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Peak growth, peak QE, peak complacency?
Maxime Alimi, Head of Investment Strategy
January 2018
Research & Investment Strategy
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The economy could grow at nearly 4% in 2018, with accelerations in the US and the euro area
Macro outlook
The global economy is doing great
Source: Eurostat, Bloomberg and AXA IM Research
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-5
-4
-3
-2
-1
0
1
2
3
4
5
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
%
EMU forecasts vs actual growth
Median forecast 1y ahead
Actual
survey implied2.9%
The US economy is entering its 9th year of expansion … but economic cycles don’t die of old age
The right question: what shock could push the economy away from its natural growth path?
Macro outlook
Economic cycles don’t die of old age
Source: BEA and AXA IM Research
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20
4
4034
0
5
10
15
20
25
30
35
40
45
Median Min Max Current
Duration of US economic expansions since 1950
Quarters
Even though inflation has not moved much, confidence has risen that it will eventually normalise
Macro outlook
Sea change in inflation expectations
Source: Goldman Sachs and AXA IM Research
3Research & Investment Strategy
0%
20%
40%
60%
80%
100%
2010 2011 2013 2014 2016 2017
US 5Y inflation expectations' distribution
Probability high inflation (>3%)
Probability medium inflation (1-3%)
Probability low inflation (<1%)
2017 failed to see interest rates rise. The lesson appears to be that the relevant variable is the global stock of QE,which should peak in 2018
Macro outlook
QE: it’s the stock, stupid!
Source: central banks and AXA IM Research
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0
5
10
15
20
25
30
35
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
BoJ ECB BoE Fed
% total government debt securities
Government debt securities held by G4 central banks
Market outlook
Believe in soft landings for equity valuations
Source: Robert J. Shiller , Datastream,
Standard valuation metrics for equity markets look scary
We see three reasons why a soft landing is possible: i) strong corporate fundamentals, ii) central banks’ put, iii)earnings base effects
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32.5x
43.8x
31.2x
0
5
10
15
20
25
30
35
40
45
18
81
18
86
18
91
18
96
19
01
19
06
19
11
19
16
19
21
19
26
19
31
19
36
19
41
19
46
19
51
19
56
19
61
19
66
19
71
19
76
19
81
19
86
19
91
19
96
20
01
20
06
20
11
20
16
Cyclically adjusted PE ratio (1881 - 2017)
CAPE
Avg., +1 sd, -1 sd
Market outlook
High valuations today = low returns tomorrow
Source: Robert J. Shiller and AXA IM Research
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y = -0.54x + 20.67R² = 0.84
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
10 20 30 40 50
Historical data (1960-present)
Current: CAPE = 30.1 ; expected 10Yannualised return = 4.3%
US cyclically-adjusted P/E and forward returns
Shiller P/E consistent with low but positive returns in coming 10 years
Risks outlook
Macro concentration risk
Source: IMF and AXA IM Research
China has contributed about 35% to global growth since 2007
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1980 1985 1990 1995 2000 2005 2010 2015
China's contribution to global growth
Risks outlook
Financial concentration risk
Source: Bloomberg and AXA IM Research
ETFs exhibit hidden risks: liquidity mismatches and concentration
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0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Asset value in top 2 US HY ETFs
$bn
Risks outlook
Herding risk
Source: CFTC and AXA IM Research
A decade of low interest rates has led everyone to search for yield EVERYWHERE
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-200
-150
-100
-50
0
50
2005 2007 2009 2011 2013 2015 2017
Net positions in VIX futures, non-commercial
Thousands of contracts
Risks outlook
Financial optimisation: the great ‘debt for equity’ swap
Source: BEA and AXA IM Research
Aggressive financial optimisation from US companies has increased vulnerabilities in the credit space
10Research & Investment Strategy
50
55
60
65
70
75
80
85
90
95
100
0
200
400
600
800
1,000
1,200
1,400
1,600
1980 1985 1990 1995 2000 2005 2010 2015
US nonfinancial corporate debt
Debt/Profits
Debt/Value added (RHS)
% %
Digital economy: tomorrow augmented
Productivity, everywhere but in the statistics?
Source: FRED and AXA IM Research
Large productivity mismeasurements have occurred in the past
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1996 1997 1997 1998 1999 1999 2000
Successive estimates of US productivity in 1996
%
Digital economy: tomorrow augmented
Global trade, a thing of the past?
Source: Oxford Economics, Wohlers report 2017, Unctad, ING
3D printing may prove a game changer for global trade
The digital economy jeopardises the development model of EMs entirely
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Digital economy: tomorrow augmented
Algorithmic and personal pricing: the end of inflation as we know it?
Source: Keepa, The Wall Street Journal and AXA IM Research
AI leads to better but opaque pricing strategies
Personal pricing could imply that inflation no longer has a collective meaning
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10.1
9.18.7
12.0
10.6
8
9
10
11
12
Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
US$
The cost of a 20-pack of Duracell batteries
Conclusion
Key take-aways
1. The global economy is experiencing its best year since the financial crisis
2. Watch out for economic optimism morphing into market euphoria
3. We know very little about the market impact of QE exit
4. A decade of low interest rates has created imbalances and vulnerabilities
14Research & Investment Strategy
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Disclaimer
15Research & Investment Strategy
