Economic Research

Overview

By analysing and monitoring the forces that shape and drive economies and financial markets at the global, regional and country level, we are in an advantaged position to provide confident insights into shifting trends and the timing of turning points. Our analysis is based on a deeper understanding of the implications of political and economic events and the interconnectedness of the global economy.

We have a globally-consistent approach, which means our recommendations at a regional or sector-based level are always informed by factoring in the ‘big picture’ implications of macro global analysis. Unlike other researchers who specialise in a specific geography or sector, our outputs benefit from the full spectrum of knowledge from across our entire organisation. This allows us to understand how events or flows at the global level will impact on individual economies and investments.

Our Economic Research Methodology

As a company, it’s in our nature to question things – and look for those places where risk and opportunity may be understated or overstated. We do this by considering the fundamental building blocks of economic forecasting – sectoral balances, financial flows, and money and credit growth. Vitally, we look at these economic drivers through the frame of our global economic, policy, and political knowledge, which is outside the range of vision of many forecasters. We also build proprietary models and processes to monitor global leading indicators and financial flows.

This allows us to deliver actionable, courageous views that takes the full picture into consideration, and provides a clearer understanding of the ways in which money is flowing around the world.

We are brave in our outlook. We’re not afraid to buck the trend and make early off-consensus calls. When the fundamental facts point towards a particular outcome, we have the discipline to debate and stress-test our ideas rigorously. We are pragmatic in our approach and are not wedded to any single ideology that could restrict our thinking. And, as independents, we have no conflict of interest when it comes to disclosing the full implications of any given situation.

Services

Daily Notes

Insightful macroeconomic analysis driven by ideas and provided in a concise 2-page format. (Daily)

Macro Picture

Focusing on global macro themes at the heart of current market moves and provided in an easily readable 8-10 page format. (Fortnightly on Thursdays)

Global View

In-depth big picture analysis of global economic issues. Recent themes: ECB exit strategy, oil and GCC, French election and economy, Brexit plan B, Yellen and USTs, currency wars, addressing client questions. (12 per year)

Global Leading Indicators

Proprietary leading indicators for the major developed and developing economies which predict turning points in the growth cycle. (Monthly)

Global Financial Trends

Analysis and forecast of global financing conditions and the credit cycle with early warning of vulnerabilities in the financial system and potential triggers. (10 issues per year)

US Watch

Updates of our central scenario economic, political and market forecasts in 8-10 pages. (One note per week)

Europe Watch

Updates of our the key European economic, political and policy and market views. (One note per week)

China Watch

Analysis of key economic and policy drivers and what they mean for China related markets. (One note per week)

UK Outlook

Comprehensive analysis and 2-year forecast for all major UK economic variables GDP, inflation, money and credit, housing, consumption, govt. spending etc. (Quarterly)

Economics Research

Economics
02 Nov 2018

China Watch: Dont get too excited about stimulus

  • Beijing is not simply repeating an old-style credit easing to prop up the economy
  • The positive spill-over effect of China stimulus on the global economy will be offset by further yuan devaluation
  • Growth will decelerate further until a stronger policy response in H1/19
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Economics
29 Oct 2018

Daily Note: Schrodinger’s Brexit

  • We expect BINO to be the final outcome of the Brexit negotiations; until then the currency market discounts all risks
  • GBP currently mid-range; we examine the bull and bear cases
  • UK financials likely to respond temporarily to GBP repricing, but fundamentals matter more for index investors
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Economics
11 Oct 2018

China Watch: Record Bond Defaults

  • Value of bond defaults reaches record high
  • Defaults reflect continued focus on deleveraging and moral hazard
  • Neutral monetary policy favours government-linked bonds
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Economics
10 Oct 2018

Macro Strategy: Decompression sickness

  • Term premium decompression has further to run
  • Curves to bear-steepen: stocks historically benefit, but a different cause this time means a different consequence
  • We raise stops on MSCI DM/EM and Gilt-Bund spread trades
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Track Record

12 Jun 2018

2018: RMB appreciation to be halted by authorities

We said:

The real effective exchange rate of the RMB has appreciated by 10% on the producer price measure since 2016. While the divergence in profits growth suggests domestic consumption has remained solid, we believe policymakers will be less tolerant of a further rise in the trade weighted RMB as growth pressures mount in H2. The focus on curbing debt in the financial sector and on reining in unauthorised government financing is set to weigh on growth in the coming quarters. However, China is unlikely to engineer a significant depreciation of the RMB. In the current global political climate, a sharp decline in the exchange rate could be interpreted as Beijing firing the first shot of a currency war. We expect the RMB's trade-weighted appreciation to come to a halt. 

Outcome:

RMB index peaked at 97.85 on 22 June 2018 and fell back to 93 as trade war fears were priced in. Far from depreciating the currency the authortieis intervened to prevent a more rapid fall than markets would have priced in. 

14 May 2018

2018: Oil sweet spot is maturing fast

We said:

The oil market is in a sweetspot and, so long as demand stays solid, crude prices could see further upside. That said, the sweetspot is maturing, paving the way for a pick-up in volatility going into 2019. Three factors underlie this prospect.

First, while it is too soon to call time on the cyclical world economic upswing, oil is no longer as cheap relative to global growth momentum as it was, say, six months ago. Some demand destruction can be expected gradually to set in. What is more, as inflation expectations respond to rising crude prices, sharp bond yield increases could pose challenges for growth and, therefore, oil consumption.

Second, a smooth transition to the next stage of OPEC+ strategy is by no means guaranteed.  With the approach of next month’s review, the different perspectives of the two pillars of OPEC+ – Saudi Arabia and Russia – look set to become more apparent. Riyadh has been signalling since last year that it favours postponing any reversal of the production restraint agreed in November 2016 and has meanwhile found it expedient to over-deliver on its output cuts. The Saudi preference for keeping the oil price higher for longer is unmistakeable.

By contrast, Russia would be comfortable with a price range of US$50-60/bbl; and while taking care to avoid giving any impression of serious disagreement with the Saudis, Moscow would prefer to stick to the global inventories criterion that underlay the 2016 agreement. This would point to a decision to increase output.

Third and finally, by mid-2019 new pipeline infrastructure should be up and running in the Permian, ready to accommodate higher US shale production.

We have long held the view that OPEC+ action was a defensive supply taper in the hope of stronger demand. This hope has materialised, but OPEC’s initiative can no longer be described as defensive. The pendulum is now swinging in the other direction, stoking a price overshoot that will raise the stakes for all parties involved: producers, consumers and investors

Outcome:

WTI prices continued to rise to $74pb in July before range trading. In early October volatillity was back in large style. WTI fell from $76bp to $60bp in one month. 

17 Apr 2018

2018: AUD to fall heavily vs. USD

We said:

We downgrade AUD from 0 to -1 vs USD on domestic risks and monetary policy divergence. AUD is particularly exposed to two of the major factors roiling markets: FOMC policy tightening and trade war risk.

Following the FOMC’s rate hike last month, the RBA cash target rate is lower than fed funds for the first time in almost 20 years. The last time this happened, in the late 1990s, AUD lost one-third of its value against USD. In the 1990s the gap reached 50bp in favour of fed funds; based on market expectations of monetary policy this year the gap could widen to at least 75bp this time. The 2y yield spread is already at -50bp, and could yet test the 1990s level of -100 bp. In our Macro Strategy portfolio we own AUD/USD downside through a calendar put spread, betting that AUD will react to this erosion of yield support by the end of the year.

External demand for Australian commodities at risk. We expect Chinese GDP growth to slow moderately this year, to 6.5%, due mainly to a cooling housing market. This implies reduced demand for Australian iron ore. Sure enough, prices have already dropped 20% since the end of February. 

Online retail market share rising. Amazon Australia started trading in December. According to the latest figures, online retail turnover in Australia has increased by 40% since February 2017, In Germany, the UK and the US, where online retail sales are around 14% of the total, the Amazon effect has produced high street price disinflation and weakened the Phillips curve. The prospect of something similar happening in Australia is likely to stay the RBA’s hand, lending further support to our AUD downgrade from 0 to -1. 

 

 

 

Outcome:

AUD/USD spot was 0.78 at the time we made the call. Our Asset Allocation recommendations have a 3 to 6 month time horizon. Over 3 months AUD had fallen 5% vs. USD and this deepened to 9% over 6 months. 

16 Feb 2018

2018: Four Fed hikes in 2018

We said:

In the US, Fed policy has had the funds rate inching towards zero in real terms, in line with the growing bias of firms to add capital rather than labour to boost output. Inflation, however, is starting to pick up and the FOMC decision-making process now has to consider a markedly easier fiscal policy that is mostly targeting capital-intensive industries, through tax reforms and increased defence spending. Fed Chair Powell is, in our view, more sensitive to market mischief than to price indexes. As such, he may very well be compelled to act more aggressively than the market expects if he thinks greed is getting out of hand. We believe the base case is four 25bp rate hikes in 2018 with the impact of fiscal policy still on the policy horizon.

Outcome:

At time of writing, 26 October 2018, the Fed has hiked three times in 2018. Markets have repriced their expectations through the year and a fourth hike at the December meeting is fully priced in. 

12 Feb 2018

2018: Oil - brace for a more volatile year

We said:

Froth coming off the market, but stars still aligned for oil prices. Volatility to pick up over 2018 as the sweet spot matures. 

Some froth is now coming off oil prices – a healthy development. But not much has changed in terms of the underlying fundamentals. Higher real interest rates mirror solid global macro momentum and have some way to go before they restrict activity. Demand for crude remains strong and the global inventory glut is shrinking – a supportive combination for prices. In addition, we expect the dollar to remain soft and view output disruptions in Venezuela and geopolitical tension in the Middle East as posing upside risks for prices.

We stick to the scenario laid out in our recent LSR View: 2018 looks to be a sweet spot year for both OPEC and US producers. But with OPEC+ output guidance approaching a crossroads and US supply gathering pace, the sweet spot is maturing. OPEC’s strategy was always to be viewed as a supply taper in the hope of stronger demand. With the global economy on the mend since mid-2016, this hope has materialised. Sustained oil consumption growth is now required for prices to maintain current levels. For the time being, the market looks well supported. But as supply dynamics become more challenging and Goldilocks investing loses its shine, oil market volatility is set to rise.

Outcome:

WTI rose from $59pb at time of publication to $74pb in July, then range traded. The volatiltiy we predicted arrived in early October and prices slid from $76pb to $60pb in a month. 

11 Jan 2018

2018: China debt crisis not on the cards

Consensus said:

Most analysts agree that the rate of China's debt build up is cause for alarm. Some predict an imminent blow up in the form of a major financial crisis. Others predict a Japan-style series  of 'lost decades' as the debt burden drags down economic growth. 

We said:

Market forces do not operate in the usual way in China. Opting for a slow adjustment process does not mean that Beijing is simply sitting on the fence. This, in short, is deleveraging by stealth. The nature of China's debt rules out the likelihood of a systemic crisis, and the crux of the issue lies in the overall balance sheet. We make a debt distribution adjustment by combining the debt of the govenment, SOEs and local government funding vehicles to estimate the overall debt of the state. These adjustments do not change the total amount of debt, but the mix alters dramatically: corporate debt looks far less frightening from a default perspective. The implication is the central government still has room to absorb the current level of debt onto its balance sheet without triggering a crisis. 

We identify four main reasons why the government's position is stronger than is assumed by those who are predicting a crash landing: 1) the state can make all the difference; 2) the overall balance sheet is healthy; 3) the level of external debt is low and that of domestic savings high; 4) and real estate, which is widely used as a form of collateral, has not yet collapsed. 

Unlike many China sceptics, we believe policymakers are proactively seeking to contain financial risks by means of the following measures: 1) pooling the risks among different sectors, 2) stealth restructuring and controlled defaults, 3) increasing SOE efficiency without privatization and de-monopolization, 4) forcing financial deleveraging and strengthening regulatory coordination, 5) narrowing the credit gap with nominal GDP. 

Outcome:

There has been no financial crisis or debt blow-up. Defaults have been allowed to rise in certain specific cases as healthy part of a more macro-prudential policy. Deleveraging by stealth continues. 

Our Team

Economics

Charles Dumas

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Economics

Larry Brainard

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Economics

Steve Blitz

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Economics

Bo Zhuang

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Economics

Dario Perkins

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Economics

Shweta Singh

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Economics

Konstantinos Venetis

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Economics

Shumita Sharma Deveshwar

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Economics

Rory Green

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Economics

Davide Oneglia

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Economics

Krzysztof Halladin

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Economics

Cristobal Arias

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POLITICS

With political drivers and government policy playing an increasingly significant role in determining economic and market outcomes, our world-wide team of political analysts are able to provide critical, timely insights into political shocks and policy developments that will influence investment performance – both regionally and globally.

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MARKETS

Using the wealth of macro economic, policy, and global political insight at our disposal, our team of strategists are able to provide actionable, unbiased advice on asset allocation, investment positioning and portfolio risk management.

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