Global Economy and Markets

Global Economy and Markets

John Woods

Regional Chief Investment Officer, APAC

Investment Strategy

INVESTMENT SOLUTIONS & PRODUCTS

Important Information: This report represents the views of the Investment Strategy Department of CS and has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. It is not a product of the Credit Suisse Research Department even if it contains published research recommendations. CS has policies in place to manage conflicts of interest including policies relating to dealing ahead of the dissemination of investment research. These policies do not apply to the views of Investment Strategists contained in this report. Please find further important information at the end of this material. This material is not investment research or a research recommendation for regulatory purposes. Please refer to further important information at the end of this material. Hong Kong: For professional investors only. Singapore: For Accredited Investors only. This is intended for the recipients use and not for redistribution.

H1, 2017

2 February 2017

Conflict of Generations - Political uncertainty in 2016

“Brexit” “Trump” “Quitaly”

Source: Google, CNN, The Sun, Wall Street Journal

The disclaimer at the end of this material also applies to this page.

Historical performance indications and financial market scenarios are not reliable indicators of current or future performance.

3 February 2017

Economic policy uncertainty highest since 1997

Last data point: 31.01.2017 Source: Bloomberg, Credit Suisse



0

50

100

150

200

250

300

350

'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

Global economic policy uncertainty with PPP adjusted GDP weights(r.h.s.)

February 2017 4

Who’s right? Policy uncertainty vs. US IG credit spreads

Last data point: 31.01.2017 Source: Bloomberg, Credit Suisse



0

50

100

150

200

250

300

350

0

100

200

300

400

500

600

700

'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

US Corporate BAA 10Y spread (l.h.s.) Global economic policy uncertainty with PPP adjusted GDP weights(r.h.s.)

basis points index level

5 February 2017

Complex profile: Total returns of key assets

Source: Bloomberg, Datastream, Credit Suisse

Asset class performance 2016 vs 2015, in local currency

Last data point: 31.12.2016



45%

19%

11%

10%

10%

9%

7%

5%

4%

2%

1%

-3%

-3%

-3% -16%

-20% 0% 20% 40% 60%

WTI oil

China H-shares

Japan Equities

FTSE 100

S&P 500

European Equities

Asia HY

US inflation linked

USD/CNY

Asia IG

Hedge Funds

USD/JPY

Gold

EUR/USD

GBP/USD

February 2017 6

Last data point: 30.12.2016 Source: PBBC, Credit Suisse

Flight to Safety: Asset Allocation, FY 2016



Client Preferences

South East Asia – Dec. 16 vs. Dec. 15

7 February 2017

Key Investment Views for 2017


Source: Credit Suisse

Fixed Income

• Investing in a Rising Interest Rate

Environment

• Asia USD investment grade, financials and

EM bonds

• Convertibles

Equities

• Stocks exposed to global infrastructure

investments

• China, Australia and Switzerland equities

• Global healthcare

FX

• Positive USD, JPY, GBP and NOK

• Weaker CNY and Asian currencies

• Prefer RUB, BRL, MXN and ZAR in EM

Alternative Investments

• Hedge funds – low beta strategies

• Private equity for illiquidity-tolerant investors

• Artificial Intelligence related investments

Focus Themes 1: Infrastructure

Spending

9 February 2017

Source: OECD, Bloomberg, Credit Suisse / IDC


Note: Bloomberg consensus estimates World GDP growth 2016

Limits to Monetary Policy: Global GDP vs. Interest Rates



-1

0

1

2

3

4

5

6

7

2001 2003 2005 2007 2009 2011 2013 2015 2017

%

1M Euribor

1M USD Libor

World GDP growth

10 February 2017

Source: Bloomberg, Datastream, Credit Suisse Last data point: 07.12.2016

Fiscal Activism: OECD fiscal spending/GDP

US

Infrastructure

dividend



11 February 2017

Infrastructure needs to catch up considerably

Power

Roads

Water

Telecoms

Rail

Airports

Ports

0

10

20

30

40

50

60

70

Required Expected

Investment shortfall expected

of ~USD 20 trn

Money invested ~USD 40 trn

G20 infrastructure investment shortfalls until 2030 (USD trn)

Source: McKinsey Global Institute analysis



12 February 2017

Source: IMF, Credit Suisse

Note: 2016 figures are IMF and government estimates.

Asia infrastructure spending as % of GDP



13 February 2017

Source: The American Society of Civil Engineers as at June 2016

US Infrastructure: USD 3.4 trn funding shortfall

Funding

gap



14 February 2017

Source: Bloomberg, Datastream, Credit Suisse Last data point: 07.12.2016

Fiscal stimulus ?

Fiscal Activism: US, EU, Japan GDP



Focus Theme 2: Rising Interest rates

February 2017

Global macro momentum improved lately meaningfully

Source: Bloomberg, Credit Suisse / IDC Last data point: 02.02.2017


Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. 16

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16

Brazil China Germany India Japan Russia USA Others Total Macro Momentum

Index

February 2017

Inflation: Not a theme in Europe, but in the USA

Source: Datastream, Credit Suisse / IDC Last data point: 15.01.2017

Core inflation USA and Eurozone (% YoY)



-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

3.0

2004 2006 2008 2010 2012 2014 2016

USA

Eurozone

Switzerland

February 2017

Global Bonds Yields: US leading the Move Higher

Germany

Switzerland

USA



-1

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015 2017

Germany Switzerland USA

10y government bond yields, %


February 2017

Trajectory: US Interest Rates Expectations, 2017-19



0.00

0.50

1.00

1.50

2.00

2.50

3.00

Feb 17 May 17 Aug 17 Nov 17 Feb 18 May 18 Aug 18 Nov 18

Fed funds futures Latest FOMC projections

%

Source: Datastream, Credit Suisse Last data point: 13.02.2017

February 2017

Source: Bloomberg, Credit Suisse / IDC

Premium: Asian USD bonds offer higher yields than US

equivalents


Asian 5 year BBB rated bond premium over US equivalent (basis points)



0

100

200

300

400

500

600

700

800

Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 Jan 17

Asian 5yr BBB rated bond premium over US equivalent

127 bps

73 bps

- - - 10 year average

Focus Themes 3: China/HK Equity

22 February 2017

Source: Datastream, Credit Suisse / IDC

nach Update (+CH, DE, JP)

– no IDC, no update

- Quelldaten/IDC: wer?


Foreign trade: Export dependency of the emerging economies

Share of exports in GDP (2014 or 2015, in %)

Export share commodities Export share others



23 February 2017

Fundamentals: No hard landing in China amid economic

rebalancing

Last data point: 15.11.2016 Source: Datastream, Credit Suisse / IDC

4

8

12

16

20

24

2000 2005 2010 2015

GDP

Industrial production Retail sales

Growth (% YoY, 12-month moving average)



February 2017

49

50

51

52

53

54

55

56

57

6

7

8

9

10

11

12

13

14

2009 2010 2011 2012 2013 2014 2015 2016

China GDP growth China PMI manufacturing( r.h.s.)

Fundamentals: Growing evidence of economic

stabilization...




PMI expansion

February 2017

35

40

45

50

55

60

65

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

China PPI YoY China PMI manufacturing (r.h.s.)

Fundamentals: Growing evidence of economic

stabilization...

Source: Bloomberg, PMIPremium, Credit Suisse / IDC Last data point: 15.01.2017



PPI reflation

February 2017

-15

-10

-5

0

5

10

15

0

5

10

15

20

25

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

China PPI YoY % (RHS)

MSCI China 12M Fwd EPS growth (LHS)

IDC

Last data point: 31.01.2017 Source: Datastream, Credit Suisse / IDC

Optimistic

Pessimistic

MSCI China 12M Fwd EPS growth vs. PPI yoy%



Valuations: Earnings expected to grow by ~15% in 2017

26

February 2017

6

8

10

12

14

16

18

20

22

24

26

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

MSCI China Index MSCI World Index

Valuations: Potential for market re-rating... 12M forward P/E – MSCI China and MSCI World Index

Source: Bloomberg, PMIPremium, Credit Suisse / IDC Last data point: 01.02.2017

MSCI China Index is trading at a

~30% discount to global equities



February 2017

Technicals: Liquidity to flow into H-shares

Stock connect southbound flow

China insurance overseas investments

Prefer Financials and Infrastructure sectors

Stock connect related themes

− CNY hedge

− Dividend yields

− Chinese insurers

− A-H premium

Source: Investment Strategy and Research

The disclaimer at the end of this material also applies to this page 28

FX

29

February 2017

75

80

85

90

95

100

105

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

02/2014 08/2014 02/2015 08/2015 02/2016 08/2016 02/2017

USD: Increasingly supported by higher US yields Asian investors need to hedge against stronger USD risk

Source: Datastream, Credit Suisse / IDC Last data point: 10.02.2017

2-year swap spread (LHS)

(USD minus weighted DXY components)

DXY Index (RHS)



31 February 2017

60

70

80

90

100

110

120

130

140

2010 2011 2012 2013 2014 2015 2016

IDC

BIS CNY, EUR, JPY REER (indexed at 100 from start of

2010)


CNY

EUR

JPY

BIS CNY, EUR, JPY REER (indexed at 100 from start of 2010)



32 February 2017

Key Investment Views for 2017


Source: Credit Suisse

Fixed Income

• Investing in a Rising Interest Rate

Environment

• Asia USD investment grade, financials and

EM bonds

• Convertibles

Equities

• Stocks exposed to global infrastructure

investments

• China, Australia and Switzerland equities

• Global healthcare

FX

• Positive USD, JPY, GBP and NOK

• Weaker CNY and Asian currencies

• Prefer RUB, BRL, MXN and ZAR in EM

Alternative Investments

• Hedge funds – low beta strategies

• Private equity for illiquidity-tolerant investors

• Artificial Intelligence related investments

Asset allocation

33

Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. The disclaimer at the end of the material also applies to this page. February 2017

CS House View (3–6-month horizon)

Summary

1 Hard & local currency.

Japan China

Australia

Switzerland

Asia USD IG Corp

Emerging markets1

Convertibles

Financials

Low beta

USD/JPY

EUR/USD

- Currencies +

- Hedge Funds +

- 0 +

- Fixed Income +

- Equities +

USD/CAD

USD/CHF

GBP/USD

USD/CNY

USD/Asia

34

Govt bonds

February 15, 2017 35 Historical performance indications and financial market scenarios are not reliable indicators of current or future performance.

FX Forecasts THB vs. Majors/Asia

Source: Bloomberg, Credit Suisse / IDC

THB

Thai authorities not keen for further THB strength: Negative vs. USD

Currency

vs THB 14.02.2017 3M* 12M*

USD/THB 35.04 36.00 37.00

EUR/THB 37.01 37.08 37.00

GBP/THB 43.72 46.80 48.10

CHF/THB 34.70 34.98 33.94

JPY/THB (x100) 30.65 34.29 37.00

NOK/THB 4.16 4.26 4.35

SEK/THB 3.92 3.94 4.02

CAD/THB 26.78 26.28 27.01

AUD/THB 26.83 26.64 27.38

NZD/THB 25.06 25.20 25.90

SGD/THB 24.65 24.83 25.00*Forecast date: 10.02.2017

THB shows temporary strength Thailand’s trade outlook improved but still at subdued levels

View summary

Last Aug, when THB was trading strongly near 34.50 to the USD, Thai authorities voiced

concerns over the negative impact on THB strength. Most recently, after leaving its overnight repo rate unchanged at 1.5% as widely expected, the Bank of Thailand resumed verbal intervention and warned that "THB strength is not good for economy". As a result of temporary weakness in the USD, the THB had strengthened from 36 to 35 across Jan. So far, Thailand's economy had a promising start for the year, with a

noticeable export rebound. However, it remains unlikely if Thailand's growth is able to rebound strongly above the 3% level. THB is likely to gradually weaken again when USD strength returns. Point forecasts for USD/THB remain at 36.00 in 3M and 37.00 in 12M.

34.4

34.6

34.8

35.0

35.2

35.4

35.6

35.8

36.0

36.2

Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16

USD/THB

USD/THB

Last data point: 14.02.2017 Source: Bloomberg, Credit Suisse / IDC

-40

-20

0

20

40

60

80

Feb 05 Feb 07 Feb 09 Feb 11 Feb 13 Feb 15

Exports Imports

3M MA, % YoY

Last data point: 31.12.2016 Source: Bloomberg, Credit Suisse / IDC

36 February 2017

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37 February 2017

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Economy & Finance

Global Economy and Markets