40
-30
-20
-10
0
10
Fe
b-1
3
Ap
r-1
3
Ju
n-1
3
Au
g-1
3
Oc
t-1
3
Dec
-13
Feb-1
4
Ap
r-1
4
Jun
-14
Au
g-1
4
Oc
t-1
4
Dec
-14
Fe
b-1
5
Ap
r-1
5
Ju
n-1
5
Au
g-1
5
Oc
t-1
5
Dec
-15
Feb-1
6
Ap
r-1
6
EUBS10 EUBS5
-80
-70
-60
-50
-40
-30
-20
-10
0
10
Jan-0
3
Oct-
03
Ju
l-04
Apr-
05
Jan-0
6
Oct-
06
Ju
l-07
Apr-
08
Jan-0
9
Oct-
09
Ju
l-10
Apr-
11
Jan-1
2
Oct-
12
Ju
l-13
Apr-
14
Jan-1
5
Oct-
15
EUBS5 EUBS10
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
De
c-9
2S
ep-9
3Jun
-94
Ma
r-95
Dec
-95
Se
p-9
6Jun
-97
Ma
r-98
Dec
-98
Se
p-9
9Jun
-00
Ma
r-01
Dec
-01
Se
p-0
2Jun
-03
Mar-
04
Dec
-04
Se
p-0
5Ju
n-0
6M
ar-
07
Dec
-07
Se
p-0
8Ju
n-0
9M
ar-
10
Dec
-10
Se
p-1
1Ju
n-1
2M
ar-
13
Dec
-13
Se
p-1
4Jun
-15
Mar-
16
Real Bond Yield Spread vs Bunds Real Bond Yield Spead vs JGB
-1.0
-0.5
0.0
0.5
1.0
1.5
Ju
n-0
9
Oct-
09
Fe
b-1
0
Ju
n-1
0
Oct-
10
Fe
b-1
1
Ju
n-1
1
Oct-
11
Fe
b-1
2
Ju
n-1
2
Oct-
12
Fe
b-1
3
Ju
n-1
3
Oct-
13
Fe
b-1
4
Ju
n-1
4
Oct-
14
Fe
b-1
5
Ju
n-1
5
Oct-
15
Fe
b-1
6
Real Spreads vs Bunds (using TIPS Break-even)
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 30
Although investors seem to be convinced that G20 meeting in Feb’16 resulted in a new Plaza
Accord, with the US agreeing to delay and/or slow any tightening cycle whilst ECB, BoJ and
PBoC agreed to play down currency implications of their monetary policies, we tend to
disagree that any such agreement is possible. Given low supply of US$ and different
trajectories of the US vs. Eurozone, Japan or China as well as what we believe to be an
undisputed fact that devaluation is the only lifeline for Eurozone and Japan, there is just no
basis for a durable Plaza Accord style agreement to control currency volatilities.
As can be seen below, deflationary pressures in Japan and Eurozone remain exceptionally
strong (and rising), whether judged by inflationary expectations or inflationary outcomes and
whether one looks at wholesale or CPI. Whilst trends are similar in the US, there is far less
evidence that the US has already joined Japan and Eurozone in a liquidity trap.
Fig 84 US – Inflation Break Even Rates 3Y-5Y (%) – down but not yet out
Fig 85 Eurozone – Inflation Break-Even Rates 3Y-5Y (%) – approaching historic lows
Source: Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
Fig 86 US, Euro & Japan – 5Y/5Y inflation Break-Even rates – the same story
Fig 87 Eurozone – Consumer Price Expectation – almost 50% expect prices to flat/down in 12 months
Source: Bloomberg; Macquarie Research, April 2016 Source: EC; Macquarie Research, April 2016
Fig 88 Japan – Households expecting prices to go up by 2% - rapidly eroding confidence
Fig 89 US – University of Michigan Inflation expectations – down but remain quite well anchored
Source: CEIC; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
0.0
0.5
1.0
1.5
2.0
2.5
Apr-
10
Ju
l-10
Oct-
10
Ja
n-1
1
Apr-
11
Ju
l-11
Oct-
11
Ja
n-1
2
Apr-
12
Ju
l-12
Oct-
12
Ja
n-1
3
Apr-
13
Ju
l-13
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-14
Oct-
14
Ja
n-1
5
Apr-
15
Ju
l-15
Oct-
15
Ja
n-1
6
USGGBE05 USGGBE03
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Apr-
10
Ju
l-10
Oct-
10
Ja
n-1
1
Apr-
11
Ju
l-11
Oct-
11
Ja
n-1
2
Apr-
12
Ju
l-12
Oct-
12
Ja
n-1
3
Apr-
13
Ju
l-13
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-14
Oct-
14
Ja
n-1
5
Apr-
15
Ju
l-15
Oct-
15
Ja
n-1
6
EUSWIT5 EUSWIT3
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
3.5
Apr-
10
Au
g-1
0
De
c-1
0
Apr-
11
Au
g-1
1
De
c-1
1
Apr-
12
Au
g-1
2
De
c-1
2
Apr-
13
Au
g-1
3
De
c-1
3
Apr-
14
Au
g-1
4
De
c-1
4
Apr-
15
Au
g-1
5
De
c-1
5
FWISUS55 FWISEU55 FWISJY55
18.0
22.0
26.0
30.0
34.0
38.0
42.0
46.0
Ma
r-1
1
Ju
n-1
1
Se
p-1
1
De
c-1
1
Ma
r-1
2
Ju
n-1
2
Se
p-1
2
De
c-1
2
Ma
r-1
3
Ju
n-1
3
Se
p-1
3
De
c-1
3
Ma
r-1
4
Ju
n-1
4
Se
p-1
4
De
c-1
4
Ma
r-1
5
Ju
n-1
5
Se
p-1
5
De
c-1
5
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Ap
r-0
4
Oc
t-0
4
Ap
r-0
5
Oc
t-0
5
Ap
r-0
6
Oc
t-0
6
Ap
r-0
7
Oc
t-0
7
Ap
r-0
8
Oc
t-0
8
Ap
r-0
9
Oc
t-0
9
Ap
r-1
0
Oc
t-1
0
Ap
r-1
1
Oc
t-1
1
Ap
r-1
2
Oc
t-1
2
Ap
r-1
3
Oc
t-1
3
Ap
r-1
4
Oc
t-1
4
Ap
r-1
5
Oc
t-1
5
HH expecting prices to go up less than 2%
HH expecting prices to go up more than 2%
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
Au
g-1
1
No
v-1
1
Fe
b-1
2
Ma
y-1
2
Au
g-1
2
No
v-1
2
Fe
b-1
3
Ma
y-1
3
Au
g-1
3
No
v-1
3
Fe
b-1
4
May
-14
Au
g-1
4
No
v-1
4
Fe
b-1
5
Ma
y-1
5
Au
g-1
5
No
v-1
5
Fe
b-1
6
NEXT YEAR NEXT 5 YEARS
...causing
significant
dislocations in the
only market that is
not totally
controlled by
Central Banks
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 31
Indeed, we maintain that FX is one of the few markets left that are not controlled by
Central Banks and Government instrumentalities. Whilst the Governments do have a tight
degree of control over bond markets (particularly shorter end of the curve) and have
considerable sway over small but symbolically important equity market, it has far more limited
control over currency markets, as exemplified by regular frustrated statements by BoJ or ECB
officials.
The impotence of attempting to depreciate one’s currency against the background of
other key nations embarking on exactly the same course of action is evident when we
examine recent action in € and ¥ markets. Apart from a triangle between the US, Eurozone
and Japan, Central Banks also need to navigate between China (PBoC) and the rest of the
world. A sharp appreciation of US$, would inevitably dislodge Rmb, causing not just
contraction of Chinese domestic liquidity but also sending a wave of deflationary pressures
across the global value and supply chains. China, as the world’s largest trader, is imbedded
in almost every supply chain and would depress not just directly sourced China prices but
also wholesale prices in every single trading nation.
As can be seen below, US import prices from China (US$) have recently been falling by ~2%
but also by ~3% from Germany and by ~2%-3% from Japan. If Rmb were to devalue (to say
7:1) all wholesale prices would suffer from much deeper decline, as lower US$ values work
through wholesale and supplier channels. In other words, up until recent appreciation, the US
economy has been importing deflation from most of its key partners. Any sustained spike in
US$ would further aggravate US inflationary outcomes.
Fig 90 US Import Prices from China (%) Fig 91 US Import Prices from Germany (%)
Source: Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
Fig 92 US Import Prices from Japan (%) Fig 93 US Import Prices from Canada (%)
Source: Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
Hence ‘Catch 22’. Both Japan and Eurozone need to cheapen their currencies if either region
were to have any chance to generate inflation and some wealth impact. On the other hand,
China cannot tolerate rapidly rising US$ and depreciating € and ¥. The dilemma would
become particularly acute if there is (even a temporary) pick-up in US inflationary pressures.
At that point, the pressure on the Fed to act and tighten could easily become overwhelming,
irrespective of consequences.
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
Dec-0
4
Jul-05
Feb
-06
Sep
-06
Ap
r-07
No
v-0
7
Jun-0
8
Jan-0
9
Aug
-09
Mar-
10
Oct-
10
May-1
1
Dec-1
1
Jul-12
Feb
-13
Sep
-13
Ap
r-14
No
v-1
4
Jun-1
5
Jan-1
6
US Import prices f rom China y/y ($)
US Import prices f rom China y/y (RMB), rhs
Rmb appreciates
Rmb depreciates
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
De
c-0
4
Ju
l-05
Fe
b-0
6
Se
p-0
6
Apr-
07
No
v-0
7
Ju
n-0
8
Ja
n-0
9
Au
g-0
9
Ma
r-1
0
Oct-
10
Ma
y-1
1
De
c-1
1
Ju
l-12
Fe
b-1
3
Se
p-1
3
Apr-
14
No
v-1
4
Ju
n-1
5
Ja
n-1
6
US Import Prices from Germany (US$), y/y, lhs
US Import Prices (Euro), y/y
Euro depreciates
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
Fe
b-9
3
Ap
r-9
4
Ju
n-9
5
Au
g-9
6
Oct-
97
De
c-9
8
Fe
b-0
0
Ap
r-0
1
Ju
n-0
2
Au
g-0
3
Oct-
04
De
c-0
5
Fe
b-0
7
Ap
r-0
8
Ju
n-0
9
Au
g-1
0
Oct-
11
De
c-1
2
Fe
b-1
4
Ap
r-1
5
US Import Prices from Japan y/y (Yen)
US Imports Prices from Japan y/y (US$), rhs
Yen depreciates
Yen appreciates
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Ja
n-9
7
Ja
n-9
8
Ja
n-9
9
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
Ja
n-0
9
Ja
n-1
0
Ja
n-1
1
Ja
n-1
2
Ja
n-1
3
Ja
n-1
4
Ja
n-1
5
US import prices from Can (CAD)
US import prices from Can (US$), rhs
CAD depreciates
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 32
...continuation of high volatilities in currency and commodity markets, spilling into bond and equity markets
We believe that currency volatility is the ‘Canary in a coalmine’.
We do not see any obvious exits, other than some form of miraculous acceleration of the US
economy that will inject both demand and US$ liquidity into global economy. However as
described in our prior notes, the nature of the US economy has changed so profoundly that it
now needs to overheat far more than a decade ago to generate the same level of current
account deficits. The US economy is now mostly growing through low productivity services
(such as restaurants, hair-cuts and health care) which not only have low local but an almost
non-existent global multiplier. In other words we maintain that in order to have a meaningful
global anchoring impact, the US economy needs to be allowed to ‘overheat’ to a stage that it
is delivering nominal GDP growth rates of ~6% (vs current run-rate of ~3%). However, this is
where the possibility of stagflation comes-in. Again, we are back in a Catch 22.
We believe that strong macro cross-currents that originate in currency markets and
then get transmitted into other key asset classes would remain the key feature of
investment landscape, as Central Banks desperately try to square an impossible challenge
of satisfying Japan’s and Eurozone’s need for weak currency with the need for China to have
stable environment and the global need to avoid appreciation of the US$.
It seems like a
“Catch 22”
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 33
No productivity + Low rates = No EPS growth “You can’t squeeze blood out of stone”, first recorded in Giovanni Torriano’s “Second
Alphabet” (1662); means to attempt something that is impossible.
Whilst corporates are able to defy gravity for extended time, at the end of the day, a lack of
productivity gains and stalling GDP growth rates (as well as associated lack of trade and
liquidity) eventually starts to erode corporate profitability. Another paradox is that the
longer Central Banks keep interest rates low (or even worse negative), the more it is likely to
depress both growth and corporate returns.
Indeed on broadly based estimates (such BEA non-financial and businesses profitability)
there were signs of de-accelerating profits and outright drops over the last several quarters.
As can be seen below, this is starting to reflect itself in some reversal of historically high
corporate margins, at least partially confirming the basic tenet of investment strategy that
corporate margins are some of the most mean-reverting ratios in economics. Eroding profit
growth is evident when we include or exclude financials. In the 4Q2015, non-financials pre-
tax earnings in the US dropped by ~14% and profits were down by 4% in 3Q15 and barely
grew in 2Q2015. Given strong relationship between profitability and non-residential
investment, it provides another reason (apart from low private sector visibility and structural
shifts) as to why non-residential investment continues to disappoint.
Fig 94 US Corporate sector – Profits & Margins Fig 95 US NF Corporates – Profits vs Investment
Source: BEA; Macquarie Research, April 2016 Source: BEA; Macquarie Research, April 2016
A similar picture emerges if we look at broadly based listed US stocks (a sub-set of BEA
overall data base), which include ~1,000 listed companies. As can be seen below, US trailing
revenue growth rates turned negative in Sep-Oct’15. The same applies to EBITDA growth
rate (dropping at ~5% clip). Even if we exclude resources, revenue growth rates are now
barely at ~2% and EBIDTA growth rates de-accelerated from a run rate of 5%-7%.
Fig 96 US Corporate sector – Trailing Revenue Growth (%)
Fig 97 US Corporates Sector – Trailing EBITDA Growth (%)
Source: Thomson; Macquarie Research, April 2016 Source: Thomson; Macquarie Research, April 2016
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
20
13
Pre-Tax Profit Growth (8 quarters advanced) Pre-Tax % of NI, rhs
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-40%
-20%
0%
20%
40%
60%
80%
19
51
19
54
19
57
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
20
11
20
14
Non-Financial Corporate Pre-Tax Growth Rates (%)
Growth in non-residential private investment (%), rhs
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
Jan-
10
Jan-
12
Jan-
14
Jan-
16
Revenue growth
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
Jan-
10
Jan-
12
Jan-
14
Jan-
16
EBITDA growth
No growth & low
rates = No EPS
Eventually
stagnation gets
translated into no
EPS growth rates
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 34
Fig 98 US Corporate sector ex Resources – Trailing Revenue Growth (%)
Fig 99 US Corporates Sector ex Resources – Trailing EBITDA Growth (%)
Source: Thomson; Macquarie Research, April 2016 Source: Thomson; Macquarie Research, April 2016
Whilst SPX is a relatively small subset of either Fed, BEA or Thomson Reuters’ data bases,
nevertheless from the investment perspective it is far more significant as it relates much more
directly to investors but also it does provide at least partial view of the future, at least as
expected by the analysts. We accept that forward numbers tend to ignore ‘awkward’
expenses (such as re-structuring costs etc) or in other words, estimates provide a somewhat
‘rosy’ view by ignoring ‘all the bad stuff’, directionally, it does show whether analysts are
cutting or raising numbers and what type of forward profitability is expected.
What do the latest estimates show?
First, past trend (prevalent since at least 2011 and some would argue since early ‘00s when
guidance has become a prevalent practice) of analysts starting the year in an exceptionally
bullish mode and then gradually recognizing that even after stripping-out ‘bad stuff’, earnings
would undershoot, remains intact as we examine 2016 and 2017.
For example, in December 2014, investors were expecting adjusted earnings to be ~US$130
per share in 2015; the year ended at ~US$116. In December 2015, expectation for 2016 was
(again) close to US$125-130 (estimate was US$143/share in Dec’14); within five months the
estimate declined to US$118/share, representing only ~2% EPS growth. In other words, in
less than 18 months, SPX’s 2016 earnings estimates were reduced by ~18%. It won’t come
as a surprise but the Street expects 2017 to return back to US$135/share.
Fig 100 SPX – Adjusted Forward EPS Estimates (US$/Share)
Source: Thomson; Macquarie Research, April 2016
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Jan
-82
Jan
-84
Jan
-86
Jan
-88
Jan
-90
Jan
-92
Jan
-94
Jan
-96
Jan
-98
Jan
-00
Jan
-02
Jan
-04
Jan
-06
Jan
-08
Jan
-10
Jan
-12
Jan
-14
Jan
-16
Revenue growth
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
Jan
-82
Jan
-84
Jan
-86
Jan
-88
Jan
-90
Jan
-92
Jan
-94
Jan
-96
Jan
-98
Jan
-00
Jan
-02
Jan
-04
Jan
-06
Jan
-08
Jan
-10
Jan
-12
Jan
-14
Jan
-16
EBITDA growth
110
115
120
125
130
135
140
145
150
155
Feb-
14
Apr
-14
Jun-
14
Aug
-14
Oct
-14
Dec
-14
Feb-
15
Apr
-15
Jun-
15
Aug
-15
Oct
-15
Dec
-15
Feb-
16
2015 2016 2017
116.4
118.2
134.3
Indeed there is
already growing
evidence in SPX...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 35
Second, some might argue that above ignores the impact of resources sector, which clearly
suffered from a significant down drift of commodity prices. Whilst it is a fair comment, we find
practice of excluding certain sectors as intellectually incoherent. The argument is that if
we exclude commodities, the rest is fine. However what about excluding positive impact of
lower commodity prices on remaining sectors? Should we therefore adjust other sectors to
reflect the temporary impact of lower commodity prices? If indeed, we were to remove
commodities from growth assessment, then logically we should also adjust other sectors.
Nevertheless, to illustrate commodities impact, we have adjusted below SPX forward revenue
and EPS expectations for sectors ex-commodities. As can be seen below, after massive
revisions, the Street is now looking at SPX (ex commodities) delivering in 2016 perhaps not
much more than 4%-5% EPS growth, down from ~8%-10% per annum in 2013-15 period.
This is clearly higher than trailing earnings in the Thomson data base or a broader sample
that is tracked by the BEA and the Fed (which show absolute decline), due to three factors:
(a) removal of commodities; (b) adjustments that analysts do to their estimates to take out the
‘bad stuff’; and (c) persistent expectation of forward growth.
It seems very likely that over the next two years, flattening and more likely declining margins;
increasing constraints on share buy-backs (due to rising corporate leveraging) as well as low
private sector multiplication of money (and hence stagnating growth) are likely to preclude
any sustained increase in EPS. Indeed, one could not rule-out negative growth rates.
Fig 101 SPX – Revenue & EPS Growth (%)
Fig 102 SPX ex Commodities – Revenue & EPS Growth
Source: Thomson; Macquarie Research, April 2016 Source: Thomson; Macquarie Research, April 2016
The same trend is evident in the case of MSCI Asia ex Japan.
As described in our latest Microstrategy review (here), the region in 2015 has delivered
something close to zero growth rates in 2015 (the first time this happened since GFC) and
this applied to both overall index as well as excluding resources. In 2016, analysts are looking
for relatively meagre (in historic context) 4%-5% EPS growth (ex commodities). It remains to
be seen whether even such low growth rates are achievable. Also, as in the case of SPX, the
trend of steep negative EPS revisions is very much in evidence.
Fig 103 MSCI Asia ex – Revenue & EPS Growth (%) Fig 104 MSCI Asia ex (ex Commod.) – Revenue & EPS
Source: Thomson; MSCI; Macquarie Research, April 2016 Source: Thomson; MSCI; Macquarie Research, April 2016
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
2011 2012 2013 2014 2015P 2016E
EPS Gr Y/y Rev Gr Y/y
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2013 2014 2015P 2016E
EPS Gr Y/y Rev Gr Y/y
-5.0
0.0
5.0
10.0
15.0
20.0
2011 2012 2013 2014 2015P 2016E
EPS Gr Y/y Rev Gr Y/y
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2013 2014 2015P 2016E
EPS Gr Y/y Rev Gr Y/y
...Asia ex Japan...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 36
Fig 105 MSCI Asia ex Japan – Adjusted Forward EPS Estimates (US$/Share)
Source: Thomson; MSCI; Macquarie Research, April 2016
The latest consensus earnings expectations for Asia ex JP as a region, and by countries
(based on MSCI indices) are summarised below.
As highlighted in our recent MicroStrategy report, at the headline level, consensus expects
Asia ex earnings to grow by ~3-4% for 2016E which, on the surface, seems a much more
modest expectation, in our view. This is in sharp contrast to previous years when
expectations used to begin the year with growth rates in excess of 11-12%. However 2017
estimates remain exceptionally extended (though it is quite early in the year, and we should
expect further downgrades as we progress through the next six months)
Fig 106 Asia ex-Japan consensus earnings growth rate trends – come down a lot for 2016 but not 2017 (as usual analytical bullishness lives on)
Source: IBES, Thomson, MSCI, Macquarie Research, April 2016; Note: Bottom-up estimates using like-for-like MSCI Asia ex JP universe to ensure comparability of financials
On an individual country and market basis, review of current expectations suggests that two
countries could be at higher than average earnings risk are Indonesia and India where
consensus expects CY2016E growth rate to be 11% and 17%, respectively (vs NEG 8% and
+8% in 2015E, respectively). Thailand earnings seem to be terribly exposed in 2017 as
indeed are Indonesia, India, Malaysia, the Philippines and China.
35
40
45
50
55
60
65
70
Feb
-14
Ap
r-1
4
Jun
-14
Aug
-14
Oct
-14
Dec
-14
Feb
-15
Ap
r-1
5
Jun
-15
Aug
-15
Oct
-15
Dec
-15
Feb
-16
2015 2016 2017
38.7
40.3
44.9
Country 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E
Asia ex Japan 4.6% 10.3% 11.0% 2.4% 7.8% 11.2% -2.2% 4.0% 11.2%
China 4.2% 13.5% 12.4% 2.7% 9.1% 13.1% -3.0% 4.2% 13.7%
India 13.8% 20.0% 16.9% 10.1% 19.2% 16.8% 2.0% 17.7% 17.4%
Indonesia 1.0% 12.9% 12.4% -5.4% 10.9% 13.3% -8.6% 10.9% 13.7%
Korea 23.4% 5.6% 8.6% 20.9% 4.7% 9.7% 15.3% 2.1% 8.9%
Malaysia 0.1% 10.6% 8.7% -2.7% 7.9% 9.0% -2.5% 2.3% 9.1%
Philippines 9.0% 12.8% 12.1% 7.2% 11.7% 11.3% 5.6% 9.4% 9.6%
Singapore 0.3% 7.7% 8.1% -2.0% 5.2% 6.2% -3.5% -0.7% 6.3%
Taiwan 5.6% 5.3% 9.1% 3.8% 2.4% 8.8% 0.4% -0.4% 9.6%
Thailand 9.8% 13.1% 13.1% 4.2% 12.1% 13.2% -0.9% 6.9% 14.6%
Ex Financials 2.9% 12.2% 12.3% 0.0% 9.9% 13.0% -5.3% 6.0% 14.3%
Ex Energy/Materials 4.7% 9.3% 10.7% 3.3% 7.0% 10.5% -0.4% 3.5% 9.9%
As of Sep 2015 As of Dec-2015 Current
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 37
Fig 107 Asia ex-Japan consensus earnings growth – FY16E ex-resources expectations corrected significantly...but 2017 estimates are far too high
Source: IBES, Thomson, MSCI, Macquarie Research, April 2016; Note: Bottom up estimates using like-for-like MSCI Asia ex JP universe to ensure comparability of data
What about other key regions?
In the case of Japan, currency devaluation through 2013-15 and its impact on Japanese
corporate ROEs and margins, as well as an in-build conservatism of Japanese analysts
(borne-out of 25 years of deflation) implied that up until recently, earnings revisions remained
quite flat. However, recent ¥ appreciation is forcing analysts to significantly lower their
earnings expectations. We suspect that we are starting to witness an early stage of significant
downward revisions.
Fig 108 Japan – Corporate Net Margins (%) Fig 109 MSCI Japan – EPS Estimates (LC)
Source: Thomson; Macquarie Research, April 2016 Source: Thomson; MSCI; Macquarie Research, April 2016
Not to belabour the point, the same largely applies to European earnings estimates, whether
inclusive or exclusive of resources. As in the case of Japan, appreciating € would continue to
depress Eurozone equity returns and is now one of the key reasons as to why both ECB and
BoJ need to have lower rather than higher currency. In the absence of an incremental wealth
impact as well as improving margins, it is difficult to expect higher wages and higher prices.
Country 2015E 2016E 2017E 2015E 2016E 2017E
Asia ex Japan -0.4% 3.9% 11.3% -0.4% 3.5% 9.9%
China -3.4% 4.6% 13.8% 4.4% 5.8% 10.7%
India 1.6% 17.9% 17.4% 8.2% 17.1% 16.2%
Indonesia -8.9% 11.4% 13.5% -7.8% 11.5% 14.0%
Korea 12.4% 1.9% 9.0% 10.8% -2.2% 8.7%
Malaysia -2.4% 2.6% 8.9% -3.3% 2.9% 9.0%
Philippines 5.9% 9.1% 9.7% 5.6% 9.4% 9.6%
Singapore -3.6% -0.6% 6.3% -3.5% -0.7% 6.3%
Taiwan 1.5% -1.3% 9.7% -0.1% -0.2% 9.5%
Thailand -0.9% 8.1% 13.9% -4.9% 2.1% 16.3%
Headline MSCI/IBES Ex Energy and Materials
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
De
c-8
0
De
c-8
2
De
c-8
4
De
c-8
6
De
c-8
8
De
c-9
0
De
c-9
2
De
c-9
4
De
c-9
6
De
c-9
8
De
c-0
0
De
c-0
2
De
c-0
4
De
c-0
6
De
c-0
8
De
c-1
0
De
c-1
2
De
c-1
4
Japan market - Net margins
50
55
60
65
70
75
Feb
-14
Ap
r-1
4
Jun
-14
Au
g-1
4
Oct
-14
De
c-1
4
Feb
-15
Ap
r-1
5
Jun
-15
Au
g-1
5
Oct
-15
De
c-1
5
Feb
-16
Mar-15 Mar-16 Mar-17
56.5
63.6
68.4
...Japan and...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 38
Fig 110 MSCI EMU – Adjusted Forward EPS Estimates (US$)
Source: Thomson; MSCI; Macquarie Research, April 2016
In summary, whereas in the past, combination of monetary policies and some cost controls as
well as fair doze of share buy-backs (principally in the US) were sufficient to keep EPS growth
rates intact and the hope for faster growth rates in subsequent years alive.
The current turbulence in the currency market indicates that the efficacy of monetary policies
as means of inflating asset prices and avoiding compression of aggregate demand is coming
to an end and unless there is either spontaneous recovery in the private sector or radical
change in the Government policy (a la fiscal spending and direct support for consumption and
investment), it is unlikely that investors would benefit from much (if any) EPS growth
rates.
If indeed the Government policies change, this might well support EPS growth, but at the
expense of longer-term misallocation of resources and ultimately lower levels of returns.
However, we suspect that investors would welcome EPS growth rates, no matter where they
come from. As discussed below, we believe that so long investors are currency hedged it is in
Japan that investors are likely to see the first attempt to use a mix of aggressive monetary
and fiscal policies to drive reflation and higher EPS growth rates.
9
10
11
12
13
14
15
16
17
18
19
Feb-
14
Apr
-14
Jun-
14
Aug
-14
Oct
-14
Dec
-14
Feb-
15
Apr
-15
Jun-
15
Aug
-15
Oct
-15
Dec
-15
Feb-
16
2015 2016 2017
11.3
11.7
13.1
...Europe
EPS recession is
unlikely to relent but
could shift between
government
supported and free
enterprise sectors
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 39
Secular stagnation = 1930s low returns “History does not repeat itself but it does rhyme”, Mark Twain
Investors have regularly asked us to identify another period in recent history that broadly
corresponds to current economic, growth and investment climate. Whilst history never truly
repeats itself (hence Mark Twain’s quote above), we believe that the 1930s is probably the
closest that investors have to a similar phase of secular stagnation.
What are the similarities?
1. Both the 1930s and the current period have been impacted by a collapse of asset
prices and confidence, following a significant boom in a prior decade;
2. Both periods were characterized by technological transition and were preceded by a
period of high income and wealth inequality;
3. Both periods witnessed a hyperactive public sector, in a monetary and fiscal (i.e.
‘New Deal’) sphere; and
4. Both periods were characterized by strong deflationary pressures, caused by
collapsing asset prices and overcapacity.
However, there are also significant differences. The Fed would argue that its quick and
powerful response to GFC prevented a much more robust decline in aggregate demand. Also
unlike the 1930s, the regressive move towards protectionism this time is far more muted.
What were investment returns through the 1930s-40s?
As can be seen below real equity market returns collapsed through the 1930s and it took
more than 30 years (until 1959), for real SPX to return back to the levels that prevailed in
1929. This was the longest period of negative returns in the history of the SPX (or at least
since the 1870s). Interestingly, current SPX levels are also still slightly below its real high
(Aug’00) and it is thus far the second-longest period of negative real returns.
However, the difference between the 1930s and today is that in the 1930s, markets
experienced a much sharper initial collapse, followed by a sequence of smaller downward
movements, whereas exceptionally easy monetary policy under Greenspan and later under
Bernanke and Yellen, allowed each time real equity values to recover quite quickly before
commencing another downward move. In other words, in the latest cycle, declines have been
less pronounced whilst recoveries have generally been stronger.
Fig 111 SPX – Secular Bear Market – 1929-1949 Fig 112 SPX – It took 30 years to recover real returns
Source: Shiller; Bloomberg; Macquarie Research, April 2016 Source: Shiller; Bloomberg; Macquarie Research, April 2016
0
5
10
15
20
25
30
35
0
50
100
150
200
250
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500
19
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32
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36
19
38
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42
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46
19
48
19
50
SPX Real SPX
Secular Bear Market
0
50
100
150
200
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350
400
450
500
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
30 Years
Low real interest
rates + no EPS
growth = 1930’s &
1968-1982 returns
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 40
Fig 113 SPX – Secular Bear Market – 2000-Now
Fig 114 SPX – It took 15 years to return back to somewhere close to Aug’00 real levels
Source: Shiller; Bloomberg; Macquarie Research, April 2016 Source: Shiller; Bloomberg; Macquarie Research, April 2016
In our view, the greatest difference between the 1930s and today is that whilst the causes of
malaise were broadly similar, the monetary stance over the last 15 years (since the dot com
crash) was far more aggressive than anything witnessed in the 1930s. This in turn, caused
much more robust recovery in monetary and financial assets. However, it still does not negate
the core fundamentals and it is quite likely that erosion of efficacy of monetary policies,
when combined with declining corporate profitability would unwind some of the recent
gains, and therefore instead of looking forward to a long bull market of 1949-1968, investors
(in our view) might instead face low returns that prevailed in the 1968-1980 period.
Fig 115 SPX – Secular Bear Market – 1949-1968 – unlikely to be repeated in 2015-beyond
Fig 116 SPX – Secular Bear Market – 1968-1982 – the future might be closer to this period
Source: Shiller; Bloomberg; Macquarie Research, April 2016 Source: Shiller; Bloomberg; Macquarie Research, April 2016
What were real returns on bonds and equities in 1929-1949 and 1968-1982 periods?
Summarized below are real returns on various asset classes (and corresponding real interest
rates). As can be seen below, in the 1929-1949 cycle, real equity returns were ~4%-5% whilst
bonds delivered returns of ~2%, with an average portfolio yielding average returns of ~3%. In
1969-1982, average equity returns were negative 1% and a balanced portfolio delivered
negative average returns of ~2%, as bonds were crushed by stagflation of late ‘60s-late 70s.
On the other hand, the secular bull market phase of ‘49-‘68, delivered real equity returns of
~10%-11% and balanced portfolios were yielding positive real return of ~7%. The same
robust returns were delivered in the ‘82-‘00 secular bull market, with real equity returns even
higher at 15%-16% and balanced portfolios were on average yielding ~12%-13% with both
equities and bond markets delivering strong appreciation, as interest rates began their LT
decline.
Since 2000, equities delivered ~3%-4% real returns and bonds have done slightly better with
real returns of ~4% (and thus balanced portfolio yield was also close to 4%). However, the
presence of two major crashes in 2000-01 and 2008-09, have massively reduced returns in
the decade to 2010. Aggressive monetary policies over the last five to six years have brought
the returns on financial assets back up, with balanced portfolio yielding real gains of ~5%-6%.
500
700
900
1100
1300
1500
1700
1900
2100
2300
0
500
1000
1500
2000
2500
20
00
.01
20
01
.01
20
02
.01
20
03
.01
20
04
.01
20
05
.01
20
06
.01
20
07
.01
20
08
.01
20
09
.01
20
10
.01
20
11
.01
20
12
.01
2013
-01
20
14
.01
20
15
.01
20
16
.01
SPX Real SPX (LHS)
500
700
900
1100
1300
1500
1700
1900
2100
2300
20
00
.01
20
01
.01
20
02
.01
20
03
.01
20
04
.01
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07
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08
.01
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09
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10
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11
.01
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12
.01
20
13-0
1
20
14
.01
20
15
.01
20
16
.01
15 Years and counting...
0.0
20.0
40.0
60.0
80.0
100.0
120.0
0.0
100.0
200.0
300.0
400.0
500.0
600.0
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800.0
19
49
19
51
19
53
19
55
19
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19
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19
61
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67
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69
Real SPX (LHS) SPX
Secular Bull Market
20
40
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80
100
120
140
160
180
200
300
400
500
600
700
800
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
Real SPX (LHS) SPX
Secular Bear Market
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 41
What would happen over the next five-to-ten years?
We believe that prior to any significant shift in public sector monetary and fiscal policies, the
answer is likely to be that returns would decline and at best, real returns would be
approximating zero levels with neither equities nor bonds delivering much, if any, real
returns. However, if we were to witness a sustained shift towards nationalization of capital
markets and gross capital formation, there could be a significant impact not just on aggregate
demand but also various investment instruments. It is hard to be much more specific, other
than saying that that the public sector would attempt to ‘mimic’ the conventional
business cycle, except it would be tilted towards industries and sectors that would be
favoured by the Government action.
However, in the absence of these distortions, it is likely that in the world of low (or negative)
real interest rates and limited (if any) expansion of nominal GDP, it would be a world of no
EPS growth rates and with an already extended multiples (particularly in the US, less so in
other regions), equity and bond market returns should be limited (refer discussion of
country allocations below), most likely in line with the 1929-49 and 1968-1982 periods
(i.e. between negative to at best 2%-3% positive).
Fig 117 US – Secular Markets – Bull-Bear Phases returns (%)
Fig 118 Key DMs – Secular Markets – Bull Bear Phases Returns (%)
Source: Shiller; Bloomberg; Macquarie Research, April 2016 Source: CEIC; Bloomberg; Macquarie Research, April 2016
Fig 119 Real equity Returns vs. real Interest Rates (US, UK, Japan and Germany)
Source: Shiller; CEIC; Bloomberg; Macquarie Research, April 2016
Real returns CPI GDP Real
Equities Bonds 60% /40% Average Average Interest rates
Bull-Bear Cycles
1929-1949 4.5% 1.6% 3.3% 1.7% 3.7% 1.0%
1950-1968 10.5% 1.7% 7.0% 2.2% 4.5% 1.6%
1969-1981 -0.6% -3.5% -1.8% 7.8% 2.9% 0.6%
1982-1999 15.6% 7.8% 12.5% 3.3% 3.4% 4.5%
2000-2015 3.6% 3.9% 3.7% 2.2% 1.9% 1.4%
2000-2009 -1.4% 4.1% 0.8% 2.5% 1.8% 1.6%
20010-2015 6.5% 3.7% 5.4% 1.5% 2.1% 0.9%
Average Real returns CPI GDP Real
Equities Bonds 60% /40% Average Average Interest rates
Japan
1968-1989 13.1% 2.2% 8.7% 5.8% 5.0% 2.4%
1990-2015 0.1% 3.6% 1.5% 0.4% 1.1% 1.7%
UK
1963-1968 8.8% 0.8% 4.0% 3.5% 3.8% 3.0%
1968-1982 3.5% -2.5% -0.1% 11.7% 2.1% 0.1%
1982-1999 10.0% 8.7% 9.2% 4.5% 3.1% 4.7%
2000-2015 -1.1% 2.9% 1.3% 2.9% 2.0% 1.1%
2007-2012 -2.3% 4.4% 1.7% 3.0% 1.2% 0.2%
Germany
1970-1979 -5.3% 4.4% -1.4% 4.9% 3.0% 3.1%
1980-1989 13.7% 5.2% 10.3% 2.9% 1.9% 4.6%
1990-1999 14.4% 6.0% 11.1% 2.3% 2.2% 4.1%
2000-2015 4.5% 4.5% 4.5% 1.5% 1.3% 1.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%
Real
inte
rest
rate
s
Real equity returns
It is unlikely that
real returns would
be much more than
negative to 2%-3%
real range
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 42
Investment Allocation – countries & markets “In the kingdom of the blind, the one-eyed man is king”, Desiderius Erasmus
Assuming that investors agree with the above outlined macro view, what are investors’
options over short- to medium- (say 6 -12 months) and longer-term horizon (say 3-5 years)?
We maintain that in the short term, investors essentially face sub-optimal choices:
Fast following macro trends – not recommended but if needed, follow US$ and ¥; expect a potentially violent reversal
Investors could become (or remain) fast followers. In the world of strong and
unpredictable macro cross-currents and limited (if any) private sector visibility, following the
‘herd’ is not a bad policy. Essentially it fully accords with the above quote, as investors simply
‘blindly’ follow someone who they think might have slightly better visibility.
However, the key challenge with this strategy is that requires nimbleness and ability to quickly
turn around without having any strong fundamental reasons for either following the ‘herd’ or
deciding to move in the opposite direction. For most investors this is not an acceptable
business model.
What do fast following macro trends show now?
The last eight to nine weeks was a period of weaker US$ and stronger ¥. This has
traditionally been conducive for global reflation and supportive of commodity prices and EM
equities. The Fed’s go slow (or more appropriately go nowhere) tightening policy (since
early Feb’16) has stopped and partially reversed ~25%+ US$ appreciation that occurred
over the previous three years.
At the same time, the BoJ seems to be stuck. The impact of initial monetary boosts has
started to wear off and there does not appear anything on the horizon to replace it.
Abenomics consisted of three ‘arrows’: (a) monetary; (b) fiscal; and (c) structural
reforms. Only the monetary arrow has been aggressively deployed, with the other two arrows
either not deployed or used sparingly. Hence Abenomics as currently structured has always
been bound to fail. The more Abenomics fails, the higher ¥ exchange rate would climb.
In our view, therefore, the question is whether Japan would accept the inevitable and
withdraw back into deep deflationary trap or whether policy settings are going to change?
Similarly how can Fed continue to engineer stable/lower US$?
In terms of Japan, we believe that lower currency is the only transmission mechanism to alter
its trajectory (inflation; wealth creation). It is doubtful that adding a bit more to the current
monetary stimulus would make much difference. It is far more likely that Japan would be the
first country to cross the Rubicon by embarking on much stronger fiscal policies, funded
directly by the BoJ.
As discussed above, the new policies would take the form of support for domestic
consumption (such as short-dated vouchers; income guarantees, both unearned and
pensions) but also general rise in fiscal spending (infrastructure, R&D etc) or what we
describe as nationalization of capital markets and gross capital formation. Japan might
be the first nation to embrace it; followed by either US and China and finally Eurozone
(perpetual late comer). As Japan embarks on this policy, the net outcome would be lower ¥
but more robust reflation of GDP and aggregate demand. We think it could happen within 12
months or perhaps even sooner, as Japan in our view cannot tolerate rising ¥.
As far the US is concerned, we believe that the Fed is cornered. On the one hand, it cannot
accelerate the supply of US$ (as this would require either QE4 or significant overheating of
the US economy) and it is concerned that even at ~3% (nominal), the US is already growing
above its new trend line and hence it might be courting domestic stagflation (after all deflation
and stagflation are two sides of the same coin), which would eventually require much stronger
and faster tightening.
Fast following
macro trend
investors have an
impossible job but...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 43
The US also does not want to dislodge China. A rapid US$ appreciation would inevitably
cause significant Rmb depreciation, causing a global deflationary wave. Eurozone and Japan
on the other hand need a stronger rather weaker US$ or otherwise deflationary pressures
would become even more imbedded in both countries. Thus Fed is stuck. It wants to tighten
but cannot, as this would cause disorderly decline in global liquidity. But if it does not do so, it
is courting at least temporary domestic stagflation and it is pushing the Eurozone and Japan
further into their own deflationary traps. In essence, China wants a stable/weak US$;
Eurozone and Japan want a stronger US$ and EMs prefer a weaker US$/stronger ¥ and the
Fed wants to avoid stagflation or deflation whilst maintaining steady domestic growth.
It is a classic ‘prisoner’s dilemma’ (in other words countries/CBs in totality would be better
off by cooperating but the individual pay off for cheating is even higher).
What do we think is going to happen?
1. First, we believe that Japan has no way back. It can only move forward and its
destination must be an aggressive use of monetary and fiscal policies (funded by
BoJ). Whilst it is not clear whether or not BoJ would add to the current monetary
stimulus at the end of April or subsequent meetings, we believe that the market is
already signalling us that it would make no difference even if BoJ does it. Hence we
expect much stronger and bolder action from Japan in coming months/quarters, as
deflation gets stronger.
2. Second, the Eurozone is in exactly the same prison as Japan. The only problem is
that it does not have political structures to use monetary and fiscal levers, the way
Japan is able to do. Eurozone would take some time but again, there is no choice.
Hence, we expect consumption and investment support to accelerate, funded by
ECB (despite currently being technically illegal).
3. Third, as described above, the supply of US$ remains exceptionally low and we do
not believe that either QE4 or overheating (and much larger CA deficits) are
forthcoming. This places a floor under US$ (hence it is difficult to push DXY much
below 93-95). None of these factors are going to change, until at least early 2017
(and the new administration). In the meantime, as described above real spreads
between Treasuries and Bunds/JGBs are some of the widest ever, again providing
further support for US$ flows.
If the above outline is anywhere near true, then over time the US$ should strengthen and
both the ¥ and € would need to drop (and take Rmb with them). This, in turn, would
prompt the US to embark on its own reflation. Whilst hard to predict we maintain that Japan’s
reversal might be just a matter of months or at worst quarters; the Eurozone is probably more
likely sometime into 2017/18 and China probably before the Eurozone. The US might be pre-
emptive or it might be a final player, depending on the extent to which its economy stagnates
and prevailing volatilities.
What does it mean for our country and EM-DM market selection?
The gradual stabilization and reversal of some of the US$ gains, since late January/early
February 2016, allowed EM equities to finally break away from DMs and end an extended
period of relative under performance. Since the low point at the end of January, EM equities
are up by ~18% whilst DM equities have appreciated by 8% and in the last thirty days, EM
equities are up ~3% whilst DM indices are up by less than 1%.
Although as can be seen below, if we fix January 2013 as a starting day, EM equities have
still lost ~35% of relative value, the last two months has been a welcome reprieve for EM
equity holders. Indeed, EM underperformance extends even beyond 2013 and has been fairly
well imbedded since late 2010, with equity investors losing almost all of the gains since 2004.
As discussed in our prior reviews, rising US$ and depreciating Yen has traditionally been a
‘death cross’ for EM equities (refer, Pincer Movement) as indeed it has been between 1997
and 1999 as well as between 2011 and 2015. However, in the last two months, investors
have experienced a reversal that was more reminiscent of a ‘Goldilocks’ outcome between
2001 and 2010.
...chances of
another reversal of
US$/Yen are high,
implying...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 44
Fig 120 EM vs DM Equities (2013=100) Fig 121 EM vs DM Equities (2004=100)
Source: Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
Fig 122 DXY & Yen – Goldilocks and Pincer Movement for EM equities – 2002-2016
Fig 123 DXY & Yen – Pincer Movement – 1997-1999
Source: Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
Fig 124 DXY (US$) vs. EM/DM Relative Performance
Fig 125 DXY (US$) vs. Asia ex/DM Relative Performance
Source: Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
Whenever one reads investors’ claim that this is once-in-a-lifetime opportunity to acquire EM
assets, it usually refers to the above outlined history of brutal and unrelenting relative under-
performance, since at least 2010/11.
However, as discussed in the past (refer and refer), we believe that EMs’
underperformance is not cyclical but secular, with long-term and powerful structural
drivers that are essentially reversing positive secular trends over the previous twenty years. In
essence, we maintain that all of EMs’ growth engines (and indeed the entire raison d’être for
the EM universe) have either shut down or are in the process of disintegrating.
50.0
60.0
70.0
80.0
90.0
100.0
Jan
-13
Mar
-13
May
-13
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
Mar
-14
May
-14
Jul-
14
Sep
-14
No
v-1
4
Jan
-15
Mar
-15
May
-15
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Mar
-16
MSCI EM / MSCI DM MSCI EM $ / MSCI DM $
75
100
125
150
175
200
De
c-0
4
Jul-
05
Feb
-06
Sep
-06
Ap
r-0
7
No
v-0
7
Jun
-08
Jan
-09
Au
g-0
9
Mar
-10
Oct
-10
May
-11
De
c-1
1
Jul-
12
Feb
-13
Sep
-13
Ap
r-1
4
No
v-1
4
Jun
-15
Jan
-16
MSCI EM / MSCI DM MSCI EM $ / MSCI DM $
60
70
80
90
100
110
120
130
14060
70
80
90
100
110
120
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Jan
-16
DXY Yen-USD RHS Inverted
Pincer Movement"Goldilocks"
60
70
80
90
100
110
120
130
140
15060
70
80
90
100
110
120
Jan
-95
Jul-
95
Jan
-96
Jul-
96
Jan
-97
Jul-
97
Jan
-98
Jul-
98
Jan
-99
Jul-
99
Jan
-00
Jul-
00
Jan
-01
Jul-
01
Jan
-02
DXY Yen-USD RHS Inverted
Pincer Movement
60
70
80
90
100
110
120
1300.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Dec-9
2
Dec-9
4
Dec-9
6
Dec-9
8
Dec-0
0
Dec-0
2
Dec-0
4
Dec-0
6
Dec-0
8
Dec-1
0
Dec-1
2
Dec-1
4
MSCI EM $ / MSCI World $ DXY (rhs, inverted)
60
70
80
90
100
110
120
1300.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
Dec-9
2
Dec-9
4
Dec-9
6
Dec-9
8
Dec-0
0
Dec-0
2
Dec-0
4
Dec-0
6
Dec-0
8
Dec-1
0
Dec-1
2
Dec-1
4
MXASJ Index DXY (rhs, inverted)
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 45
Despite negative secular trends, we would be willing to embrace EM equities if they
were significantly undervalued and if this asset class has been subject to massive
outflows. As can be seen below, none of this is currently apparent if we examine EM vs. DM
valuations or relative funds flows.
If one examines forward PERs, the EM universe is currently trading at a ~25% PER discount
to DM equities (~12x vs DMs at ~16x), which is only marginally below the historical average
(since 2004) of ~20% discount (hardly a devastating value gap). If we examine EMs’ Price
to Book value, the segment is currently trading at ~1.4x book vs DMs at ~2x book. This is a
more robust discount (0.7x vs historic average of ~0.9x) but considering prevalence of
materials and banks in EM universe, it is probably not unreasonable.
Fig 126 EM vs DM Relative PER (x) Fig 127 EM vs DM Relative Price to Book (x)
Source: Bloomberg; Macquarie Research, April 2016 Source: Bloomberg; Macquarie Research, April 2016
Indeed, the position is even less clear cut when examine relative PERs in sectors that
investors actually want to buy (i.e. non-financials or non-materials). As can be seen below,
whether consumer staples; IT and telecoms; consumer discretionaries or health care, there is
not much to choose between EM and DM values. The key difference clearly lies in financials
and energy as well as to some extent materials and industrials.
Fig 128 EM vs DM sectoral forward multiples (x)
Source: MSCI, Thomson, IBES, Macquarie Research, April 2016
What about funds flows?
Whilst there was a significant net inflow of funds over the last eight weeks (~US$6bn), it
barely compensated for US$9bn outflows over the previous five months and ~US$20bn+
outflows over the previous 12 months. Hence on our preferred measure of 12 months
average funds flow relative to market capitalization, the ratio improved from Negative 0.45%
in November 2015 to ~Negative 0.2%. At the current level, funds flows (still) indicate that
EMs are somewhat oversold but not massively. It points to further mild outperformance.
0.50
0.60
0.70
0.80
0.90
1.00
1.10
Jul-
02
Mar
-03
No
v-0
3
Jul-
04
Mar
-05
No
v-0
5
Jul-
06
Mar
-07
No
v-0
7
Jul-
08
Mar
-09
No
v-0
9
Jul-
10
Mar
-11
No
v-1
1
Jul-
12
Mar
-13
No
v-1
3
Jul-
14
Mar
-15
No
v-1
5
EM/DM - 12M Fw PER Avg (since 2004) Avg (since 2010)
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Mar
-04
Oct
-04
May
-05
De
c-0
5
Jul-
06
Feb
-07
Sep
-07
Ap
r-0
8
No
v-0
8
Jun
-09
Jan
-10
Au
g-1
0
Mar
-11
Oct
-11
May
-12
De
c-1
2
Jul-
13
Feb
-14
Sep
-14
Ap
r-1
5
No
v-1
5
EM/DM - 12M Fw PBR Avg (since 2004) Avg (since 2010)
EM Asia ex DM EM/DM
Consumer Staples 21.5 21.4 20.9 1.03
Consumer Discretionary 13.8 12.5 15.6 0.88
Health Care 21.5 22.6 15.8 1.36
Industrials 13.1 12.7 15.9 0.82
Information Technology 14.7 14.7 16.5 0.89
Telecom Services 14.2 15.2 15.6 0.91
Financials 8.4 8.8 12.0 0.70
Energy 10.2 14.8 35.1 0.29
Materials 14.9 14.9 17.6 0.85
Overall 12.0 12.1 16.0 0.75
...shift from a recent
currency
“goldilocks” to
“pincer movement”
for EM equities
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 46
Fig 129 GEM Funds Flow Relative to Market Capitalization (%)
Source: MSCI, Thomson, IBES, Macquarie Research, April 2016
As long as the US$ is flat to weak and the ¥ is relatively strong, it is good times for EMs,
particularly those that are commodity-driven. However, reversal can be rapid. As soon as
investors become convinced that Japan and the Eurozone are not going to take it (i.e.
refusing to accept deepening deflation, compounded by their appreciating currencies), the
market would re-price relative exchange rates in a matter of days/weeks.
On balance, we do not believe that currently there are overwhelmingly strong reasons
as to why investors should continue to aggressively buy EMs, other than continuation of
the current currency goldilocks.
Impact of New Policies – which country is likely to be move first?
As in the case of initial wave of QE policies (i.e. 2010-14), this suggested new aggressive
fiscal spending funded by monetary expansion, is likely to be greeted by investors as the
long-awaited and badly needed global boost and as in the first wave of QEs, the first mover
advantage tends to be considerable. The US was the first mover and gained most of the
benefit whilst the Eurozone was the last and gained the least.
As discussed above it is highly likely that Japan might be the first mover this time around (as,
in our view, Japan does not really have a lot choices). There is uncertainty in our own mind as
to which country would follow Japan. Theoretically it should be either the Eurozone or China.
However, the Eurozone does not have an appropriate structure to make such a complex set
of decisions and hence (as always), it is likely to be a laggard, being the last country/block
across the line, and hence deriving the minimum of advantages. China in many ways is
already actively combining fiscal and monetary levers, but it is fully aware that it is actively
‘digging its own grave’ and is likely to be reluctant to accelerate the process.
This leaves the US, as the country that currently does not need such a powerful medicine.
However, the history tells us that if economic growth rates stagnate and volatilities come
back, the new administration (early 2017) could coalesce quickly around new policy settings.
As in the case of early versions of QE policies, it is quite likely that equity investors would
follow money and spending, in hope that escape velocity is finally at hand. Given that
suggested policies are even stronger versions of QE, the impact could be greater. Whilst
spending and commitments would be spaced-out, investors would inevitably over-anticipate
changes, and drive the ¥ down and equity prices up, before ‘one dime’ has been spent and
indeed before even final touches were placed on the new policies. The same would happen
at later stages to other economies, albeit with gradually diminishing impact.
-60%
-40%
-20%
0%
20%
40%
60%-0.6%
-0.5%
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
Dec-9
5
Jul-96
Feb
-97
Sep
-97
Ap
r-98
No
v-9
8
Jun-9
9
Jan-0
0
Aug
-00
Mar-
01
Oct-
01
May-0
2
Dec-0
2
Jul-03
Feb
-04
Sep
-04
Ap
r-05
No
v-0
5
Jun-0
6
Jan-0
7
Aug
-07
Mar-
08
Oct-
08
May-0
9
Dec-0
9
Jul-10
Feb
-11
Sep
-11
Ap
r-12
No
v-1
2
Jun-1
3
Jan-1
4
Aug
-14
Mar-
15
Oct-
15
12
m F
w re
lative
GE
M R
etu
rns (In
ve
rse
sca
le)
% 1
2M
MA
Flo
ws/M
ca
p
GEM - % Flows/Mcap,12MMA AnnEMG-12m FW Relative Price Returns%, rhs
GEM investment at 3/2015 would have realized -11% returns relative to DM by 3/2016
This is what happened to 12 month forward relative performance of EM vs DM equities when flows were negative
This is where we are currently
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 47
What does it mean for our DM market choices?
Although, most investors are justifiably worried that failure of Abenomics could drive ¥ much
higher, and hence are currently fleeing Japanese equities, we might be close to an
inflection point. Given that the US currently does not require such a powerful policy setting,
and given that on most longer-term fundamental valuation metrics (such as CAPE and Tobin
Q – refer) the US equity markets are overvalued, we are concerned that the US equities
might underperform (exacerbated by potential reversal of US$). Although Eurozone might not
react as quickly as one might hope, the same pressures that one sees currently in Japan,
applies also to Eurozone.
What about our Asia ex Japan country tilts?
In terms of our local Asia ex Japan tilts, we believe that as US$/¥ goldilocks reverses,
countries with ability to deliver sustainable growth with contained inflation and wider selection
of better quality corporates would come back in favour. This continues to tilt us towards India
and the Philippines. We also believe that China’s greater than average flexibility in utilizing
a powerful mix of fiscal and monetary policies would be rewarded (despite significant and
possibly unsurmountable structural challenges - refer).
However we are reluctant to support the ‘goldilocks beneficiaries (i.e. Indonesia, although we
are neutrally positioned in Malaysia) and/or countries with ongoing structural and political
growth impediments (such as Thailand). We also remain concerned about domestic Hong
Kong (both from real estate and retail trade exposures) as well as heightened volatilities of
capital flow cross-currents.
Fig 130 Macquarie – Asia ex Japan – Country tilts
Source: Macquarie Research, April 2016
New macro equilibrium – likely to be established within 12 months
We have argued for the last 12 months that it is becoming increasingly difficulty (and indeed
arguably impossible) to make any convincing macro calls. Unlike 2010-14 when the Fed
tended to lead or join other CBs, since late 2014, it has become increasingly hazardous to
predict instruments, direction or timing of CBs actions. The resultant macro cross-currents
are just too violent and unpredictable to be of much use.
However, as discussed above, we believe that the mew macro consensus is likely to emerge,
based on an aggressive mutation of monetary and various forms of fiscal and income support
policies (directly funded by Central Banks). Whilst Japan might be the first country to cross
this Rubicon, it is unlikely to be the last. As soon as consensus is reached, new type of
macro trading and investing is likely to come back.
In the meantime, we continue to highlight sustainable growth strategies.
-2 -1 0 1 2 3
India
Philippines
Taiwan
China
Korea
Malaysia
Singapore
Thailand
Hong Kong
Indonesia
Japan might be
close to inflection
point
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 48
Quality Growth remains our key theme Conversation between Sir Humphrey (Permanent Secretary) and Jim Hacker (Prime
Minister). Jim Hacker discussing success of his tenure, asked “what can I do to
continue this run of success?” Sir Humphrey, “Have you considered masterly
inactivity?” Hacker “No, Humphrey. A Prime Minister must be firm”. Sir Humphrey,
“Indeed. How about firm masterly inactivity.”(‘Yes Prime Minster’, 1986)
The above quote that we are very fond of repeating is just a version of ‘less is more’ or if ‘you
on a hole, stop digging’ truism.
We maintain our view (refer) that investors are essentially residing in a non-mean
reversionary world, without any conventional business or capital market cycles. Less is more
is traditionally the best advice and emphasis on ability of corporates to deliver higher than
average ROEs, on the back of strong market positioning and branding whilst avoiding an
undue reliance on revenue growth rates or leverage, is the key to sustainable (quality)
growth. Also, strong secular trends of ‘declining returns on humans’ (imbedded in the Third
Industrial Revolution), provides significant long-term Thematic opportunities.
Asia ex Quality portfolios – underperforming in Q1 but strong track record. ‘Anti-Quality’ Portfolio – performed well but could reverse
In this review, we have revamped two of our core long only portfolios for Asia ex Japan
i.e ‘Quality/Stability’ and ‘Sustainable Dividends’ and made minor changes to the ‘Thematics’
portfolio. We have also provided a new screen of ‘Anti Quality’ stocks.
Our core selection criteria continue to follow the same broad framework in terms of key
financial metrics that we prefer our stocks to exhibit (refer below). Whilst the underlying
stocks have been identified on the basis of widely available fundamentals (reported and
consensus forecasts), we avoid the temptation of following a formulaic black-box approach. In
that sense, we continue to make some exceptions where we find companies are just ‘on the
margin’ of meeting our strict conditions but the core idea is to identifying a broad list of
companies that meet all or most of our key conditions.
Summarised below are model portfolios starting with Asia ex Japan and followed by two global model portfolios.
1. Our Asia Quality/Stability model portfolio continues to emphasise high quality
companies that have high ROEs (mostly driven by margins instead of leverage or
revenue); relatively low leverage, positive free cash flow generation trends. We
ignore financials (deflationary/stagflationary environment should not be supportive of
financials). Our core conditions to identify such companies remain broadly the same
as used previously, although we have made some minor changes to our screening
process (in line with our recent work on Global portfolios). Key screening criteria:
a. Stocks that delivered and are expected to deliver positive revenue and profit
growth rates most of the years during 2014-2017E
b. Stocks that are expected to deliver positive recurring profit CAGR growth of
at least 5% over the next 2 years i.e. 2015-2017E. Whilst we look for growth,
this is one of the conditions where are much more relaxed and we made several
exceptions.
c. Stocks that have high level of ROE (at least an average of 12% over 2014-
2017E) which we believe should be in most cases be able to cover costs of
capital. At the same time, we avoid companies that have or are expected to
have declining ROEs going forward.
d. Average EBITDA margins of 5% over 2014-2017E, but at the same time there
is a general trend of rising EBITDA margins during this period, as a measure
of margin sustainability and an attempt to avoid stocks in which ROE
improvements are delivered purely from rising revenues or increasing leverage.
e. In our Asia portfolios, in line with our global portfolio work, we are now using Net
Debt/EBITDA as the key leverage measure (as opposed to Net Debt/Equity used
in earlier versions of our Asia ex Japan portfolios). We avoid companies with
Net Debt/EBITDA ratio of more than 2x and rising overall leverage.
We continue to
recommend Quality-
Sustainable growth
portfolios or...
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 49
f. We continue to emphasise Free cash flow (FCF) generation and therefore
avoid companies with negative FCF.
g. We exclude Financials completely from the screen, as financials don’t tend to
perform well in either deflationary or stagflationary climate;
h. In our Asia ex portfolios, we place a liquidity filter on market cap greater than
US$2bn (vs. US$5bn in our Global portfolio) to ensure sufficient liquidity basis.
i. There are no explicit valuation criteria although in some extreme cases we
have excluded companies where current PEs seemed extremely high or
extremely low.
j. Lastly, where the shortlisted stocks are also covered by Macquarie fundamental
analysts, we have excluded companies where our analysts have an
Underperform rating.
Our current Asia ex JP ‘Quality/Stability’ portfolio has 20 stocks (17 rated Outperform by
Macquarie Analysts; 3 non-covered), with 13 new additions (highlighted).
The recent rush towards ‘trash’ has reduced the performance of our flagship ‘Quality &
Stability’ portfolio. However, the portfolio is still up +21-22% (relative to ASXJ, US$ terms)
since inception in March 2013, after being up ~26-27% at the end of Jan-2016. YTD the
portfolio is marginally down 2% relative to Asia ex Japan.
2. We have also refreshed our Asia ex JP ‘Sustainable Dividends’ model portfolio
which attempts to highlight stocks that are likely to deliver sustainable dividends.
This is a true income-yielding portfolio with the underlying assumption of ‘low for
longer’ interest rates globally, and therefore a continued chase for yields. However,
the key differentiation in our yield portfolio (vs conventional quant-driven screens) is
additional overlay of quality and sustainability of dividends growth. In other words,
we attempt to avoid ‘yield traps’ and identify companies that have history of paying
dividends and have ability to sustain them given stronger than average
fundamentals. Key criteria summarized below:
a. Quality measure:
o Profitability trends: Positive EBITDA and Net Income trends (i.e.
profitable enterprises); High ROEs with average of at least 12% over
2014-2017E;
o Growth: Stocks that delivered and are expected to deliver positive
revenue and profit growth rates most of the time during 2014-
2017E. Again, we are much more relaxed with the ‘growth’ condition.
o Strong balance sheets: FCF positive during 2015-2016E, and Net
Debt/EBITDA below 2x.
b. Dividends history: At least four years history of stable or growing dividends
(2013-2016E). Reasonably high dividend yields (around 3.5%/3% in 2016E for
Asia ex/Global) which in most cases should be higher than local sovereign bond
yields (although we have relaxed this condition for our Asia ex JP and indeed
there are some exceptions).
c. We have put a filter on market cap (> US$2bn for Asia; US$5bn for Global) to
ensure sufficient liquidity and have also completely ruled out financials.
d. There is no specific valuation criteria
Our April 2016 edition of Asia ex JP ‘Sustainable Dividends’ portfolio has 18 stocks (16 rated
Outperform by Macquarie Analysts), with 7 new additions (highlighted in the table below).
Our ‘Sustainable Dividends’ portfolio has suffered more significantly recently partly due to
the recent ‘trash’ rally but also due to the significant underperformance (down more than
50%) of two stocks (Wasion and Boer Power) which were largely due to company specific
reasons. Nevertheless, the portfolio has managed to still keep up with the index with a
modest outperformance of 3-4% since inception in Feb 2015. YTD it is down 6-7% (relative).
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Fig 131 Macquarie –Asia ex JP ‘Quality & Stability’ stock list (April 2016 edition)
Source: FactSet, Macquarie Research, April 2016; Fundamental data based on FactSet consensus estimates including covered stocks; Priced as of close of 8-April 2016
Fig 132 Macquarie –Asia ex JP ‘Sustainable Dividends’ stock list (April 2016 edition)
Source: FactSet, Macquarie Research, April 2016; Fundamental data based on FactSet consensus estimates including covered stocks; Priced as of close of 8-April 2016
Code Company Name GICS L3 Name Reco. Analyst Name CountryMarket Cap
(US$M)
Target price
(Listing crncy)
Upside /
Downside
(%)
ROE ('16E)
Net debt /
EBITDA
('16E)
EBITDA
mgns
('16E)
DY (2016E)
Recurring
profit CAGR
'15-17E
3M, perf
(LC), %
PER-12m
fw
PER-Avg 12M
fw (since'10)
035420 KS NAVER Corp. Internet Software & ServicesOutperform Kwang Cho SOUTH KOREA 18,724 920,000.00 37.3 27.4 (1.6) 30.8 0.2 31.7 1.7 27.8 23.2
600066 CH Zhengzhou Yutong Bus Co. Class A Machinery Outperform Zhixuan Lin CHINA 6,644 26.40 32.0 30.1 (1.5) 15.2 4.7 12.8 0.8 11.4 11.3
ST SP Singapore Telecommunications Diversified Telecommunication ServicesOutperform Prem Jearajasingam SINGAPORE 44,827 4.80 29.7 15.3 1.6 29.4 5.0 6.2 4.5 14.5 14.0
700 HK Tencent Holdings Ltd. Internet Software & ServicesOutperform Wendy Huang HONG KONG 192,266 196.00 22.5 31.2 (1.4) 42.2 0.3 29.2 12.2 29.3 27.5
1316 HK Nexteer Automotive Group Limited Auto Components Outperform Leo Lin HONG KONG 2,532 10.00 18.2 25.6 0.2 13.5 1.8 16.6 (1.2) 10.7 11.1
000333 CH Midea Group Co. Ltd. Class A Household Durables Outperform Terence Chang CHINA 20,190 38.00 24.8 25.9 (1.3) 12.4 4.5 11.2 0.7 8.8 10.2
HTHT US China Lodging Group Hotels Restaurants & LeisureOutperform Jake Lynch CHINA 2,288 44.75 18.5 15.9 (1.4) 22.4 0.7 19.9 27.8 26.5 26.1
EIM IN Eicher Motors Limited Machinery Outperform Amit Mishra INDIA 7,992 23,360.00 19.6 37.1 (0.9) 17.0 0.5 26.1 11.4 32.8 21.1
INFO IN Infosys Limited IT Services Outperform Nitin Mohta INDIA 43,125 1,450.00 22.4 24.3 (2.0) 27.6 2.5 13.3 9.9 17.6 17.7
MSIL IN Maruti Suzuki India Limited Automobiles Outperform Amit Mishra INDIA 16,789 4,200.00 17.0 21.1 (1.2) 15.4 1.2 24.3 (18.7) 16.3 16.3
1044 HK Hengan International Group Personal Products Outperform Linda Huang HONG KONG 10,495 76.00 7.2 23.2 (0.4) 27.6 3.4 6.9 1.7 18.5 23.3
GCPL IN Godrej Consumer Products Personal Products Outperform Amit Mishra INDIA 7,303 1,550.00 15.2 23.8 0.1 18.4 0.6 17.7 9.9 33.9 27.3
1999 HK Man Wah Holdings Limited Household Durables Outperform Jake Lynch HONG KONG 2,470 11.00 10.4 25.6 (0.8) 21.4 3.8 15.7 10.6 13.9 10.8
2313 HK Shenzhou International Group Textiles Apparel & Luxury GoodsOutperform Terence Chang HONG KONG 7,406 44.80 14.3 20.5 0.0 27.5 3.0 17.6 (0.4) 16.7 10.5
ITC IN ITC Limited Tobacco Outperform Amit Mishra INDIA 40,209 360.00 11.5 30.3 (1.0) 38.3 2.4 11.9 2.6 22.8 24.9
2330 TT Taiwan Semiconductor Manufacturing Co., Ltd.Semiconductors & Semiconductor EquipmentOutperform Patrick Liao TAIWAN 127,380 167.00 5.4 23.8 (0.6) 64.9 3.6 5.1 17.5 12.8 12.6
5347 TT Vanguard International Semiconductors & Semiconductor EquipmentOutperform Patrick Liao TAIWAN 2,545 52.50 5.0 19.0 (2.6) 32.2 5.5 22.9 21.1 14.3 13.2
288 HK WH Group Ltd. (HK) Food Products N/R N/R HONG KONG 10,503 N/R N/R 14.3 1.0 9.4 2.6 6.8 36.9 12.0 10.1
669 HK Techtronic Industries Co., Ltd. Household Durables N/R N/R HONG KONG 7,165 N/R N/R 18.2 (0.0) 11.8 1.7 18.9 (2.6) 15.8 13.4
1193 HK China Resources Gas Group Limited Gas Utilities N/R N/R HONG KONG 6,195 N/R N/R 17.0 0.8 20.5 1.7 14.6 12.6 14.2 18.0
Simple average 28,852 23.5 (0.7) 24.9 2.5 16.5 8.0 18.5 17.1
Code Company Name GICS L3 Name Reco. Analyst Name CountryMarket Cap
(US$M)
Target price
(Listing crncy)
Upside /
Downside
(%)
ROE ('16E)
Net debt /
EBITDA
('16E)
EBITDA
mgns
('16E)
DY (2016E)
Recurring
profit CAGR
'15-17E
3M, perf
(LC), %
PER-12m
fw
PER-Avg 12M
fw (since'10)
600104 CH SAIC Motor Corporation Limited Class A Automobiles Outperform Zhixuan Lin CHINA 34,741 29.30 43.7 16.0 (2.5) 3.7 7.1 6.4 3.4 7.0 7.9
2333 HK Great Wall Motor Co., Ltd. Class H Automobiles Outperform Janet Lewis HONG KONG 10,905 12.50 108.0 20.0 (0.2) 14.3 5.8 2.4 (24.1) 5.3 8.9
5347 TT Vanguard International Semiconductor Co.Semiconductors & Semiconductor EquipmentOutperform Patrick Liao TAIWAN 2,545 52.50 5.0 19.0 (2.6) 32.2 5.5 22.9 21.1 14.3 13.2
600741 CH HUAYU Automotive Systems Company Limited Class AAuto Components Outperform Zhixuan Lin CHINA 7,369 21.00 36.4 17.1 (2.0) 7.9 5.3 9.6 (1.0) 8.3 8.3
ST SP Singapore Telecommunications Limited Diversified Telecommunication ServicesOutperform Prem Jearajasingam SINGAPORE 44,827 4.80 29.7 15.3 1.6 29.4 5.0 6.2 4.5 14.5 14.0
600066 CH Zhengzhou Yutong Bus Co., Ltd. Class A Machinery Outperform Zhixuan Lin CHINA 6,644 26.40 32.0 30.1 (1.5) 15.2 4.7 12.8 0.8 11.4 11.3
GLO PM Globe Telecom Inc. Wireless Telecommunication ServicesOutperform Kervin Sisayan PHILIPPINES 5,817 2,400.00 15.1 27.0 1.1 39.0 4.7 7.2 18.1 16.2 15.0
000333 CH Midea Group Co. Ltd. Class A Household Durables Outperform Terence Chang CHINA 20,190 38.00 24.8 25.9 (1.3) 12.4 4.5 11.2 0.7 8.8 10.2
2020 HK ANTA Sports Products Ltd. Textiles Apparel & Luxury GoodsOutperform Terence Chang HONG KONG 5,664 19.80 4.7 25.6 (1.8) 24.7 4.3 14.6 (6.0) 16.4 14.8
2317 TT Hon Hai Precision Industry Co., Ltd. Electronic Equipment Instruments & ComponentsOutperform Allen Chang TAIWAN 40,228 116.00 41.5 13.4 (1.8) 5.3 4.2 0.1 5.0 9.0 10.3
DELTA TB Delta Electronics (Thailand) Public Co. Ltd.Electronic Equipment Instruments & ComponentsN/R N/R THAILAND 3,076 N/R N/R 22.5 (3.0) 15.7 4.1 10.1 9.4 14.4 11.0
1999 HK Man Wah Holdings Limited Household Durables Outperform Jake Lynch HONG KONG 2,470 11.00 10.4 25.6 (0.8) 21.4 3.8 15.7 10.6 13.9 10.8
2330 TT Taiwan Semiconductor Manufacturing Co., Ltd.Semiconductors & Semiconductor EquipmentOutperform Patrick Liao TAIWAN 127,380 167.00 5.4 23.8 (0.6) 64.9 3.6 5.1 17.5 12.8 12.6
TLKM IJ PT Telekomunikasi Indo Class B Diversified Telecommunication ServicesOutperform Prem Jearajasingam INDONESIA 25,877 4,200.00 23.5 21.7 0.1 50.5 3.5 13.8 9.5 18.3 13.9
T MK Telekom Malaysia Bhd. Diversified Telecommunication ServicesOutperform Prem Jearajasingam MALAYSIA 6,360 8.30 23.9 11.8 1.1 31.5 3.4 4.6 1.2 27.4 23.8
1216 TT Uni-President Enterprises Corp. Food Products Outperform Dexter Hsu TAIWAN 9,826 63.00 10.3 12.9 1.2 10.4 3.4 13.3 4.9 19.1 18.2
1044 HK Hengan International Group Personal Products Outperform Linda Huang HONG KONG 10,495 76.00 7.2 23.2 (0.4) 27.6 3.4 6.9 1.7 18.5 23.3
021240 KS Coway Co., Ltd. Household Durables Neutral HongSuk Na SOUTH KOREA 6,272 95,000.00 1.6 28.6 (0.3) 30.4 3.4 7.7 3.2 18.2 16.8
Simple average 20,594 21.1 (0.8) 24.2 4.4 9.5 4.5 14.1 13.6
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 51
3. We have made some minor changes to our Asia ex JP ‘Thematic winners’
portfolio which has 49 stocks (vs 47 stocks earlier with 6 additions and 4 deletions)
This is a long-term portfolio where we disregard valuations and quality criteria
completely with the central thesis that these stocks should be driven by genuine
themes as opposed to changes in Global Central Bank policies. The list is based on
a poll of our on-the-ground fundamental analysts.
Our basic investment rationale is that most positive investment themes over the last
three decades (such as emerging market growth, middle class creation, global catch-
up and convergence) are likely to weaken considerably. Instead themes that will
come to the fore would be far more constraints-based (or negative). The idea of this
portfolio is to maximize the power of constraints rather than opportunities.
We have identified seven investable constraints and highlight stocks in Asia ex
Japan that are potential plays on such themes.
Our long-term Asia ex JP ‘Thematics’ portfolio has managed to outperform MSCI
Asia ex Japan US$ index by 3% since inception in Oct-2014 despite having no
quality or valuation filter. YTD thematic portfolio has underperformed ASXJ by 5%.
Fig 133 Macquarie – Asia ex Japan ‘Thematics’ portfolio (April 2016 edition)
Source: Macquarie Research, April 2016
Ticker Name Reco. Country Ticker Name Reco. Country
Security, Prisons and Bullets Robots, Industrial, Automation and Technology
2357 HK AviChina N/R China 300124 CH Shenzhen Inovance N/R China
002415 CH Hikvision O/P China HOLI US HollySys Automation Technologies N/R China
2634 TT Aerospace Industrial Development CorpO/P Taiwan 002241 CH GoerTek O/P China
047810 KS Korea Aerospace Industries O/P Korea 2049 TT Hiwin Technologies U/P Taiwan
079550 KS LIG NEX1 O/P Korea 2308 TT Delta Electronics N Taiwan
STE SP ST Engineering U/P Singapore 1590 TT AirTAC O/P Taiwan
Educational & Training services Shifts in manufacturing migration/competitiveness
EDU US New Oriental Education & Technology O/P China 2333 HK Great Wall Motor Company O/P China
XRS US TAL Education Group N/R China 600066 CH Zhengzhou Yutong Bus (A-Share) O/P China
NORD US Nord Anglia Education N/R China 600031 CH Sany Heavy Industry N/R China
Environmental Constraint 425 HK Minth Group O/P China
2208 HK Xinjiang Goldwind O/P China 2382 HK Sunny Optical O/P China
2688 HK ENN Energy N/R China 1766 HK CRRC Corp Ltd O/P China
3800 HK GCL-Poly Energy O/P China 2313 HK Shenzhou International O/P China
257 HK China Everbright International O/P China 1476 TT Eclat Textile U/P Taiwan
1193 HK China Resources Gas N/R China 600741 CH Huayu Automative O/P China
958 HK Huaneng Renewables O/P China 3606 HK Fuyao Glass O/P China
SIIC SP SIIC Environment N/R Singapore Demographics
EDC PM Energy Development O/P Philippines 2628 HK China Life Insurance O/P China
MWC PM Manila Water N/R Philippines 300015 CH Aier Eye Hospital Group Co. Ltd. N/R China
Entertainment Services GE SP Great Eastern Holdings Ltd O/P Singapore
1970 HK IMAX China N/R China RFMD SP Raffles Medical Group N/R Singapore
002739 CH Wanda Cinema N/R China BDMS TB Bangkok Dusit Medical Services N Thailand
700 HK Tencent O/P China BH TB Bumrungrad Hospital U/P Thailand
NTES US Netease.com O/P China IHH MK IHH Healthcare Bhd O/P Malaysia
GENM MK Genting Malaysia O/P Malaysia KPJ MK KPJ Healthcare N Malaysia
079160 KS CJ CGV O/P Korea FORH IN Fortis Healthcare O/P India
...pure Thematics
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 52
4. We also provide a new screen of ‘Anti-Quality’ stocks in Asia ex Japan which
in essence is a reverse of our ‘Quality Portfolios’, and highlights stocks with
high leverage, negative cash flow trends and low ROEs.
As highlighted above, a scenario where global economy moves into ‘socialist
paradise’ with CBs and Governments accelerating monetary and fiscal policies to
stimulate growth, it is quite likely that investors might gravitate towards ‘low quality’
stocks, in our view. As discussed above, we believe that the investors’ acceptance of
new macro strategies should become a general investor consensus call.
Indeed, there is no surprise that our ‘Anti-Quality’ portfolio is up significantly over
the last two months, eradicating around 10% of relative losses sustained over the
previous twelve months (see charts later)
Key screening criteria is: (a) Mid-large cap stocks with a market cap >US$ 1bn; (b)
Net Debt/EBITDA over 2x during 2014-15; (c) FCF negative during 2014-15; (d)
ROEs of less than 12% during 2014-15; and (e) non-financials. We deliberately
focused mostly on historical data as opposed to estimates which incorporate usual
analytical optimism.
Our screen throws a list of 18 stocks with a mix of energy/materials/industrial names.
Fig 134 Macquarie –Asia ex Japan ‘Anti-Quality’ stock screen (April 2016)
Source: FactSet, Macquarie Research, April 2016; Fundamental data based on FactSet consensus estimates including covered stocks; Priced as of close of 8-April 2016
Code Company Name GICS L3 Name Reco. Analyst Name CountryMarket Cap
(US$M)
Target price
(Listing crncy)
Upside /
Downside
(%)
ROE ('16E)
Net debt /
EBITDA
('16E)
3M, perf
(LC), %
PER-12m
fw
PER-Avg 12M
fw (since'10)
1211 HK BYD Company Class H Automobiles Underperform Janet Lewis HONG KONG 19,179 24.00 (42.9) 9.6 1.7 9.5 23.3 34.0
1898 HK China Coal Energy Class H Oil Gas & Consumable FuelsN/R N/R HONG KONG 8,974 N/R N/R (4.2) 14.1 10.3 NA 34.9
2039 HK China Int. Marine Containers H share Machinery N/R N/R HONG KONG 5,657 N/R N/R 6.0 5.7 (5.5) 14.8 12.4
TATA IN Tata Steel Limited Metals & Mining Underperform Rakesh Arora INDIA 4,695 229.00 (29.5) 2.3 5.8 27.0 30.2 10.7
078930 KS GS Holdings Corp. Oil Gas & Consumable FuelsN/R N/R SOUTH KOREA 4,686 N/R N/R 9.4 3.7 18.2 8.5 8.0
JSTL IN JSW Steel Limited Metals & Mining Neutral Rakesh Arora INDIA 4,597 1,137.00 (12.5) 7.5 3.8 22.4 18.1 10.2
69 HK Shangri-La Asia Limited Hotels Restaurants & LeisureN/R N/R HONG KONG 4,252 N/R N/R 1.9 6.8 28.4 30.2 28.6
139480 KS E-Mart, Inc. Food & Staples Retailing Outperform HongSuk Na SOUTH KOREA 4,159 210,000.00 22.8 5.2 3.8 (9.5) 12.3 12.4
OLAM SP Olam International Limited Food & Staples Retailing N/R N/R SINGAPORE 3,544 N/R N/R 8.1 7.6 (2.4) 10.8 12.6
363 HK Shanghai Industrial Holdings Limited Industrial Conglomerates N/R N/R HONG KONG 2,462 N/R N/R 6.0 2.8 (7.8) 7.0 8.9
RCOM IN Reliance Communications Limited Wireless Telecommunication ServicesN/R N/R INDIA 1,926 N/R N/R 2.2 5.0 (39.1) 15.9 16.3
ADANI IN Adani Power Limited Independent Power and Renewable Electricity ProducersUnderperform Inderjeetsingh Bhatia INDIA 1,769 23.00 (33.4) (3.1) 6.0 0.4 NA 39.1
1833 HK Intime Retail (Group) Co. Ltd. Multiline Retail Neutral Linda Huang HONG KONG 1,743 6.40 7.4 8.0 0.9 (22.6) 10.2 15.6
MRT SP Smrt Corporation Ltd Road & Rail Underperform Justin Chiam SINGAPORE 1,674 1.10 (27.4) 10.7 1.7 3.8 22.7 20.4
001740 KS SK Networks Co., Ltd. Trading Companies & DistributorsN/R N/R SOUTH KOREA 1,349 N/R N/R 3.8 3.4 19.5 15.0 12.5
2603 TT Evergreen Marine Corp. (Taiwan) Ltd. Marine N/R N/R TAIWAN 1,306 N/R N/R (5.9) 11.4 (5.2) NA 44.6
1208 HK MMG Ltd. Metals & Mining Outperform Ben Crowley HONG KONG 1,180 2.00 15.6 (1.7) 12.1 12.9 NM 41.7
BAB MK Bumi Armada Bhd. Energy Equipment & ServicesOutperform Isaac Chow MALAYSIA 1,164 1.26 76.2 4.8 7.5 (25.6) 11.5 17.6
Simple average 4,129 3.9 5.8 1.9 16.5 21.1
The “anti-quality”
screen might be the
preferred vehicle
after nationalization
of capital markets
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 53
Our Asia ex Japan model portfolio performance is highlighted below.
Fig 135 Macquarie –Asia ex ‘Quality and Stability’ portfolio performance relative to MSCI Asia ex (since inception March 2013 until April 2016)
Fig 136 Macquarie – Asia ex ‘Sustainable Dividends’ portfolio performance relative to MSCI Asia ex (since inception Feb 2015 until April 2016)
Source: Bloomberg, Macquarie Research, April 2016: Note – Equal weighted portfolio; Returns are dollar returns including dividends; Excludes transaction costs; Past performance is not a guarantee of future performance; Until close of 8 April 2016
Source: Bloomberg, Macquarie Research, April 2016: Note – Equal weighted portfolio; Returns are dollar returns including dividends; Excludes transaction costs; Past performance is not a guarantee of future performance; Until close of 8 April 2016
Fig 137 Macquarie – Asia ex Japan ‘Thematic Winners’ portfolio performance relative to MSCI Asia ex JP (since inception Oct-2014 until April 2016)
Fig 138 Macquarie – Asia ex JP ‘Anti-Quality’ portfolio performance relative to MSCI Asia ex JP Index
Source: Bloomberg, Macquarie Research, April 2016: Note – Equal weighted portfolio; Returns are dollar returns including dividends; Excludes transaction costs; Past performance is not a guarantee of future performance; Until close of 8 April 2016
Source: Bloomberg, Macquarie Research, April 2016: Note – Equal weighted portfolio; Returns are dollar returns including dividends; Excludes transaction costs; Past performance is not a guarantee of future performance; Until close of 8 April 2016
Global Quality Portfolios – treading water; down 1% YTD
In this review, we have made only minor changes to our Global ‘Quality/Stability’
portfolio. The core conditions continue to be the same as used during our original review,
and similar to the conditions used for Asia ex Japan. We added Singtel, Infosys and Oracle
to this portfolio; whilst we have removed Hermes, Kroger, Luxottica and PT Telkom
Indonesia from our model portfolio.
Our latest model portfolio highlighting Global ‘Sustainable Dividends’ stocks is highlighted
below. We have made minor changes to the portfolio by adding Great Wall Motor, but
removing Thai Beverage and Marks and Spencer. There are no changes to the core
conditions of this screen, and these remain similar to ones used for Asia ex Japan.
Both portfolios were treading water in 1Q16, down around 1% YTD vs MSCI World.
95
100
105
110
115
120
125
130
135
Mar
-13
May
-13
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
Mar
-14
May
-14
Jul-
14
Sep
-14
No
v-1
4
Jan
-15
Mar
-15
May
-15
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Mar
-16
"Quality and Stability" portfolio (rel to MSCI ASXJ, $ TR basis)
96
98
100
102
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106
108
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112
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116
Feb
-15
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-15
Ap
r-1
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g-1
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No
v-1
5
De
c-1
5
Jan
-16
Feb
-16
Mar
-16
"Sustainable Dividends" portfolio (rel to MSCI ASXJ, $ TR basis)
95
97
99
101
103
105
107
109
111
113
115
Oct
-14
No
v-1
4
De
c-1
4
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Oct
-15
No
v-1
5
De
c-1
5
Jan
-16
Feb
-16
Mar
-16
"Thematic Winners" portfolio (rel to MSCI ASXJ, $ TR basis)
-25
-20
-15
-10
-5
0
5
10
16
-Se
p-1
5
30
-Se
p-1
5
14
-Oct
-15
28
-Oct
-15
11
-No
v-1
5
25
-No
v-1
5
9-D
ec-
15
23
-De
c-1
5
6-J
an-1
6
20
-Jan
-16
3-F
eb
-16
17
-Fe
b-1
6
2-M
ar-1
6
16
-Mar
-16
30
-Mar
-16
Excess returns "Anti Quality" returns MXASJ $
Ma
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54
Fig 139 Macquarie –Global ‘Quality & Stability’ stock list (April 2016)
Source: FactSet, Macquarie Research, April 2016; Fundamental data based on FactSet consensus estimates including covered stocks; Priced as of close of 8-April 2016
Code Company Name GICS L3 Name Reco. Analyst Name CountryMarket Cap
(US$M)
Target
price
(Listing
crncy)
Upside /
Downside
(%)
ROE
('16E)
Net debt /
EBITDA
('16E)
EBITDA
mgns
('16E)
DY (2016E)
Recurring
profit CAGR
'15-17e
3M, perf
(LC), %
PER-12m
fw
PER-Avg
12M fw
(since'10)
MSFT US Microsoft Corporation Software Neutral Sarah Hindlian UNITED STATES 435,961 53.00 (2.4) 28.1 (1.9) 36.9 2.6 6.1 2.0 18.4 12.5
JNJ US Johnson & Johnson Pharmaceuticals N/R N/R UNITED STATES 301,818 N/R N/R 24.6 (0.8) 35.3 2.8 3.6 9.0 16.5 14.3
FB US Facebook, Inc. Class A Internet Software & ServicesOutperform Ben Schachter UNITED STATES 260,958 150.00 37.6 18.8 (1.7) 60.3 0.0 38.2 10.4 33.4 41.1
700 HK Tencent Holdings Ltd. Internet Software & ServicesOutperform Wendy Huang HONG KONG 192,808 196.00 22.5 31.2 (1.4) 42.2 0.3 29.2 8.9 29.7 27.5
ORCL US Oracle Software Outperform Sarah Hindlian UNITED STATES 165,870 46.00 13.9 24.7 (1.0) 46.8 1.4 4.3 14.1 14.4 12.6
7203 JP Toyota Motor Corp. Automobiles Outperform Takuo Katayama JAPAN 165,588 9000.00 64.1 11.64 2.02 13.7 4.2 (6.4) (23.0) 7.4 12.8
DIS US Walt Disney Company Media Neutral Tim Nollen UNITED STATES 159,045 95.00 (1.3) 21.5 0.9 31.0 1.5 7.2 (2.9) 16.1 16.2
V US Visa Inc. Class A IT Services Outperform Kevin McVeigh UNITED STATES 150,095 85.00 9.2 22.0 (0.5) 70.8 0.7 9.5 3.9 25.8 20.1
2330 TT Taiwan Semiconductor Mfr Co Semiconductors & Semiconductor EquipmentOutperform Patrick Liao TAIWAN 122,758 167.00 5.4 23.8 (0.6) 64.9 3.7 5.1 13.3 12.5 12.6
AMGN US Amgen Inc. Biotechnology N/R N/R UNITED STATES 120,079 N/R N/R 27.3 0.7 55.6 2.5 5.8 1.9 14.3 12.9
NOVOB DC Novo Nordisk A/S Class B Pharmaceuticals N/R N/R DENMARK 115,743 N/R N/R 77.2 (0.3) 46.2 2.0 11.3 (7.9) 23.1 21.7
MA US MasterCard Incorporated Class A IT Services Outperform Kevin McVeigh UNITED STATES 103,228 112.00 19.8 59.3 (0.7) 57.6 0.8 7.1 1.5 25.7 20.0
OR FP L'Oreal SA Personal Products N/R N/R FRANCE 99,993 N/R N/R 15.0 (0.3) 21.4 2.1 8.3 3.2 23.8 21.4
ABBV US AbbVie, Inc. Biotechnology N/R N/R UNITED STATES 96,886 N/R N/R 134.4 1.8 45.5 3.8 15.8 4.4 11.4 14.0
BAYN GR Bayer AG Pharmaceuticals N/R N/R GERMANY 95,237 N/R N/R 23.2 1.4 22.7 2.6 8.3 (7.7) 13.6 13.4
MC FP LVMH Moet Hennessy Louis Vu. Textiles Apparel & Luxury GoodsOutperform Daniele Gianera FRANCE 84,251 185.00 26.7 16.2 0.3 23.5 2.7 12.8 6.9 17.3 16.4
NKE US NIKE, Inc. Class B Textiles Apparel & Luxury GoodsOutperform Laurent Vasilescu UNITED STATES 81,412 77.50 33.8 28.1 (0.6) 17.1 1.1 11.6 (1.9) 24.9 20.8
AIR FP Airbus Group SE Aerospace & Defense N/R N/R NL/FRANCE 49,976 N/R N/R 38.5 (0.9) 9.7 2.5 10.8 (7.9) 15.5 15.8
BN FP Danone SA Food Products N/R N/R FRANCE 45,876 N/R N/R 14.4 1.8 17.1 2.7 6.7 1.4 19.6 17.0
ST SP SingTel Diversified Telecommunication ServicesOutperform Prem Jearajasingam SINGAPORE 43,891 4.80 29.7 15.3 1.6 29.4 5.1 6.2 7.5 14.5 14.0
FDX US FedEx Corporation Air Freight & Logistics Outperform Kelly Dougherty UNITED STATES 43,691 187.00 14.7 19.6 0.6 15.7 0.7 9.6 15.6 13.6 14.6
CON GR Continental AG Auto Components N/R N/R GERMANY 41,689 N/R N/R 21.9 0.5 16.0 2.3 8.6 (12.7) 11.7 10.8
ADP US Automatic Data Processing, Inc. IT Services N/R N/R UNITED STATES 41,555 N/R N/R 31.4 (0.5) 21.2 2.3 9.6 11.8 25.3 21.1
INFO IN Infosys Technologies IT Services Outperform Nitin Mohta INDIA 40,796 1450.00 22.4 24.3 (2.0) 27.6 2.6 13.3 12.4 17.8 17.7
WPP LN WPP Plc Media Outperform Tim Nollen UNITED KINGDOM 30,215 17.00 3.3 16.8 1.4 17.7 3.1 7.8 8.7 15.5 12.9
4503 JP Astellas Pharma Inc. Pharmaceuticals N/R N/R JAPAN 28,206 N/R N/R 14.9 (1.7) 24.0 2.6 9.1 (16.6) 14.8 17.7
4452 JP Kao Corp. Personal Products N/R N/R JAPAN 25,794 N/R N/R 16.8 (0.7) 16.5 1.6 12.5 (5.3) 22.7 21.7
6981 JP Murata Manufacturing Co., Ltd. Electronic Equipment Instruments & ComponentsOutperform George Chang JAPAN 25,136 18500.00 39.0 16.3 (1.2) 31.7 2.0 6.3 (24.7) 12.8 19.1
ADS GR adidas AG Textiles Apparel & Luxury GoodsOutperform Andreas Inderst GERMANY 24,773 115.00 12.4 13.9 0.3 8.9 1.7 14.5 20.7 24.7 16.7
TEL NO Telenor ASA Diversified Telecommunication ServicesN/R N/R NORWAY 23,499 N/R N/R 25.2 1.3 34.0 6.0 10.6 (8.4) 12.7 12.5
EA US Electronic Arts Inc. Software Outperform Ben Schachter UNITED STATES 20,362 72.00 14.0 30.4 (2.6) 33.3 0.0 17.0 3.4 18.6 19.2
HO FP Thales SA Aerospace & Defense N/R N/R FRANCE 18,366 N/R N/R 17.9 (1.1) 11.7 1.9 9.8 11.8 17.7 11.6
MSIL IN Maruti Suzuki India Limited Automobiles Outperform Amit Mishra INDIA 16,179 4200.00 17.0 21.1 (1.2) 15.4 1.3 24.3 (20.3) 16.5 16.3
CAP FP Cap Gemini SA IT Services N/R N/R FRANCE 15,785 N/R N/R 12.8 0.7 13.4 1.8 23.9 (2.7) 15.2 14.1
7741 JP HOYA CORPORATION Health Care Equipment & SuppliesOutperform Damian Thong JAPAN 15,187 5500.00 34.5 16.8 (2.1) 30.2 2.0 3.0 (15.9) 16.9 16.7
COLOB DC Coloplast A/S Class B Health Care Equipment & SuppliesN/R N/R DENMARK 14,908 N/R N/R 73.0 (0.2) 36.7 2.8 15.0 (9.2) 25.8 22.3
ITV LN ITV plc Media Outperform Tim Nollen UNITED KINGDOM 13,756 3.00 24.6 61.5 0.4 30.7 3.1 7.9 (9.9) 13.2 13.0
8035 JP Tokyo Electron Ltd. Semiconductors & Semiconductor EquipmentOutperform Damian Thong JAPAN 10,016 8400.00 17.9 12.7 (2.1) 19.8 3.5 4.0 (5.2) 14.1 23.0
IPG US Interpublic Group of Cos Media Outperform Tim Nollen UNITED STATES 9,325 25.00 10.1 26.6 0.1 14.5 2.5 7.3 1.4 17.1 16.0
EIM IN Eicher Motors Limited Machinery Outperform Amit Mishra INDIA 7,809 23360.00 19.6 37.2 (0.9) 17.0 0.5 26.0 9.2 32.8 21.0
2313 HK Shenzhou International Group Textiles Apparel & Luxury GoodsOutperform Terence Chang HONG KONG 7,232 44.80 14.3 20.5 0.0 27.5 3.1 17.6 (9.0) 16.5 10.5
669 HK Techtronic Industries Co., Ltd. Household Durables N/R N/R HONG KONG 7,163 N/R N/R 18.2 (0.0) 11.8 1.7 18.9 (4.4) 16.2 13.4
Simple average 80,308 28.7 (0.3) 29.1 2.2 11.4 (0.3) 18.3 17.1
Ma
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Fig 140 Macquarie –Global ‘Sustainable Dividends’ stock list (April 2016)
Source: FactSet, Macquarie Research, April 2016; Fundamental data based on FactSet consensus estimates including covered stocks; Priced as of close of 8-April 2016
Code Company Name GICS L3 Name Reco. Analyst Name CountryMarket Cap
(US$M)
Target
price
(Listing
crncy)
Upside /
Downside
(%)
ROE
('16E)
Net debt /
EBITDA
('16E)
EBITDA
mgns
('16E)
DY (2016E)
Recurring
profit CAGR
'15-17e
3M, perf
(LC), %
PER-12m
fw
PER-Avg
12M fw
(since'10)
NXT LN Next plc Multiline Retail Neutral Andreas Inderst UNITED KINGDOM 11,440 57.00 4.3 159.6 0.7 23.3 7.6 1.9 (21.2) 12.0 13.1
BKG LN Berkeley Group Holdings plc Household Durables N/R N/R UNITED KINGDOM 6,458 N/R N/R 30.5 (0.4) 25.8 6.0 24.8 (5.6) 8.4 11.6
TEL NO Telenor ASA Diversified Telecommunication ServicesN/R N/R NORWAY 23,499 N/R N/R 25.2 1.3 34.0 6.0 10.6 (8.4) 12.8 12.5
2333 HK Great Wall Motor Company Automobiles Outperform Janet Lewis HONG KONG 10,716 12.50 108.0 19.6 (0.2) 14.1 6.0 1.1 (43.0) 4.9 9.0
TW/ LN Taylor Wimpey plc Household Durables N/R N/R UNITED KINGDOM 8,908 N/R N/R 19.7 (0.2) 21.3 5.7 12.2 (1.7) 10.9 18.2
DAI GR Daimler AG Automobiles N/R N/R GERMANY 76,055 N/R N/R 16.8 (0.8) 12.5 5.5 4.7 (12.9) 6.9 9.7
ST SP Singapore Telecommunications Diversified Telecommunication ServicesOutperform Prem Jearajasingam SINGAPORE 44,471 4.80 29.7 15.3 1.6 29.4 5.0 6.2 6.8 14.6 14.0
BMW GR Bayerische Motoren Werke AG Automobiles N/R N/R GERMANY 55,360 N/R N/R 14.0 (0.7) 15.7 4.5 0.7 (15.5) 7.7 9.8
2020 HK ANTA Sports Products Ltd. Textiles Apparel & Luxury GoodsOutperform Terence Chang HONG KONG 5,642 19.80 4.7 25.6 (1.8) 24.7 4.4 14.6 (19.9) 15.3 14.8
2317 TT Hon Hai Precision Electronic Equipment Instruments & ComponentsOutperform Allen Chang TAIWAN 39,163 116.00 41.5 13.5 (2.0) 5.3 4.3 0.1 2.8 9.0 10.3
SKAB SS Skanska AB Class B Construction & EngineeringN/R N/R SWEDEN 8,958 N/R N/R 19.5 (0.6) 5.3 4.3 1.4 16.9 14.4 14.2
7270 JP Fuji Heavy Industries Ltd. Automobiles Neutral Takuo Katayama JAPAN 24,994 4,900.00 41.1 24.9 (1.3) 18.4 4.3 (4.3) (24.9) 7.2 10.2
7203 JP Toyota Motor Corp. Automobiles Outperform Takuo Katayama JAPAN 165,588 9,000.00 64.1 11.6 2.0 13.7 4.2 (6.4) (23.0) 7.4 12.8
RAND NA Randstad Holding NV Professional Services N/R N/R NETHERLANDS 9,446 N/R N/R 17.4 (0.0) 5.2 4.1 11.2 (16.5) 11.7 13.7
SIE GR Siemens AG Industrial Conglomerates N/R N/R GERMANY 86,851 N/R N/R 15.2 2.0 12.5 4.0 5.6 4.8 12.7 12.2
EZJ LN easyJet plc Airlines Outperform Douglas McNeill UNITED KINGDOM 8,259 21.00 44.2 23.8 (0.5) 18.6 4.0 11.6 (16.0) 9.2 11.2
SAN FP Sanofi Pharmaceuticals N/R N/R FRANCE 111,031 N/R N/R 12.5 0.5 31.6 4.0 (1.0) (3.4) 13.5 11.5
ABBV US AbbVie, Inc. Biotechnology N/R N/R UNITED STATES 96,886 N/R N/R 134.4 1.8 45.5 3.8 15.8 4.4 11.4 14.0
7202 JP Isuzu Motors Limited Automobiles N/R N/R JAPAN 8,125 N/R N/R 14.0 (0.6) 12.6 3.8 6.8 (14.5) 6.9 10.4
MO US Altria Group, Inc. Tobacco N/R N/R UNITED STATES 124,446 N/R N/R 213.5 1.1 48.0 3.7 7.5 7.4 20.4 14.7
KNEBV FH Kone Oyj Class B Machinery N/R N/R FINLAND 20,811 N/R N/R 37.5 (1.2) 15.5 3.7 2.0 8.0 20.9 19.3
2330 TT Taiwan Semiconductor Mfrg Semiconductors & Semiconductor EquipmentOutperform Patrick Liao TAIWAN 122,758 167.00 5.4 23.8 (0.6) 64.9 3.7 5.1 13.3 12.5 12.6
ROG VX Roche Holding Ltd Genusssch. Pharmaceuticals N/R N/R SWITZERLAND 218,474 N/R N/R 54.6 0.5 41.4 3.5 9.2 (11.1) 15.9 14.0
9201 JP Japan Airlines Co., Ltd. Airlines Outperform Azita Nazrene JAPAN 13,172 5,900.00 46.1 20.2 (0.9) 24.0 3.3 2.9 (5.4) 7.1 7.2
PAYX US Paychex, Inc. IT Services N/R N/R UNITED STATES 19,317 N/R N/R 42.1 (0.5) 42.8 3.3 na 5.6 24.5 21.6
DRI US Darden Restaurants, Inc. Hotels Restaurants & LeisureN/R N/R UNITED STATES 8,334 N/R N/R 24.6 0.1 13.6 3.3 9.7 3.3 16.6 14.5
ELUXB SS Electrolux AB Class B Household Durables N/R N/R SWEDEN 8,133 N/R N/R 25.1 0.3 7.9 3.2 22.2 8.0 14.2 12.6
WPP LN WPP Plc Media Outperform Tim Nollen UNITED KINGDOM 30,215 17.00 3.3 16.8 1.4 17.7 3.1 7.8 8.7 15.6 12.9
ULVR LN Unilever PLC Personal Products N/R N/R UNITED KINGDOM 58,616 N/R N/R 34.2 1.0 17.8 3.1 5.6 15.0 21.1 17.1
GIVN VX Givaudan SA Chemicals N/R N/R SWITZERLAND 18,340 N/R N/R 20.4 0.4 24.1 3.1 8.3 7.5 24.3 19.0
UPS US United Parcel Service, Inc. Class B Air Freight & Logistics Neutral Kelly Dougherty UNITED STATES 72,238 105.00 1.1 191.7 1.0 16.9 2.9 4.6 10.9 17.8 17.0
TGT US Target Corporation Multiline Retail Outperform Bob Summers UNITED STATES 49,301 90.00 12.8 25.5 1.3 10.6 2.8 3.9 10.9 15.3 14.1
JNJ US Johnson & Johnson Pharmaceuticals N/R N/R UNITED STATES 301,818 N/R N/R 24.6 (0.8) 35.3 2.8 3.6 9.0 16.5 14.3
PUB FP Publicis Groupe SA Media Outperform Tim Nollen FRANCE 15,780 69.00 10.2 15.2 0.8 17.7 2.8 6.4 9.1 13.4 14.1
Simple average 55,400 40.7 0.1 22.6 4.1 6.6 (2.5) 16.2 16.1
Macquarie Wealth Management Rights, Wrongs & Returns
13 April 2016 56
Appendices
Fig 141 Index performance, (Local currency, unless stated otherwise), %
Note : Priced as of close of 8 April 2016 Source: MSCI, Thomson, Macquarie Research, April 2016
Fig 142 Index performance by MSCI countries and sectors (Local currency) – Last three months, %
Note : Priced as of close of 8 April 2016 Source: MSCI, Thomson, Macquarie Research, April 2016
MSCI Indices - 1W - 1M - 3M - 1Y - 3Y - 5Y YTD Index
MSCI AC Asia ex JP (LC) -0.7 1.8 3.7 -16.9 0.3 -7.1 -1.9 612
ASXJ Consumer Discretionary -1.1 1.4 3.8 -16.9 -13.7 -18.5 -2.6 412
ASXJ Consumer Staples 0.8 4.5 4.2 -5.0 16.1 31.0 2.1 487
ASXJ Energy -0.3 -0.7 10.9 -19.3 -29.0 -46.2 5.9 513
ASXJ Financials -1.2 1.0 -0.9 -22.6 -4.7 -10.9 -6.9 270
ASXJ Health Care 0.8 0.6 -1.7 -11.9 49.0 80.8 -3.9 944
ASXJ Industrials -0.2 1.4 2.5 -19.8 -4.9 -28.1 -3.1 153
ASXJ Information Technology -1.2 3.0 7.5 -12.5 20.3 27.7 0.6 318
ASXJ Materials -0.2 0.7 11.7 -6.9 -2.5 -36.7 7.9 298
ASXJ Utilities 1.0 4.1 6.8 -8.9 6.5 30.0 2.6 225
ASXJ Telecom Svcs -0.3 1.6 4.9 -17.7 2.6 16.3 0.3 136
MSCI AC ASIA EX JP U$ -0.8 3.4 6.0 -19.1 -5.6 -15.7 -0.6 497
MSCI CHINA U$ -0.5 3.8 2.1 -28.5 -3.9 -21.5 -6.4 56
MSCI HONG KONG U$ 0.1 4.2 3.3 -13.6 3.3 2.7 -2.4 9,220
MSCI INDIA U$ -2.2 1.5 -0.7 -19.8 6.5 -19.4 -5.5 434
MSCI INDONESIA U$ -0.2 0.6 13.0 -13.4 -25.9 -18.0 11.5 728
MSCI KOREA U$ -0.4 6.0 7.5 -11.8 -5.8 -18.3 1.9 363
MSCI MALAYSIA (EM) U$ 0.2 8.0 17.1 -13.4 -22.0 -19.1 12.6 384
MSCI PHILIPPINES U$ -0.4 6.7 11.9 -13.0 0.0 59.5 5.5 561
MSCI SINGAPORE U$ -0.4 3.8 10.0 -18.2 -21.8 -22.0 3.2 3,358
MSCI TAIWAN U$ -2.2 -0.1 11.7 -14.8 3.9 -11.7 3.6 275
MSCI THAILAND U$ -3.2 -2.4 17.3 -20.6 -25.9 -11.2 11.5 329
MSCI China -0.4 3.7 2.0 -28.5 -4.0 -21.6 -6.3 56
MSCI Hong Kong 0.2 4.1 3.2 -13.5 3.3 2.6 -2.3 12,880
MSCI India -1.7 0.2 -1.0 -14.2 29.8 21.7 -5.0 937
MSCI Indonesia -0.3 0.6 6.6 -12.1 -0.1 24.5 6.3 5,796
MSCI Korea -0.5 1.4 3.5 -6.7 -4.6 -13.0 0.3 528
MSCI Malaysia 0.5 2.4 4.2 -6.8 -0.6 4.4 2.3 601
MSCI Philippines -0.1 4.9 9.5 -9.7 11.8 71.1 3.5 1,244
MSCI Singapore -0.6 1.1 3.0 -18.7 -15.3 -16.5 -1.9 1,471
MSCI Taiwan -1.6 -1.1 8.8 -11.1 12.3 -1.0 2.3 313
MSCI Thailand -3.2 -3.2 13.5 -14.4 -11.2 3.9 8.8 463
MSCI EMG -0.8 1.4 6.5 -14.3 -0.7 -8.7 0.7 44,791
MSCI World (Dev) -0.8 1.4 2.7 -8.6 20.7 32.2 -3.6 1,232
MSCI AC World (All) -0.8 1.4 3.0 -9.2 18.2 26.6 -3.2 454
MSCI Japan -1.1 -5.0 -11.5 -20.7 13.8 45.5 -17.3 775
MSCI USA -1.2 3.6 6.3 -2.5 30.4 53.4 -0.2 1,947
MSCI AC Asiapac x JP ($) -1.1 2.1 6.2 -19.3 -11.7 -19.1 -1.3 406
MSCI AC WORLD U$ -0.6 2.5 5.1 -8.9 10.3 12.9 -1.4 394
MSCI EM U$ -1.1 3.6 10.4 -20.0 -18.9 -32.3 2.9 817
MSCI WORLD U$ (Dev) -0.5 2.4 4.5 -7.6 14.4 20.8 -1.8 1,632
MSCI EM ASIA U$ -1.0 3.2 6.2 -19.9 -5.5 -17.8 -0.6 401
MSCI WORLD EX JP ($) -0.8 2.8 5.4 -7.2 15.5 21.4 -1.2 1,649
MSCI EUROPE U$ 0.2 1.3 1.9 -14.2 -0.9 -9.4 -4.7 1,451
MSCI EMU U$ -0.6 1.6 1.8 -14.1 4.9 -14.5 -4.8 163
MSCI AC Asia ex JP
AC
Asia
ex JP
China HK India Indo Korea Mal Phils Sing TW Thai EMG World
(Dev) Japan
AC
World
MSCI Country Index 3.7 2.0 3.2 -1.0 6.6 3.5 4.2 9.5 3.0 8.8 13.5 6.5 2.7 -11.5 3.0
Cons. Disc 3.8 -2.9 17.6 -2.4 16.0 1.6 14.4 12.5 12.1 -3.1 7.8 4.3 1.4 -14.7 1.6
Staples 4.2 0.4 36.9 1.6 17.2 -2.5 2.8 21.5 17.3 7.8 16.6 5.7 7.0 -2.0 6.9
Energy 10.9 11.4 NA -1.8 43.0 26.8 -5.1 0.0 0.0 18.3 24.6 12.3 11.5 -13.7 11.6
Financials -0.9 -4.8 0.4 -8.1 0.3 2.0 7.6 7.8 1.1 1.7 10.0 4.0 -4.7 -19.7 -3.6
Banks -0.6 -3.8 0.4 -8.8 0.3 1.9 7.7 5.4 0.1 5.0 9.4 4.8 -10.0 -29.8 -7.4
Real Estate 1.5 -2.0 1.7 NA NA NA 2.2 10.3 2.9 13.1 15.5 5.9 5.5 -1.2 5.6
Health Care -1.7 2.4 NA -4.1 2.1 3.0 -1.8 NA 0.0 -35.6 1.2 0.6 -1.1 -5.5 -1.1
Industrials 2.5 3.1 -0.8 -0.5 -6.3 2.6 5.8 15.4 1.7 0.6 11.4 4.7 5.5 -8.7 5.4
IT 7.5 8.4 10.5 4.7 NA 2.5 0.0 0.0 0.0 11.6 9.4 7.5 6.1 -11.5 6.3
Materials 11.7 13.9 0.0 10.4 -3.5 13.3 -9.0 0.0 NA 14.7 13.8 15.0 7.6 -13.2 8.6
Utilities 6.8 4.8 7.4 -5.9 5.3 16.9 7.0 2.3 NA NA 15.0 8.3 6.9 -12.9 7.0
Telecom Services 4.9 7.0 15.1 -7.1 9.2 0.3 -6.1 -0.8 3.7 8.0 12.1 7.9 5.4 1.4 5.8
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Fig 143 Valuations – Asia ex JP and key comps
Note : Priced as of close of 8 April 2016 Source: MSCI, Thomson, IBES, Macquarie Research, April 2016
Avg since 2010
MSCI Indices PER P/B EPS gr ROE DY PER P/B ROE DY PER P/B PER P/B
MSCI AC Asia ex JP 12.1 1.3 5.8 10.3% 2.9% 12.0 1.6 13.1% 2.9% 11.5 1.5 6% -15%
ASXJ Consumer Discretionary 12.5 1.4 12.6 11.5% 2.3% 11.1 1.8 15.8% 2.4% 11.0 1.8 13% -20%
ASXJ Consumer Staples 21.4 2.8 13.0 13.1% 2.0% 16.1 2.6 15.4% 2.4% 18.8 2.7 14% 3%
ASXJ Energy 14.8 0.9 4.8 6.0% 2.6% 9.9 1.7 15.1% 3.2% 10.2 1.4 45% -35%
ASXJ Financials 8.8 0.9 2.6 9.8% 3.9% 12.0 1.4 11.5% 3.3% 10.3 1.2 -14% -28%
ASXJ Health Care 22.6 3.5 21.8 15.7% 0.9% 18.6 3.2 15.8% 1.1% 21.4 3.2 5% 10%
ASXJ Industrials 12.7 1.1 8.6 8.6% 2.7% 13.1 1.4 10.8% 2.5% 12.6 1.3 1% -16%
ASXJ Information Technology 14.7 2.0 8.0 13.5% 2.1% 13.1 2.0 15.8% 2.2% 11.9 1.9 23% 4%
ASXJ Materials 14.9 1.1 25.8 7.1% 2.7% 10.3 1.4 13.1% 3.2% 11.6 1.3 28% -17%
ASXJ Utilities 10.7 1.2 -10.0 11.3% 3.6% 12.6 1.4 10.8% 3.3% 13.2 1.4 -19% -14%
ASXJ Telecommunication Services 15.2 1.8 3.6 11.6% 3.8% 13.0 2.0 15.2% 4.1% 13.6 1.9 12% -6%
MSCI China 10.5 1.2 7.1 11.8% 2.7% 11.5 1.8 15.1% 3.0% 9.8 1.5 6% -16%
MSCI Hong Kong 14.4 1.0 4.6 6.8% 3.7% 15.4 1.4 8.8% 3.3% 14.8 1.3 -3% -23%
MSCI India 16.8 2.5 18.2 15.1% 1.8% 14.4 2.6 16.6% 1.6% 15.0 2.4 12% 6%
MSCI Indonesia 15.0 2.5 11.9 16.7% 2.6% 11.3 2.8 22.2% 3.2% 13.7 3.0 10% -15%
MSCI Korea 10.7 0.9 3.7 8.6% 1.9% 9.3 1.2 12.6% 1.7% 9.2 1.1 16% -17%
MSCI Malaysia 15.8 1.6 5.3 10.3% 3.1% 14.3 1.9 13.1% 3.6% 14.7 1.9 7% -15%
MSCI Philippines 18.2 2.4 9.2 13.4% 1.9% 14.9 2.2 14.7% 2.7% 16.8 2.6 9% -5%
MSCI Singapore 12.3 1.1 1.1 8.7% 4.3% 14.1 1.5 11.0% 3.7% 13.3 1.4 -7% -24%
MSCI Taiwan 12.7 1.5 1.4 11.9% 4.1% 14.0 1.7 13.2% 3.9% 13.2 1.7 -4% -11%
MSCI Thailand 14.1 1.7 9.6 12.2% 3.2% 10.9 1.8 16.4% 3.9% 11.8 1.9 20% -8%
MSCI EMG 11.9 1.3 10.0 10.8% 3.1% 10.7 1.6 14.5% 3.3% 10.6 1.4 12% -10%
EMG Consumer Discretionary 13.8 1.7 14.8 12.2% 1.9% 11.0 1.8 16.0% 2.1% 11.5 1.8 20% -9%
EMG Consumer Staples 21.5 3.3 18.4 15.2% 2.3% 16.3 2.9 16.7% 2.6% 19.5 3.1 10% 4%
EMG Energy 10.2 0.6 -7.7 6.0% 3.4% 7.7 1.2 13.8% 3.2% 7.4 0.9 39% -28%
EMG Financials 8.4 1.0 4.2 11.8% 4.1% 10.0 1.5 14.5% 3.4% 9.4 1.3 -11% -25%
EMG Health Care 21.5 3.4 20.0 15.9% 1.2% 17.7 3.0 16.3% 1.5% 19.5 3.1 10% 12%
EMG Industrials 13.1 1.2 15.5 9.1% 2.3% 12.0 1.5 12.0% 2.4% 12.9 1.4 1% -18%
EMG Information Technology 14.7 2.0 8.1 13.5% 2.1% 13.1 1.9 15.6% 2.2% 11.9 1.9 24% 4%
EMG Materials 14.9 1.1 228.3 7.3% 2.8% 10.2 1.6 15.0% 3.6% 11.1 1.3 33% -17%
EMG Utilities 9.7 1.0 -7.8 10.2% 10.1% 11.5 1.1 9.1% 3.5% 11.0 1.0 -12% -6%
EMG Telecommunication Services 14.2 1.8 12.7 12.9% 3.9% 12.3 2.2 17.6% 4.2% 12.6 2.0 13% -8%
MSCI World (Dev) 16.0 2.0 5.9 12.3% 2.8% 14.5 1.9 13.6% 2.7% 13.5 1.8 18% 12%
World(Dev) Consumer Discretionary 15.6 2.6 11.1 16.7% 2.2% 16.5 2.0 13.4% 2.0% 14.8 2.2 6% 18%
World(Dev) Consumer Staples 20.9 4.0 6.4 19.0% 2.7% 16.5 3.1 19.1% 2.8% 16.3 3.1 28% 28%
World(Dev) Energy 35.1 1.4 -17.5 4.0% 4.1% 13.4 1.8 14.5% 2.8% 13.8 1.5 155% -6%
World(Dev) Financials 11.9 1.0 3.5 8.5% 3.8% 11.9 1.3 10.8% 3.4% 11.5 1.0 4% -2%
World(Dev) Health Care 15.8 3.2 8.5 20.5% 2.1% 15.9 2.9 19.6% 2.3% 14.2 2.8 11% 16%
World(Dev) Industrials 15.9 2.4 12.6 15.0% 2.6% 15.1 2.1 14.5% 2.4% 14.0 2.0 14% 17%
World(Dev) Information Technology 16.5 3.3 7.6 19.9% 1.6% 19.1 2.9 18.2% 1.2% 14.1 2.7 17% 21%
World(Dev) Materials 17.6 1.7 1.8 9.4% 2.6% 13.9 1.8 13.8% 2.4% 13.1 1.6 35% 0%
World(Dev) Utilities 16.2 1.5 -2.3 9.6% 3.9% 13.9 1.6 10.8% 4.2% 14.4 1.3 12% 15%
World(Dev) Telecommunication Services 15.6 2.2 6.4 13.9% 4.3% 19.9 1.8 12.6% 4.6% 13.4 1.8 16% 22%
MSCI AC World (All) 15.4 1.9 6.4 12.1% 2.8% 14.2 1.9 13.7% 2.9% 13.1 1.7 18% 9%
MSCI Japan 13.1 1.1 14.9 8.4% 2.3% 16.8 1.3 8.5% 1.7% 13.7 1.1 -4% -1%
MSCI USA 17.1 2.6 5.5 15.2% 2.2% 15.2 2.3 15.5% 2.1% 14.2 2.2 20% 20%
MSCI Australia 15.4 1.7 2.2 10.8% 5.0% 13.9 2.0 14.5% 4.7% 13.3 1.8 15% -6%
12 Month forward estimates LT Average (12M forward ests) Current vs post-2010 avg
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Recent Asia Equity Strategy Research
Central Banks & Markets - Mutually assured destruction 31 March 2016 Global Travel Notes - The blind leading the blind 29 March 2016 MicroStrategy - Earnings season – A letdown so far but there is a silver lining 22 March 2016 What caught my eye? v.54 - Negative rates and the war on savers 2 March 2016 What caught my eye? v.53 - Philippines shelter; CBs calling E.T 23 February 2016 Is it a policy dead-end? - Consistency in an inconsistent world 11 February 2016 What caught my eye? v.52 - Launching global portfolios 4 February 2016 Central Banks - Why insistence on failed policies? 1 February 2016 China’s hard landing - Has it already happened? 27 January 2016 What caught my eye? v.51 - Bulls, Bears and low rates 22 January 2016 What caught my eye? v.50 - The Fed and the need for redemption 11 January 2016 MicroStrategy – Growth it is - Five reasons we prefer Growth over Value 8 January 2016 China choices – narrowing - Between a rock and a hard place 7 January 2016 What caught my eye? v.49 - China’s savings dilemma 4 January 2016 Fed hikes. What now? - Implications for EM equities 17 December 2015 20 YEARS IN ASIA 14 December 2015 Is it Bear Stearns moment? - Year of living dangerously, part II 14 December 2015 Rights, Wrongs & Returns - 2016 - Year of living dangerously 25 November 2015 Policy cross-currents - What would unhinge PBoC? 12 November 2015 Bihar dreaming - On impossibility of reforms 9 November 2015 What caught my eye? v.48- EMs – downside to the upside, 3 November 2015 What caught my eye? v.47- The more they do; the worse it gets, 27 October 2015 What caught my eye? v.46-Equities – irrational exuberance?, 8 October 2015 Time for a policy U-turn? - Back to the future: British Leyland, 18 September 2015 What caught my eye? v.45 - Today is more insidious than 1997, 16 September 2015 Old Friend Deflation is Back - From traders to shareholders, 25 August 2015 EM vs DM Equities - What would the average opinion say?, 20 August 2015 Deflators of the world unite - Impact on the US & Global PPIs, 17 August 2015 China’s dilemma - Between a rock and a hard place, 13 August 2015 Return of deflationary vortex - Commodities – canary in a coalmine?, 10 August 2015 What caught my eye? v.44 - Barbarians at the gate, 5 August 2015 China’s policy response - How different is it to G4 economies?, 20 July 2015 Rights, Wrongs & Returns - 2H–Falling knives & deflating bubbles, 13 July 2015 Are dominos finally falling? - Greece, Puerto Rico, China, 6 July 2015 What caught my eye? v.43 - Why consumer & business reticence?, 29 June 2015 China drama & Greek farce - Are CBs at the end of the road?, 29 June 2015 What caught my eye? v.42 - Resisting China; Asia ex earnings, 17 June 2015 Trade & Cyclicality - Stagnation in both = lower yields, 28 May 2015 What caught my eye? v.41 - China & Global Manufacturing, 27 May 2015 What caught my eye? v.40 - CBs vs deflation: will liquidity win?, 8 May 2015 What caught my eye? v.39 - China & Indonesia: Binary outcomes, 29 April 2015 What caught my eye? v.38 - When size does not matter, 13 April 2015 Rights, Wrongs & Returns - 2Q-3Q’15 - The Hall of Mirrors, 27 March 2015 Global Liquidity Watch - Return of Greenspan’s conundrum?, 10 March 2015 What caught my eye? v.37 - India hope is still intact; travel notes, 5 March 2015 Chasing dividends - No mean reversion = desire for yield, 13 Feb 2015 What caught my eye? v.36 - Secular stagnation & four horsemen, 6 Feb 2015 Global liquidity watch - Liquidity tight but should improve, 27 Jan 2015 What caught my eye? v.35 - Focus on Thailand; CBs’ effectiveness, 26 Jan 2015 What caught my eye? v.34 - Trade & Flow watch; A vs H shares, 8 Jan 2015 Is deflation almost here? - What do DXY & bonds tell us, 6 Jan 2015 Global contagion risks - Commodities: canary in a coal mine?, 17 Dec 2014 China A retail exuberance - Damned if you do and damned if you don’t, 9 Dec 2014 Global Liquidity Watch - Eroded in 3Q’14 & Oct/Nov, 8 Dec 2014 Rights, Wrongs & Returns - 2015 preview: the “known unknowns”, 2 Dec 2014 How exposed is Korea? - Yen “doomsday machine”, 17 November 2014 What caught my eye? v. 33 - Currency wars & their discontents, 13 November 2014 What caught my eye? v.32 - On social upheavals, schools & robots, 30 October 2014 What caught my eye? v.31 - Is China in a liquidity trap? EM risks, 16 October 2014 What caught my eye? v.30 - EM vulnerabilities; U/W Indonesia, 9 October 2014 What caught my eye? v.29 - China’s city vs global city, 18 September 2014
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What caught my eye? v.28 - Unstoppable China; EM equity rally, 9 September 2014 Global Liquidity - Most measures are looking better, 21 August 2014 ASEAN at the crossroads - Complex choices; uncertain outcomes, 18 August 2014 Phils – Fading optimism - ST concerns overshadow LT story, 31 July 2014 What caught my eye? v.27 - Importance of Trust; China’s rerating, 29 July 2014 Trade – Waiting for Godot - Small pick-up but no robust cyclicality, 18 July 2014 Rights, Wrongs & Returns - Higher rates or perhaps no rates, 15 July 2014 What caught my eye? v.26 - Oil, geopolitics & family formation, 3 July 2014 What caught my eye? v.25 - Value - many ways to skin a cat, 23 June 2014 What caught my eye? v.24 - Financial stability & catch 22, 13 June 2014 What caught my eye? v.23 - Reforms: who will & who will not, 30 May 2014 What caught my eye? v.22 - Upgrades and stagflations, 21 May 2014 Coups & Martial laws - Not necessarily a bad choice, 20 May 2014 What caught my eye? v.21 - China tourism; Portfolio update, 12 May 2014 What does FIC market tell equity investors? - All quiet on the Western front, 9 May 2014 What caught my eye? v.20 - Investments & geopolitical risks, 29 April 2014 What caught my eye? v.19 - Liquidity in its various forms, 16 April 2014 Rights, Wrongs & Returns - Policy errors, cyclicality & EM volatility, 28 March 2014 FOMC – Impact on EMs - Higher US$, rates and lower demand, 20 March 2014 Difficult case of Indonesia - Euphoria vs. terms of trade & liquidity, 17 March 2014 What caught my eye? v.18 - Is China unravelling? Not Yet, 11 March 2014 “Each unhappy family is unhappy in its own way” - Ukraine, Thailand, Argentina, et al, 3 March 2014 DM vs. EM push & pull - Beware what you wish for, 26 February 2014 Bond Yields & Equities - The question of foreign demand, 24 February 2014 What caught my eye? v.17 - Is the Philippines for real?, 24 February 2014 What caught my eye? v.16 - Third industrial revolution & its impact, 12 February 2014 What caught my eye? v.15 - Investment Cycles & Funds Flows, 17 January 2014 Liquidity trap vs. Stagflation - China vs India – tough choice, 15 January 2014 What caught my eye? v.14 - Would Indian corporates invest?, 6 January 2014 Tapering is on, so is the put - What is likely to happen to volatilities?, 19 December 2013 Investment Outlook – 2014 - “Out with the old and in with the new” Is it 1998 or 1999 – Buy all or Sell all?, 11 December 2013 What caught my eye? v.13 - China's savings conundrum & Plenum, 25 November 2013 What caught my eye? V.12- Hardware vs software; China's "divide & conquer” reform agenda?, 6 November 2013 What caught my eye? v.11 - Leading indicators and “blind alleys”, 28 October 2013 What caught my eye? v.10 - Corporate leverage – how much of a problem?, 3 October 2013 Asia Strategy - When you rely on asset bubbles, what else do you do?, 19 September 2013 What caught my eye? v.9 - Rmb: How exposed is China?, 18 September 2013 What caught my eye? v.8 - In and out of “shadows”, 6 September 2013 What caught my eye? v.7 - If something can not go on forever, it will stop, 22 August 2013 ASEAN 4 – risks & returns - Kaleidoscope of themes, 16 August 2013 What caught my eye? v.6 - China industrial sector – the Good, the Bad and the Ugly, 31 July 2013 Reviewing Tactical Portfolio - Tough choices: damned if you do and damned if you don't in a slowing world, 10 July 2013 What caught my eye? v.5 - Liquidity – receding tide, 5 July 2013 What caught my eye? v.4 - Central Bank’s “chicken run”, 27 June 2013 What caught my eye? v.3 - QEs to eternity whether successful or not, 12 June 2013 What caught my eye? v.2 - Korea - is China or Japan a greater threat?, 29
May 2013
What caught my eye? - Inflation falling everywhere, 22 May 2013 Rights, Wrongs & Returns - Bears and the Investment Clock, 24 April 2013 DXY rises and Yen falls - The pincer movement for EM equities, 8 April 2013 APAC – Competitive Edge - Separating winners from losers, 21
March 2013
Walk on the wild side - Macro threats - what, if and when, 4 March 2013
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Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada
Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be
expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 31 December 2015
AU/NZ Asia RSA USA CA EUR Outperform 50.68% 61.04% 53.16% 47.90% 65.22% 43.59% (for global coverage by Macquarie, 5.33% of stocks followed are investment banking clients)
Neutral 31.51% 24.66% 34.18% 47.70% 29.71% 34.62% (for global coverage by Macquarie, 5.02% of stocks followed are investment banking clients)
Underperform 17.81% 14.30% 12.66% 4.39% 5.07% 21.79% (for global coverage by Macquarie, 3.78% of stocks followed are investment banking clients)
Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.
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