ANZ Macro Strategy / 1 May 2013 / 2 of 14
AN EXTENDED NOMINAL GDP ZONE: INCOMETRUMPS GROWTH
Our core investment view is that global nominalGDP will remain stable through an extendedmoderate growth cycle anchored by sustained G3policy support.
Currently fiscal tightening and easing global growthmomentum has lifted disinflation/deflation risksabove inflation.
The ANZ producer price monitor has corrected muchmore sharply than our lead indicator. In level termsANZ producer prices are approaching the July 2012cycle low when the ANZ lead indicator wassubstantially lower than at present.
In this environment yield convergence will besustained and income will continue to trump growth.This environment could become reinforcing if asynchronized lift in global growth does not unfold by2015.
Therefore disinflation/deflation remains theembedded risk and will provide the catalyst foradditional policy support.
INVESTING IN AN EXTENDED NOMINAL GDPZONE: INCOME WILLTRUMP GROWTH
Our core investment view is that
global nominalGDP will remain stable through an extendedmoderate growth cycle anchored by G3 policysupport.
Currently we consider disinflation/deflationrisks are moderately larger than inflation, althoughwe see neither risk overwhelming steady and stablenominal growth over the foreseeable future.In this environment yield convergence will besustained and companies (including growthcompanies) have an incentive to shift to dividends.The current loss of momentum in our ANZ global leadindicator is reinforcing the preference for income overgrowth.Clearly the risk is that this environment becomesreinforcing as capital spending plans are wound backto fund dividends. In essence central banks havepostponed the adjustment by supporting an extendedperiod of steady nominal GDP growth. The risk isthat nominal growth skids below the lower bound of nominal GDP where inflation expectations are reviseddown.
WILL FINANCIAL RISK APPETITE REMAINRESILIENT AGAIN IN 2013?
Despite the sharp loss of global growth momentumthrough 2012 ANZ global risk appetite
inflationexpectations remained very resilient throughthe slow down.
However, while financial assetprices continued to surge through 2012 measures of producer and commodity prices eased sharply withthe cycle (Figure 2). In short, financial risk has inpart disconnected from the cycle on central bankpolicy support. The risk is that support becomesembedded without generating a synchronisedrecovery.Currently our ANZ global lead indicators are easingand (as was the case through 2012) our estimate of financial risk appetite remains buoyant. However,while producer and commodity prices declinedthrough 2012 currently they are declining much moresharply than the cycle suggesting that disinflationaryforces could be gaining traction.Finally, the key challenge is to identify when thecurrent super cycle in financial asset prices peaks.We see two environments that would drive a peak:
A sustained lift in inflation as growth finallylifts to a sustained synchronised recovery; or
A sustained period of disinflation that edgestowards deflation as nominal GDP falls to thelower bound of the zone.To date inflation expectations have remainedanchored despite large output gaps and risingunemployment. It has been the
stability of inflation expectations and relatively steadynominal growth that remains the definingfeature of the current economic environment.
FIGURE 2. FINANCIAL ASSETS REMAIN RESILIENTDESPITE LOSS OF ECONOMIC MOMENTUM
Sources: Markit, Bloomberg, Thomson Reuters Datastream, ANZ
AUSTRALIA: A MICROCOSM OF GLOBAL CAPITALMARKETS
resilience of financial risk appetite andinflation expectations through an extendedperiod of steady nominal growth (as was thecase in 2012)
remains the key driver of markets. In