bienville global review
BIENVILLE GLOBAL REVIEW Global Divergences: An Update September 2014
SUMMARY In Global Divergences, published August 2013, we noted that “following a synchronized global downturn in 2008 and a synchronized policy-induced recovery in 2009, significant divergences in growth rates and fiscal and monetary policy” were present in the global economy. Those divergences, which drove considerable disparities in performance across asset classes, continue today… • Although global growth has recently picked up, it is unevenly distributed around the world. The U.S. has led the overall improvement as deleveraging, fiscal drag and weather-related headwinds have waned • Global trade has remained subdued, however. As suggested a year ago, weak global trade is problematic for ‘surplus’ countries, such as China and Germany, who are more dependent on external demand. Deficit countries, such as the U.S., who have independent central banks and the ability to create their own own domestic demand, have experienced better growth. The U.S. equity market has also outperformed its developed market peers • The imbalances in the U.S. economy have largely adjusted, a process facilitated by the Federal Reserve’s stimulus. The government’s fiscal deficit is now sustainable, and a weakened dollar has improved external competiveness. Household debt relative to income has fallen while wealth has risen. Lower commodity prices have boosted real incomes • Eurozone growth has consistently disappointed, and inflation has fallen to 0.4%, far away from the ECB’s 2.0% target. In June, the ECB moved to negative deposit rates, and most recently, announced a program of asset purchases with the hope of lifting private sector credit (an unlikely outcome). The effect may be mostly felt through a weaker euro • The increase in the consumption tax in Japan temporarily hurt growth. Overall, Abenomics has disappointed. And it’s improbable that the BoJ will achieve their 2.0% inflation target by April 2015, but a weakening yen has reinvigorated investor interest (and the Nikkei) • China continues to underwhelm. Activity is weak, and property prices are falling • Elsewhere in EM, Brazil is suffering from stagflation ahead of an important presidential election, while the election of Modi has improved India’s prospects. Indian equities rallied, but unfortunately we missed it. The GCC countries continue to impress, rewarding investors. • Argentina remains a mess, but today’s dysfunction is setting up a phenomenal medium-term investment opportunity, which the market has begun discounting • Nearly $10 trillion in balance sheet expansion by central banks reduced volatility across equities, interest rates and currencies, encouraging risk taking. But recently, currency vol has spiked, potentially a harbinger of things to come. Regardless, country and asset class selection should remain important
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BIENVILLE CAPITAL MANAGEMENT 2
GLOBAL DIVERGENCES Since the publication of Global Divergences in August 2013, global equity performance has continued to diverge, rewarding country selection. The U.S. has delivered impressive returns—outpacing other developed markets—while select emerging and frontier markets have outperformed considerably… Global Equity Markets YTD Total Return (USD) 100%
1-Year Total Return (USD)
93%
Performance in Dubai, Argentina, Saudi Arabia and India have been driven by idiosyncratic situations, while the U.S. continues to benefit predominantly from multiple expansion
80%
60%
55%
55%
42%
40%
Across Europe, equity markets are negative in Germany, France and the UK, while Italy and Spain are only slightly positive
40% 31%
30%
30% 19%
20% 10%
8%
9%
9% 2%
2%
3%
0% -1%
-3%
-20%
-17%
-17%
-40% Dubai
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Argentina
Saudi Arabia
India
Emerging Markets
U.S.
China
Europe
Japan
Russia
BIENVILLE CAPITAL MANAGEMENT 3
GLOBAL DIVERGENCES Divergent asset price performance can be explained by divergent economic performance as well as differing policies, particularly monetary policy...
Global Macro Backdrop Country / Region
Growth
Fiscal Policy
Monetary Policy
US
Improving, but unspectacular
Neutral
Becoming less accommodative (tightening at the margin*)
Europe
Slow to negative growth
Tight
Becoming more expansive (e.g., TLTRO and ABS purchase)
China
Slowing
Neutral
Tight financial conditions (e.g., interbank liquidity)
Japan
Weak**
Tight, turning looser
Highly expansive through QQE
Emerging Markets
Slowing
Neutral
Neutral to Tightening
*The end of QE and the recent rise in the USD represent a marginal tightening in financial conditions **Growth contracted following the increase in the consumption tax in April
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BIENVILLE CAPITAL MANAGEMENT 4
GLOBAL DIVERGENCES In the U.S., growth has improved but remains unspectacular. Progress has been made in the labor market, though much of the decline in the official unemployment rate has come from a reduction in labor participation, partly due to demographics…
Unemployment (Official & U-6 Rate)
The U-6 measure adds ‘marginally attached’ persons (i.e., those who are neither working nor looking for work, but want a job) to the labor force
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BIENVILLE CAPITAL MANAGEMENT 5
GLOBAL DIVERGENCES Debt relative to household incomes has reverted to 2002 levels. Meanwhile, household net worth has risen, thanks largely to the rally in financial assets…
Household Debt-to-Income (LS, in %) vs. Household Net Worth (RS)
Net worth is rising…
…while debt-toincome is falling
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BIENVILLE CAPITAL MANAGEMENT 6
GLOBAL DIVERGENCES The U.S. has largely adjusted. This process has been ameliorated by Fed policy. Since 2008, the Fed’s balance sheet has expanded by nearly $4 trillion...
Federal Reserve Balance Sheet (in trillions)
QE3 announced
QE2 begins QE1 announced
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BIENVILLE CAPITAL MANAGEMENT 7
GLOBAL DIVERGENCES By design, QE has compressed volatility, encouraging risk taking across equities, interest rates and currencies. As G4 central banks are now pursuing disparate paths, currency vol has spiked. Whether rate and equity vol follow remains to be seen...
Equity, Interest Rate and Currency Volatility (in %)
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BIENVILLE CAPITAL MANAGEMENT 8
GLOBAL DIVERGENCES Higher risk assets, including equities, high yield bonds and emerging market debt, have all correlated closely to the expansion of the Fed’s balance sheet—a by-product of the ‘portfolio balance channel.’ As such, each time QE stopped, equities slumped… Federal Reserve Total Assets vs. S&P 500 Index
QE3 set to end
In the past 5 years, total assets held by the Fed, ECB, BOJ and BOE have risen by ~$850 billion annually. The cumulative increase has been ~$10 trillion
QE2 ends QE1 ends
QE2 ends (-19%)
QE1 ends (-16%)
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BIENVILLE CAPITAL MANAGEMENT 9
GLOBAL DIVERGENCES In Europe, after a recovery in 2013 and early 2014, purchasing manager indices have rolled over. PMIs in Italy and France are now at contractionary levels…
European PMIs by Country
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BIENVILLE CAPITAL MANAGEMENT 10
GLOBAL DIVERGENCES In Italy, Spain and Portugal, consumer prices are falling, a worrisome development. Deflation hinders economic recovery and further increases the burden of existing debt…
European Inflation by Country As a response to deflationary pressures, the ECB took deposit rates to negative territory and announced both LTROs and an ABS purchase program (i.e., QE-lite) The program should ramp up gradually and is intended to take the ECB’s balance sheet back to previous peak levels of around €3 trillion, from €2 trillion today The ECB expects participation of ~€450-850bn in the TLTRO program and asset purchases of €150-550bn
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 11
GLOBAL DIVERGENCES European yields have ‘re-converged’ from the sovereign debt crisis in 2011 and 2012. German bund yields are at all-time lows and French OATs are yielding half of 10-year Treasuries. Highly-indebted Portugal is borrowing below 4.0%...
European Sovereign Bond Yields by Country QE won’t lower yields much— as they’re already low—but could: •
•
Divergence…
Re-convergence…
Cause other assets to rise via portfolio balance channel; and Lower the currency, providing stimulus and boosting inflation expectations somewhat
However, because most European trade remains inside Europe, a growth boost from a lower euro will be limited
Convergence…
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BIENVILLE CAPITAL MANAGEMENT 12
GLOBAL DIVERGENCES The stock of debt of nearly all European countries is higher today than the levels that preceded and instigated the crisis. A recession or deflation would be problematic for countries such as Portugal and Italy, hence the ECB’s recent actions…
Government Debt to GDP
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Country
2007
2011
2013
Change Since 2011
Portugal
68.4%
108.2%
129.0%
+19%
Italy
103.3%
120.7%
132.6%
+10%
Ireland
24.9%
104.1%
123.7%
+19%
Greece
107.4%
170.3%
175.1%
+3%
Spain
36.3%
70.5%
93.9%
+34%
France
64.2%
86.2%
93.5%
+9%
Germany
65.2%
80.0%
78.4%
-2%
Source: EuroStat
Despite a default and restructuring, Greece’s debtto-GDP remains very high…
BIENVILLE CAPITAL MANAGEMENT 13
GLOBAL DIVERGENCES Japanese consumption slumped following the increase in the consumption tax, hitting overall growth, but is expected to rebound…
Japan Household Consumption, QoQ
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BIENVILLE CAPITAL MANAGEMENT 14
GLOBAL DIVERGENCES The yen has finally broken out from this past year’s trading range and is testing ¥110…
USD/JPY Exchange Rate In April 2013, the BOJ implemented “Quantitative & Qualitative Easing,” or QQE
The BOJ has a stated objective of reaching 2% inflation by April 2015, a goal it’s unlikely to meet
The monetary base has been increasing by ¥70 trillion per year (versus the Fed, which is tapering monthly asset purchases to zero)
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BIENVILLE CAPITAL MANAGEMENT 15
GLOBAL DIVERGENCES Chinese economic growth continues to be subpar. The major manufacturing PMI is near 50—the level separating expansion versus contraction. The new export orders PMI is also weak…
China Manufacturing and New Export Orders See China’s Dangerous Game, February 2012 & June 2013, and China’s Paradox, October 2012
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BIENVILLE CAPITAL MANAGEMENT 16
GLOBAL DIVERGENCES Tight financial conditions are also taking a toll on Chinese growth. Loan growth has fallen to the slowest pace in several years. Deposit growth has been sluggish as well, constraining banking system liquidity for the foreseeable future…
China Loan & Deposit Growth (%)
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BIENVILLE CAPITAL MANAGEMENT 17
GLOBAL DIVERGENCES Other categories of bank credit, including wealth management products, have also been weak. This suggests tougher credit conditions for related industries, primarily real estate where construction activity is weak and prices are falling…
Select China Social Financing Categories (CNY)
Strong credit growth via ‘wealth management products’ supports the real estate boom…
It’s likely that measures to support China’s weak real estate sector are forthcoming
Tightness in credit implies further weakness in real estate and infrastructure investment, where excesses are evident
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BIENVILLE CAPITAL MANAGEMENT 18
GLOBAL DIVERGENCES India’s industrial production re-accelerated after the election of Narendra Modi to Prime Minister…
India Industrial Production Growth (YoY)
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BIENVILLE CAPITAL MANAGEMENT 19
GLOBAL DIVERGENCES Slower growth over the past few months combined with a lower currency has resulted in the narrowing of India’s current account deficit relative to a year ago, a necessary condition to put the economy on firmer footing…
India Current Account and Trade Balance (USD, in billions) India has suffered from a lack of investment and policy paralysis due to scandals and mismanagement within the ruling Congress Party. Modi, the head of the opposition BJP party, is viewed as investor-friendly by the markets His party's win, with a full majority in the Parliament, should lead to a new investment cycle and promarket reforms, which could boost India's growth rate
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BIENVILLE CAPITAL MANAGEMENT 20
GLOBAL DIVERGENCES Reflecting these improving conditions, the Indian market has experienced a strong rally over the past year as it has gained nearly 50% from August’s lows. Unfortunately, we missed it…
BSE Sensex 30
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BIENVILLE CAPITAL MANAGEMENT 21
GLOBAL DIVERGENCES By contrast, Brazil’s performance has been abysmal and its economy recently entered into a recession. Credit growth has decelerated to the lowest level since 2004, while industrial production is at the worst levels since 2008. Clearly, further adjustment is needed to return Brazil to its formerly-high levels of economic growth… Brazil Outstanding Loans and Industrial Production (YoY) The current recession is accompanied by high inflation that is close to the central bank’s upper limit, as well as a high current account deficit
See Brazil: In Need of a New Growth Model, October 2013
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BIENVILLE CAPITAL MANAGEMENT 22
GLOBAL DIVERGENCES Brazil’s poor economic performance has translated into low approval ratings for President Dilma Rousseff. The market has rallied over the past several months on the prospect of a more market-friendly challenger, Marina Silva, winning the election in October… MSCI Brazil Index
Recent polling shows Marina Silva nearly tied with Dilma in the presidential election to be held on October 5th, which would force a run-off three weeks later…
In that run-off, polling suggests Silva would receive 46% of the vote versus 44% to Dilma
Should Rousseff win again, or a Silva victory not translate into substantial policy change, the market may continue to give back its recent gains
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BIENVILLE CAPITAL MANAGEMENT 23
GLOBAL DIVERGENCES Loan growth in the UAE has increased after several years of stagnation. Corporate earnings in Dubai have been growing between 35% and 75% over the past two years, catalyzing equities…
United Arab Emirates Loans & Deposit Growth (%) Strong deposit growth over the past several years has kept the banking system liquid, despite the Dubai World default and restructuring of 2010
See The GCC: Diversifying from Energy, October 2013
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BIENVILLE CAPITAL MANAGEMENT 24
GLOBAL DIVERGENCES Saudi Arabia’s stock market has surged on the back of strong economic performance and the announced opening of the market to foreigners, while corporate earnings have been steadily growing at mid-to-high single digit rates…
Tadawul All Share TASI Index
Saudi authorities announce market to open to foreigners in mid-2015
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BIENVILLE CAPITAL MANAGEMENT 25
DISCLAIMER The Bienville Global Review (the “Presentation”) is a distribution which highlights the research of Bienville Capital Management, LLC (“Bienville”) in different areas of interest across the macro landscape. Bienville believes that understanding the global macroeconomic backdrop is a prerequisite to efficiently allocating capital. The Presentation is not intended to be an all-encompassing review of the financial markets. Rather, it should serve as a concise summary, which provides clients with an update of Bienville’s areas of focus within its research process. We hope that the Presentation will create an ongoing dialogue with our investors on the global dynamics that drive the financial markets. The topics covered in the Presentation may or may not be related to Bienville’s active positions or investment strategies. The content of the Presentation includes forward-looking statements, estimates, projections, assumptions, beliefs and opinions (collectively, “Projections”), which may prove to be substantially inaccurate or based upon flawed reasoning and assumptions. Moreover, Projections are inherently subject to significant risks and uncertainties beyond the control of Bienville and its affiliates, including Bienville Capital Partners, LP, Bienville Capital Partners Offshore, Ltd. and Gulf Coast Opportunities Fund, LP (and collectively with other private investment funds that Bienville or its affiliates may form and manage in the future, the “Funds”). The information contained in the Presentation regarding Bienville and the Funds has been prepared solely for illustration and discussion purposes. Except where otherwise indicated, the Presentation speaks as of the date hereof, and Bienville undertakes no obligation to correct, update, or revise the Presentation, or to otherwise provide any additional materials. Although Bienville believes the Presentation is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, Bienville makes no representation or warranty, express or implied, as to the accuracy or completeness of the Presentation or any other written or oral communication it makes with respect to the tactical positions or investment strategies described herein. Bienville expressly disclaims any liability relating to the Presentation or such communications (or any inaccuracies or omissions herein). The Presentation merely constitutes an opinion or belief based upon the information set forth herein, which opinion or beliefs may prove to be wrong. The information and opinions contained in the Presentation are based on public information. Neither Bienville nor the Funds makes any commitment or undertaking to take or refrain from taking any investment decision or other action with respect to the tactical positions or investment strategies described herein. Bienville may change its views about the tactical positions and investment strategies described in the Presentation at any time, for any reason. Bienville and the Funds may buy, sell, or otherwise change the form or substance of any of their investments at any time. Bienville disclaims any obligation to notify any recipient of this Presentation of any such changes. The Presentation is not investment advice, or a recommendation or solicitation to buy or sell any securities mentioned herein or otherwise. If any offer of interests in any Fund is made, it shall be pursuant to one or more definitive private placement memoranda for such Fund which would contain material information not contained herein and which shall supersede this information in its entirety. Any decision to invest in a Fund should be made after reviewing the definitive private placement memoranda for the Fund, conducting such investigations as the investor deems necessary and consulting the investor’s own investment, legal, accounting, and tax advisors in order to make an independent determination of the suitability and consequences of an investment in the Fund. This Presentation and its contents are confidential, and proprietary information of Bienville, and any reproduction of this information, in whole or in part, without the prior written consent of Bienville is prohibited. For additional information about Bienville, including fees and services, please see our disclosure statement as set forth on Form ADV. Additional information is available from Bienville upon request.
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BIENVILLE CAPITAL MANAGEMENT 26
SUMMARY In Global Divergences, published August 2013, we noted that “following a synchronized global downturn in 2008 and a synchronized policy-induced recovery in 2009, significant divergences in growth rates and fiscal and monetary policy” were present in the global economy. Those divergences, which drove considerable disparities in performance across asset classes, continue today… • Although global growth has recently picked up, it is unevenly distributed around the world. The U.S. has led the overall improvement as deleveraging, fiscal drag and weather-related headwinds have waned • Global trade has remained subdued, however. As suggested a year ago, weak global trade is problematic for ‘surplus’ countries, such as China and Germany, who are more dependent on external demand. Deficit countries, such as the U.S., who have independent central banks and the ability to create their own own domestic demand, have experienced better growth. The U.S. equity market has also outperformed its developed market peers • The imbalances in the U.S. economy have largely adjusted, a process facilitated by the Federal Reserve’s stimulus. The government’s fiscal deficit is now sustainable, and a weakened dollar has improved external competiveness. Household debt relative to income has fallen while wealth has risen. Lower commodity prices have boosted real incomes • Eurozone growth has consistently disappointed, and inflation has fallen to 0.4%, far away from the ECB’s 2.0% target. In June, the ECB moved to negative deposit rates, and most recently, announced a program of asset purchases with the hope of lifting private sector credit (an unlikely outcome). The effect may be mostly felt through a weaker euro • The increase in the consumption tax in Japan temporarily hurt growth. Overall, Abenomics has disappointed. And it’s improbable that the BoJ will achieve their 2.0% inflation target by April 2015, but a weakening yen has reinvigorated investor interest (and the Nikkei) • China continues to underwhelm. Activity is weak, and property prices are falling • Elsewhere in EM, Brazil is suffering from stagflation ahead of an important presidential election, while the election of Modi has improved India’s prospects. Indian equities rallied, but unfortunately we missed it. The GCC countries continue to impress, rewarding investors. • Argentina remains a mess, but today’s dysfunction is setting up a phenomenal medium-term investment opportunity, which the market has begun discounting • Nearly $10 trillion in balance sheet expansion by central banks reduced volatility across equities, interest rates and currencies, encouraging risk taking. But recently, currency vol has spiked, potentially a harbinger of things to come. Regardless, country and asset class selection should remain important
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 2
GLOBAL DIVERGENCES Since the publication of Global Divergences in August 2013, global equity performance has continued to diverge, rewarding country selection. The U.S. has delivered impressive returns—outpacing other developed markets—while select emerging and frontier markets have outperformed considerably… Global Equity Markets YTD Total Return (USD) 100%
1-Year Total Return (USD)
93%
Performance in Dubai, Argentina, Saudi Arabia and India have been driven by idiosyncratic situations, while the U.S. continues to benefit predominantly from multiple expansion
80%
60%
55%
55%
42%
40%
Across Europe, equity markets are negative in Germany, France and the UK, while Italy and Spain are only slightly positive
40% 31%
30%
30% 19%
20% 10%
8%
9%
9% 2%
2%
3%
0% -1%
-3%
-20%
-17%
-17%
-40% Dubai
CONFIDENTIAL
Argentina
Saudi Arabia
India
Emerging Markets
U.S.
China
Europe
Japan
Russia
BIENVILLE CAPITAL MANAGEMENT 3
GLOBAL DIVERGENCES Divergent asset price performance can be explained by divergent economic performance as well as differing policies, particularly monetary policy...
Global Macro Backdrop Country / Region
Growth
Fiscal Policy
Monetary Policy
US
Improving, but unspectacular
Neutral
Becoming less accommodative (tightening at the margin*)
Europe
Slow to negative growth
Tight
Becoming more expansive (e.g., TLTRO and ABS purchase)
China
Slowing
Neutral
Tight financial conditions (e.g., interbank liquidity)
Japan
Weak**
Tight, turning looser
Highly expansive through QQE
Emerging Markets
Slowing
Neutral
Neutral to Tightening
*The end of QE and the recent rise in the USD represent a marginal tightening in financial conditions **Growth contracted following the increase in the consumption tax in April
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 4
GLOBAL DIVERGENCES In the U.S., growth has improved but remains unspectacular. Progress has been made in the labor market, though much of the decline in the official unemployment rate has come from a reduction in labor participation, partly due to demographics…
Unemployment (Official & U-6 Rate)
The U-6 measure adds ‘marginally attached’ persons (i.e., those who are neither working nor looking for work, but want a job) to the labor force
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 5
GLOBAL DIVERGENCES Debt relative to household incomes has reverted to 2002 levels. Meanwhile, household net worth has risen, thanks largely to the rally in financial assets…
Household Debt-to-Income (LS, in %) vs. Household Net Worth (RS)
Net worth is rising…
…while debt-toincome is falling
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 6
GLOBAL DIVERGENCES The U.S. has largely adjusted. This process has been ameliorated by Fed policy. Since 2008, the Fed’s balance sheet has expanded by nearly $4 trillion...
Federal Reserve Balance Sheet (in trillions)
QE3 announced
QE2 begins QE1 announced
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 7
GLOBAL DIVERGENCES By design, QE has compressed volatility, encouraging risk taking across equities, interest rates and currencies. As G4 central banks are now pursuing disparate paths, currency vol has spiked. Whether rate and equity vol follow remains to be seen...
Equity, Interest Rate and Currency Volatility (in %)
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 8
GLOBAL DIVERGENCES Higher risk assets, including equities, high yield bonds and emerging market debt, have all correlated closely to the expansion of the Fed’s balance sheet—a by-product of the ‘portfolio balance channel.’ As such, each time QE stopped, equities slumped… Federal Reserve Total Assets vs. S&P 500 Index
QE3 set to end
In the past 5 years, total assets held by the Fed, ECB, BOJ and BOE have risen by ~$850 billion annually. The cumulative increase has been ~$10 trillion
QE2 ends QE1 ends
QE2 ends (-19%)
QE1 ends (-16%)
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 9
GLOBAL DIVERGENCES In Europe, after a recovery in 2013 and early 2014, purchasing manager indices have rolled over. PMIs in Italy and France are now at contractionary levels…
European PMIs by Country
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 10
GLOBAL DIVERGENCES In Italy, Spain and Portugal, consumer prices are falling, a worrisome development. Deflation hinders economic recovery and further increases the burden of existing debt…
European Inflation by Country As a response to deflationary pressures, the ECB took deposit rates to negative territory and announced both LTROs and an ABS purchase program (i.e., QE-lite) The program should ramp up gradually and is intended to take the ECB’s balance sheet back to previous peak levels of around €3 trillion, from €2 trillion today The ECB expects participation of ~€450-850bn in the TLTRO program and asset purchases of €150-550bn
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 11
GLOBAL DIVERGENCES European yields have ‘re-converged’ from the sovereign debt crisis in 2011 and 2012. German bund yields are at all-time lows and French OATs are yielding half of 10-year Treasuries. Highly-indebted Portugal is borrowing below 4.0%...
European Sovereign Bond Yields by Country QE won’t lower yields much— as they’re already low—but could: •
•
Divergence…
Re-convergence…
Cause other assets to rise via portfolio balance channel; and Lower the currency, providing stimulus and boosting inflation expectations somewhat
However, because most European trade remains inside Europe, a growth boost from a lower euro will be limited
Convergence…
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 12
GLOBAL DIVERGENCES The stock of debt of nearly all European countries is higher today than the levels that preceded and instigated the crisis. A recession or deflation would be problematic for countries such as Portugal and Italy, hence the ECB’s recent actions…
Government Debt to GDP
CONFIDENTIAL
Country
2007
2011
2013
Change Since 2011
Portugal
68.4%
108.2%
129.0%
+19%
Italy
103.3%
120.7%
132.6%
+10%
Ireland
24.9%
104.1%
123.7%
+19%
Greece
107.4%
170.3%
175.1%
+3%
Spain
36.3%
70.5%
93.9%
+34%
France
64.2%
86.2%
93.5%
+9%
Germany
65.2%
80.0%
78.4%
-2%
Source: EuroStat
Despite a default and restructuring, Greece’s debtto-GDP remains very high…
BIENVILLE CAPITAL MANAGEMENT 13
GLOBAL DIVERGENCES Japanese consumption slumped following the increase in the consumption tax, hitting overall growth, but is expected to rebound…
Japan Household Consumption, QoQ
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 14
GLOBAL DIVERGENCES The yen has finally broken out from this past year’s trading range and is testing ¥110…
USD/JPY Exchange Rate In April 2013, the BOJ implemented “Quantitative & Qualitative Easing,” or QQE
The BOJ has a stated objective of reaching 2% inflation by April 2015, a goal it’s unlikely to meet
The monetary base has been increasing by ¥70 trillion per year (versus the Fed, which is tapering monthly asset purchases to zero)
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 15
GLOBAL DIVERGENCES Chinese economic growth continues to be subpar. The major manufacturing PMI is near 50—the level separating expansion versus contraction. The new export orders PMI is also weak…
China Manufacturing and New Export Orders See China’s Dangerous Game, February 2012 & June 2013, and China’s Paradox, October 2012
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 16
GLOBAL DIVERGENCES Tight financial conditions are also taking a toll on Chinese growth. Loan growth has fallen to the slowest pace in several years. Deposit growth has been sluggish as well, constraining banking system liquidity for the foreseeable future…
China Loan & Deposit Growth (%)
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 17
GLOBAL DIVERGENCES Other categories of bank credit, including wealth management products, have also been weak. This suggests tougher credit conditions for related industries, primarily real estate where construction activity is weak and prices are falling…
Select China Social Financing Categories (CNY)
Strong credit growth via ‘wealth management products’ supports the real estate boom…
It’s likely that measures to support China’s weak real estate sector are forthcoming
Tightness in credit implies further weakness in real estate and infrastructure investment, where excesses are evident
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 18
GLOBAL DIVERGENCES India’s industrial production re-accelerated after the election of Narendra Modi to Prime Minister…
India Industrial Production Growth (YoY)
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 19
GLOBAL DIVERGENCES Slower growth over the past few months combined with a lower currency has resulted in the narrowing of India’s current account deficit relative to a year ago, a necessary condition to put the economy on firmer footing…
India Current Account and Trade Balance (USD, in billions) India has suffered from a lack of investment and policy paralysis due to scandals and mismanagement within the ruling Congress Party. Modi, the head of the opposition BJP party, is viewed as investor-friendly by the markets His party's win, with a full majority in the Parliament, should lead to a new investment cycle and promarket reforms, which could boost India's growth rate
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 20
GLOBAL DIVERGENCES Reflecting these improving conditions, the Indian market has experienced a strong rally over the past year as it has gained nearly 50% from August’s lows. Unfortunately, we missed it…
BSE Sensex 30
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 21
GLOBAL DIVERGENCES By contrast, Brazil’s performance has been abysmal and its economy recently entered into a recession. Credit growth has decelerated to the lowest level since 2004, while industrial production is at the worst levels since 2008. Clearly, further adjustment is needed to return Brazil to its formerly-high levels of economic growth… Brazil Outstanding Loans and Industrial Production (YoY) The current recession is accompanied by high inflation that is close to the central bank’s upper limit, as well as a high current account deficit
See Brazil: In Need of a New Growth Model, October 2013
CONFIDENTIAL
BIENVILLE CAPITAL MANAGEMENT 22
GLOBAL DIVERGENCES Brazil’s poor economic performance has translated into low approval ratings for President Dilma Rousseff. The market has rallied over the past several months on the prospect of a more market-friendly challenger, Marina Silva, winning the election in October… MSCI Brazil Index
Recent polling shows Marina Silva nearly tied with Dilma in the presidential election to be held on October 5th, which would force a run-off three weeks later…
In that run-off, polling suggests Silva would receive 46% of the vote versus 44% to Dilma
Should Rousseff win again, or a Silva victory not translate into substantial policy change, the market may continue to give back its recent gains
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GLOBAL DIVERGENCES Loan growth in the UAE has increased after several years of stagnation. Corporate earnings in Dubai have been growing between 35% and 75% over the past two years, catalyzing equities…
United Arab Emirates Loans & Deposit Growth (%) Strong deposit growth over the past several years has kept the banking system liquid, despite the Dubai World default and restructuring of 2010
See The GCC: Diversifying from Energy, October 2013
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GLOBAL DIVERGENCES Saudi Arabia’s stock market has surged on the back of strong economic performance and the announced opening of the market to foreigners, while corporate earnings have been steadily growing at mid-to-high single digit rates…
Tadawul All Share TASI Index
Saudi authorities announce market to open to foreigners in mid-2015
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