1 MAY 2013 INSIDE
Strategy Update:
2
Weekly Feature
7
What We’re Watching
9
Weekly Analytics
11
- Positioning
11
- Sentiment
12
CONTRIBUTORS
Kerry Duce Senior Strategist +61 2 9227 1101
Kerry.Duce@anz.com
Warren Hogan Chief Economist +61 2 9227 1562
Warren.Hogan@anz.com
Tom Kenny Senior Economist, +61 2 9227 1741
Tom.Kenny@anz.com
Andrew McManus Economist, +61 2 9227 1742
Andrew.McManus@anz.com
MACRO STRATEGY GLOBAL ECONOMICS & STRATEGY
ANZ RESEARCH
STRATEGY FEATURE: INVESTING IN AN EXTENDED LOW NOMNINAL GDP GROWTH ENVIRONMENT
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Our core investment view is that the global economy remains in an extended stable nominal GDP growth environment anchored by G3 central banks. This environment will continue to support global yield convergence with risks absorbed by central banks. The ANZ baseline is that cheap financing will support a synchronised recovery in global capital goods spending towards end 2013.
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To date inflation expectations have remained anchored and this has supported the effectiveness of central bank policy. A sustained behavioural shift to income over growth could become self-reinforcing if capital spending is shelved. Growth could then skid below the nominal GDP zone that supports riskier yield exposures.
WEEKLY FEATURE: EURO ZONE CREDIT CONDITIONS EASE BUT DEMAND SLUMPS FURTHER
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The latest ECB lending survey (released 24 April) highlights a modest improvement in lending standards, albeit they remain restrictive. The survey also shows that the negative impact from the sovereign crisis on bank funding conditions has largely faded. This is where the good news ends.
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Poor growth prospects remain a major deterrent to credit demand (from households and enterprises) in the euro zone (EZ). The lack of credit demand points to further contraction in the region. This poor prognosis along with the disappointing read on Germany’s PMI in April should see the ECB ease policy when it meets on 2 May — we expect a 25bp cut in the key policy rate to 0.50%.
WHAT WE’RE WATCHING
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The US labour market continues to be of great importance for Fed policy expectations and financial markets. We expect non-farm payrolls grew by 130k (private: +150k) and the unemployment rate remained at 7.6% in April.
POSITIONING/SENTIMENT
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The consolidation in economic momentum through March and April has resulted in a modest easing in risk appetite. In particular, there have been corrections to commodity prices, while high yield spreads and non-commodity based equities remain relatively well supported.
CHART OF THE WEEK
FIGURE 1. AUSTRALIAN EQUITY RETURNS SHIFT FROM COMMODITY INFLATION TO ASSET INFLATION AS QE RAMPED UP
Sources: MSCI, Bloomberg, Thomson Reuters Datastream, ANZ
ANZ Macro Strategy / 1 May 2013 / 2 of 14
STRATEGY UPDATE
AN EXTENDED NOMINAL GDP ZONE: INCOME TRUMPS GROWTH
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Our core investment view is that global nominal GDP will remain stable through an extended moderate growth cycle anchored by sustained G3 policy support.
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Currently fiscal tightening and easing global growth momentum has lifted disinflation/deflation risks above inflation.
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The ANZ producer price monitor has corrected much more sharply than our lead indicator. In level terms ANZ producer prices are approaching the July 2012 cycle low when the ANZ lead indicator was substantially lower than at present.
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In this environment yield convergence will be sustained and income will continue to trump growth. This environment could become reinforcing if a synchronized lift in global growth does not unfold by 2015.
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Therefore disinflation/deflation remains the embedded risk and will provide the catalyst for additional policy support.
INVESTING IN AN EXTENDED NOMINAL GDP ZONE: INCOME WILLTRUMP GROWTH
Our core investment view is that
global nominal GDP will remain stable through an extended moderate growth cycle anchored by G3 policy support.
Currently we consider disinflation/deflation risks are moderately larger than inflation, although we see neither risk overwhelming steady and stable nominal growth over the foreseeable future. In this environment yield convergence will be sustained and companies (including growth companies) have an incentive to shift to dividends. The current loss of momentum in our ANZ global lead indicator is reinforcing the preference for income over growth. Clearly the risk is that this environment becomes reinforcing as capital spending plans are wound back to fund dividends. In essence central banks have postponed the adjustment by supporting an extended period of steady nominal GDP growth. The risk is that nominal growth skids below the lower bound of nominal GDP where inflation expectations are revised down.
WILL FINANCIAL RISK APPETITE REMAIN RESILIENT AGAIN IN 2013?
Despite the sharp loss of global growth momentum through 2012 ANZ global risk appetite
inflation expectations remained very resilient through the slow down.
However, while financial asset prices continued to surge through 2012 measures of producer and commodity prices eased sharply with the cycle (Figure 2). In short, financial risk has in part disconnected from the cycle on central bank policy support. The risk is that support becomes embedded without generating a synchronised recovery. Currently our ANZ global lead indicators are easing and (as was the case through 2012) our estimate of financial risk appetite remains buoyant. However, while producer and commodity prices declined through 2012 currently they are declining much more sharply than the cycle suggesting that disinflationary forces could be gaining traction. Finally, the key challenge is to identify when the current super cycle in financial asset prices peaks. We see two environments that would drive a peak:
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A sustained lift in inflation as growth finally lifts to a sustained synchronised recovery; or
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A sustained period of disinflation that edges towards deflation as nominal GDP falls to the lower bound of the zone. To date inflation expectations have remained anchored despite large output gaps and rising unemployment. It has been the
stability of inflation expectations and relatively steady nominal growth that remains the defining feature of the current economic environment.
FIGURE 2. FINANCIAL ASSETS REMAIN RESILIENT DESPITE LOSS OF ECONOMIC MOMENTUM
Sources: Markit, Bloomberg, Thomson Reuters Datastream, ANZ
AUSTRALIA: A MICROCOSM OF GLOBAL CAPITAL MARKETS
The
resilience of financial risk appetite and inflation expectations through an extended period of steady nominal growth (as was the case in 2012)
remains the key driver of markets. In
ANZ Macro Strategy / 1 May 2013 / 3 of 14
STRATEGY UPDATE
our strategy feature this week we analyse this thematic through the prism of Australian capital markets (the safe high yielding Australian equity and corporate bond markets). The Australian equity market is essentially a barbell between global materials (mining) companies (leveraged to commodities via Chinese growth) and AA rated global banks (high quality financial assets that offer elevated safe yield). The Australian dollar clearly straddles both asset classes, although since the Q3 2012 and the Fed open ended asset purchase program it appears to be tilting more towards safe financial yield rather than commodity inflation. Overall in our strategy feature this week we identify the core theme driving markets as the
continued transition from the commodity super cycle to the yield super cycle anchored by a stable moderate nominal GDP growth cycle
. We date the peak in the commodity super cycle in late 2011 (likely earlier if we abstract from the large Chinese fiscal stimulus). Since late 2011 we have observed two commodity min-cycles. However, the peak in each mini cycle has been slightly lower than the previous high while mini cycle troughs tend to be lower. In contrast to the steady unwind of the commodity super cycle since late 2011, the
financial asset super cycle (the global race to the bottom in yields) has printed each peak above the previous high
while mini cycle lows have been shallower.
AUSTRALIAN EQUITIES: THE GREAT DIVIDE BETWEEN INCOME AND GROWTH WIDENS
We identify two structural shifts in the Australian equity market (and global capital markets) post the global financial crisis. 1.
In
late 2011 we observed a large structural capitulation in mining equity stocks
that marked the peak of the commodity super cycle. Subsequent to the capitulation we have observed two mining mini cycles in late 2011 and again in late 2012. Both were a sell opportunity. 2.
Since Q3 2012 (Fed announces open ended asset purchases) we have observed a relentless shift to global yield compression
reflected in the Australian bond and equity markets. Each dip has marked a buy on the dip in yield. Subsequent to the collapse in the mining index in late 2011 returns to the materials sector lagged the returns to financial assets through to September 2012. However, since September 2012 when the
Fed announced its open ended asset purchases the returns to mining have fallen sharply while the returns to the financial sector have surged
. Clearly the market does not expect that open ended Fed purchases will fuel commodity inflation (yet). Figure 3 clearly shows that since April 2012 the total return Australian financial stocks have surged by some 40%. Over the same period returns to mining and materials have slumped by 15%. The gap between financials and mining has widened sharply since Q3 2012 when the Fed announce its open ended asset purchase program. In
short, the race to the bottom in global yields spurred by the Fed and now the Bank of Japan has trumped the commodity super cycle since late 2011
.
FIGURE 3. LARGE DIVERGENCE BETWEEN FINANCIAL AND MINING SECTORS BUILDS
Sources: MSCI, Thomson Reuters Datastream, ANZ
In figure 4 we plot the relative performance of the Australian materials sector to financials against base metals (in USD) and the Australian US dollar cross since April 2011. This chart clearly shows the collapse in materials and base metals in August 2011 was largely ignored by the Australian dollar that has disconnected from commodities and is trading more in line with high safe yield. Subsequently, we have observed two commodity mini-cycles with lower peaks in December 2011 and December 2012. Both cycles were truncated.