presentation 2017 macro themes

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Bank of Tokyo-Mitsubishi UFJ A member of MUFG, a global financial group Global – Seven Themes to Watch in 2017 Amir Khan Economic Research | London Desk February 2017 *Data sourced from Macrobond & IMF/World Bank unless otherwise stated

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Page 1: Presentation   2017 macro themes

Bank of Tokyo-Mitsubishi UFJ A member of MUFG, a global financial group

Global – Seven Themes to Watch in 2017

Amir KhanEconomic Research | London Desk

February 2017*Data sourced from Macrobond & IMF/World Bank unless otherwise stated

Page 2: Presentation   2017 macro themes

Coverage

► Recap of 2016

► Outline of 2017 Themes

► Key risks/take-aways

2 Global – Seven Themes to Watch in 2017 | February 2017

Page 3: Presentation   2017 macro themes

3 Global – Seven Themes to Watch in 2017 | February 2017

Recap of 2016

Page 4: Presentation   2017 macro themes

2016 – All about surprises

► 2016 was a year that populism & political risk came to haunt the developed market economies, capped by the Brexit vote & the election of Donald Trump.

► Economic growth – rather than accelerating – relapsed somewhat, with overall growth falling below the post-crisis average of around 3.2%.

► Markets continued to charge ahead with the rally in risk assets broadening out to other assets classes e.g. commodities.

4 Global – Seven Themes to Watch in 2017 | February 2017

Page 5: Presentation   2017 macro themes

5 Global – Seven Themes to Watch in 2017 | February 2017

2017 Themes

Page 6: Presentation   2017 macro themes

Setting the scene – 2017 – Winds of change…

Change is sweeping through politics, economics and markets & this threatens to bring with it a new direction for the global economy & financial markets. The underlying drivers behind this include the following:

► Rising populism

► Increasing headwinds to globalisation

► Transition in the policy landscape

6 Global – Seven Themes to Watch in 2017 | February 2017

Page 7: Presentation   2017 macro themes

…Which has helped to determine our choice of themes for this year

7 Global – Seven Themes to Watch in 2017 | February 2017

1. • Tepid growth but momentum set to pick up

2. • Markets likely to remain in thrall to Donald Trump

3. • Commodity markets set to see further light at the end of the tunnel

4. • A pivot from monetary to fiscal policy

5. • Emerging Markets under the spotlight

6. • Political uncertainties in Europe set to rise

7. • Banks back in vogue

Page 8: Presentation   2017 macro themes

Theme #1: Tepid growth but momentum set to pick up…

► Although we expect growth through the course of 2017 to pick up slightly from last year’s subdued level ofaround 3.1%, at under 3.5%, our sense is that it will remain broadly in line with the average figure that wehave seen since the financial crisis.

8 Global – Seven Themes to Watch in 2017 | February 2017

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Figure 1: Global GDP growth has undergone a structural slowdown

Pre-financial crisis average2000-07 (4.5%)

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2017 consensusmarket estimate (3.2%)

Page 9: Presentation   2017 macro themes

Theme #1 cont.:…If forward-looking surveys are anything to go by

► Since the latter half of last year, PMI surveys appears to suggest that growth momentum is showingmeaningful signs of improvement.

► Supportive of this is the fact that with new orders outpacing inventory build-up this will provide the basis foran upturn in the investment cycle.

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Figure 2: PMI surveys point to a synchronised uptick in growth...

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(Reading >50 denotes expansion)

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Figure 3:...A trend which appears to confirmed by a favourable evolution of the new orders/inventories ratio

US UK Euro Area China Japan

(Ratio)

Page 10: Presentation   2017 macro themes

Theme #1 cont: At the country level, the spotlight will fall on the US

► With the Chinese authorities having managed to stabilise the country’s growth through the course of last year, attention has shifted to the US & whether it can do any better with the arrival of a new president.

► While hopes are high – borne out by sentiment & real economic data – the scope for disappointment is no less significant especially if Trump’s policies fuel a move towards greater trade protectionism.

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Figure 5:...And this will be supported by a rebound in corporate sentiment as well as real economic activity

US Corp. confidence Index (RHS) US Econ. Surprise Index (LHS)

Pre-crises Post-crises Change 2000-07 2008-16 2014 2015 2016 2017f 2017 vs. 2016*

US 2.7 1.3 2.4 2.6 1.6 2.3 0.7UK 2.9 1.0 3.1 2.2 2.0 1.2 -0.8Euro Area 2.2 0.4 1.1 2.0 1.6 1.5 -0.1Japan 1.5 0.2 0.0 0.5 1.0 1.0 0.0China 10.5 8.4 7.3 6.9 6.7 6.5 -0.2World 3.3 3.2 3.4 3.2 3.1 3.2 0.1

among the major economies (%, y/y)…Figure 4: Consensus figures appear to suggest that the US will lead global growth

Page 11: Presentation   2017 macro themes

Theme #2: Markets likely to remain in thrall to Donald Trump…

► The convincing electoral victory of Donald Trump over Hillary Clinton late last year, while unexpected, was well received by the markets.

► While this rally – dubbed the “Trumpflation trade” – has lost some momentum recently, our sense is that it has further to run, especially if Trump embarks on implementing his pro-growth fiscal stimulus.

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Figure 6: The market's inflation expectations have spiked upwards in the belief that a Trump presidency will serve to

boost growth...(%, y/y)Trump electoral victory

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Figure 7:...And this, in turn, has served as a leg-up for US Equity markets & the dollar

Dollar index

S&P 500

(Rebased, 8 Nov = 100)

Page 12: Presentation   2017 macro themes

Theme #2 Cont.:…But this will be subject to a number of caveats…

► If the arrival of Trump causes an unsustainable move upwards in the USD it could undermine the prospectsof S&P500 companies, which have a high reliance on foreign currency earnings.

► A rising USD may undermine commodity prices, most of which tend to be denominated in the US currency.

► The low level of market volatility & high correlations across different asset classes – which havecharacterised the markets in recent years – may be set to change going forward.

► While the likelihood of an activist fiscal policy under a Trump administration has been much touted, it’simportant to note that fiscal policy works with inherent time lags.

12 Global – Seven Themes to Watch in 2017 | February 2017

Page 13: Presentation   2017 macro themes

Theme #2 Cont.:…Suggesting that markets will become more discerning going forward

► Since the election of Donald Trump, there has been a sharp divergence between the internationally focused S&P 500 vs the more domestically focused Russell 2000 Index.

► Beyond this, divergences across different industry sector have also come to the fore.

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Figure 9: S&P 500 has lagged the Russell 2000 Index since the election of Trump...

S&P500 Index Russell 2000 Index

(Index rebased, 8 Nov = 100)

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Figure 10: ...While banks & other domestically focused sectors have outperformed their peers

Banks Construction & engineering Telecoms Energy Pharma

(Index rebased, 8 Nov = 100)

Page 14: Presentation   2017 macro themes

Theme #3: Commodity markets set to see further light at the end of the tunnel…

►With continued progress being made to reduce the overhang of excess supply across a number of commodity markets, e.g. oil, we expect the prospects for the commodity markets as a whole to undergo further improvements this year.

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Figure 11: Oil prices continue to hover above key technical levels...

Brent crude 200 MA 50 MA

(US$/barrel)

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Figure 12:...But despite this prevailing prices remain shy of the levels required to balance OPEC members fiscal & external balances

Fiscal breakeven 2017

External breakeven 2017

(US$/barrel)

Current oil price

Page 15: Presentation   2017 macro themes

Theme #3 Cont.:…But with some pull-back cannot be ruled out

► On the downside, of note here is that with metals prices, such as iron ore, already experiencing a substantial run-up in prices in 2016 – in excess of 90% in the case of iron ore – some pull-back in prices cannot be ruled out 2017.

15 Global – Seven Themes to Watch in 2017 | February 2017

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Figure 13: Commodity markets have seen a pretty broad-based improvement, led by the energy segment

Energy Industrial Metals Precious Metals Overall Index

(Index rebased, Jan-16=100)

Page 16: Presentation   2017 macro themes

Theme #4: A pivot away from monetary policy…

► Central banks have done most of the heavy lifting in terms of propping up growth & financial markets around the globe, but this overreliance has caused a number of unintended side-effects. Result Æ push-back against such policies.

16 Global – Seven Themes to Watch in 2017 | February 2017

Page 17: Presentation   2017 macro themes

Theme #4:…Towards greater fiscal support

► With monetary policy increasingly out of favour, attention has shifted towards fiscal policy & not just in the US.

17 Global – Seven Themes to Watch in 2017 | February 2017

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Figure 15: Change in cyclically adjusted primary balance (% of GDP), 2015-18

2014 2015 2016 2017

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Theme #5: Emerging Markets under the spotlight

► Although EMs have so far avoided a “taper tantrum” style sell-off seen in 2013, our sense, however, is that markets may become more discriminating going forward.

► This is based on two factors: i) the Fed that is looking to normalise its policy settings at more rapid pace than previously anticipated; and ii) markets have greater policy uncertainty to deal with under Trump.

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Figure 16: With market expectations of the Fed funds rate having risen in the aftermath of Trump's election...

Latest

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Page 19: Presentation   2017 macro themes

Theme #6: Political uncertainties in Europe set to rise…

► While concerns over Brexit & the electoral victory of Trump continue to hog the limelight for the time being, this doesn’t preclude the fact that populist tendencies are also sweeping across a range of other European countries as well.

19 Global – Seven Themes to Watch in 2017 | February 2017

(Source) YouGov/BuzzFeed, BTMU Economic Research Office

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Figure 18: Number of Europeans espousing authoritarian/populist views (%, total)

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Theme #6 Cont.:… As a number of EU countries are set to go the polls

Key election/political events ahead in 2017

Low/moderate Moderate High

Italy: With the former PM Renzi resigning following an unsuccessful referendum vote on constitutional reforms on 4 Dec, there is a risk that Italy may once again go the polls in 2017. This could see the Eurosceptic Five-Star Movementdo well.

Germany: Federal elections Sept/Oct 2017. Mainstream coalition govt likely to win, but the result of the far-right AfD needs to be closely monitored.

France: Presidential elections Apr/May 2017. Possible good result for National Front’s Marine Le Pen in the 1st round. Unlikely to win run-off, though outcome is rather uncertain.

Netherlands: Mar 2017 General election could see a strong result from Geert Wilder’s far-right PVV, but unlikely to be able to form a govt.

Global – Seven Themes to Watch in 2017 | February 2017

Page 21: Presentation   2017 macro themes

Theme #7: Banks back in vogue

After being faced with a litany of headwinds since the financial crisis, we’re of the view that 2017 could be the year that banks start to turn the corner. Some supporting factors include:

► Economic growth is set to improve somewhat, particularly among the developed market economies.

► Under the Trump administration, the regulatory burden on banks may be pared back somewhat.

► The problem of NPLs appears to have peaked, with the exception of some peripheral economies in the EU.

► With global interest rates set to rise going forward, led by the US, this will help to improve the net interestmargin (NIM) and, hence, profitability position of banks.

21 Global – Seven Themes to Watch in 2017 | February 2017

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22 Global – Seven Themes to Watch in 2017 | February 2017

Key Risks/Take-aways

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23 Global – Seven Themes to Watch in 2017 | February 2017

Q&A

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24 Global – Seven Themes to Watch in 2017 | February 201724

The Bank of Tokyo-Mitsubishi UFJ, Ltd. is authorised and regulated by the Prudential Regulatory Authority (PRA) & Financial conduct Authority (FCA).

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This report does not attempt to address the specific needs, or investment objectives of any specific recipient. This report is based on information from sources deemed to be reliable but is not guaranteed to be accurate and should not be regarded as a substitute for the exercise of the recipient’s own judgment. Unless otherwise stated, all views herein (including any statements and forecasts) are solely those of The Bank of Tokyo-Mitsubishi UFJ, Ltd., its subsidiaries and affiliates each of whom are under no obligation whatsoever to update this report. The Bank of Tokyo-Mitsubishi UFJ, Ltd., its subsidiaries and affiliates accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report.

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