20141204-NATIXIS-What_will_be_the_important_mechanisms_in_the_economies_in_2015,_and_what_will_be_the_consequences_for_the_financial_markets__23页_1mb

FLASH MARKETS Summary

Core Content

This report from December 4, 2014, provides an economic outlook for 2015, analyzing key mechanisms and their implications for financial markets. It outlines the structural changes in global growth, inflation, liquidity, and income distribution, and discusses the resulting impacts on asset classes and investment strategies.

Main Points

1. Drivers of Global Growth

• United States: The sole driver of solid growth, fueled by reindustrialization, low labor costs, and energy prices.
• BRICS Countries: Experiencing stagnation in industrial production due to structural bottlenecks, with Russia facing capital outflows and China struggling with competitiveness and structural transition.
• Euro Zone: Stuck in weak growth due to declining potential growth in Germany and supply issues in Southern Europe.
• Japan: In recession, with inflation driven by yen depreciation, which reduces real wages and household spending.
• Global Growth and Trade: Weak and non-heterogeneous, with no growth transmission between regions.

2. Low Inflation Outlook

• Phillips Curve Disappearance: Inflation no longer rises with employment, due to structural changes in labor markets.
• Oil Price Decline: Stimulates consumption in OECD countries but doesn't significantly change growth scenarios.
• Inflation Trends: Very low in the euro zone and the UK, and low in the US. No sign of an upturn in potential growth.

3. Global Liquidity Growth

• Monetary Policy Expansion: Japan and the euro zone continue expansionary policies, while the US and UK have stopped quantitative easing.
• Liquidity Shift: Liquidity is now created in Japan and the euro zone, favoring OECD financial markets over emerging markets.
• Capital Flows: Capital has been flowing out of emerging markets and into OECD countries since early 2013.

4. Low Potential Growth

• Real and Nominal Potential Growth: Declined globally due to productivity slowdowns and aging populations.
• No Recovery in Potential Growth: No signs of an upturn in real or nominal potential growth, with the US and Europe experiencing convergence between potential growth and interest rates.
• Negative Nominal Potential Growth: Particularly in Japan.

5. Diverging Income Distribution Trends

• Positive for Companies: In the US, Japan, Spain, and the UK, where income is skewed in favor of corporate profits.
• Negative for Employees: In Germany, France, and Italy, where income distribution is distorted in favor of workers.
• Global Labor Market Shift: Decline in employees' bargaining power, with implications for credit quality and equity performance.

Consequences for Financial Markets

1. Heterogeneous Financial Performance

• Regional growth gaps will persist, leading to divergent financial market performances.

2. Low Long-Term Interest Rates

• Low inflation, abundant liquidity, and low potential growth will keep long-term interest rates low.
• Markets expect only minor rate increases in the US and UK, and no increase in Japan.

3. Equity Valuation

• Equities are not overvalued due to the alignment of falling interest rates and potential growth.
• Expected to outperform credit in the US and Europe, especially during Fed tightening in 2015.

4. Credit Quality Deterioration

• Credit quality will worsen in countries with sluggish growth and no income distribution favoring companies (e.g., France, Italy, Germany).
• Rating downgrades are expected, particularly in High Yield segments.

5. Weakness of Cyclical Sectors

• Global growth remains weak, leading to poor performance in cyclical sectors such as energy, consumer goods, and financials.
• Commodity prices are expected to stay low due to weak demand and supply imbalances.

6. Emerging Market Risks

• Emerging countries face structural external deficits and capital outflows, especially in Russia.
• Exchange rate risk is high due to the dollar's rise against emerging currencies.
• Emerging equities are less attractive in relative value terms.

Investment Implications

• Diversification: Increasing importance of diversification across asset classes and geographies.
• Factor Sensitivity: Asset classes react differently to macroeconomic factors:
  • Equities: Positive to GDP growth and liquidity, negative to volatility.
  • Bonds: Neutral to positive to GDP and inflation, negative to volatility.
  • Commodities: Negative to inflation and volatility, positive to GDP and liquidity.
  • Credit: Positive to GDP and liquidity, negative to volatility.
• US Equities: Strong in growth and liquidity, with support from the cyclical phase.
• Euro Zone Equities: Benefited by ECB's QE, but still affected by weak growth.
• Emerging Markets: At risk due to capital outflows and exchange rate volatility.

Conclusion

The global economy has undergone significant structural changes, with the US as the main growth driver and the disappearance of Phillips curves leading to persistent low inflation. The shift in liquidity creation and divergent income distribution trends will lead to a more fragmented financial market environment. Investors should focus on diversification and consider the implications of these factors on asset performance.

Appendix: Factor Regime and Cycle Phases

• Variables Used:

  • GDP: 6-month variation in growth forecast for year N+1.
  • Inflation: 6-month variation in inflation forecast for year N+1.
  • Real Interest Rate: 6-month variation in 10-year interest rate deflated by 10-year inflation expectations.
  • Volatility: 6-month variation in the VIX index.

• Cycle Phases:

  • Phase 1: Growth acceleration, easing lending conditions, accommodative monetary policy.
  • Phase 2: Positive GDP growth, credit expansion, high profits, neutral monetary policy.
  • Phase 3: Slowing GDP growth, high inflation, margin compression, tightening lending conditions.
  • Phase 4: Recession, falling profits, tightening lending conditions.

Disclaimer

This document is not an investment recommendation and is provided solely for informational purposes. It is not intended to be used for promoting investment decisions and is not subject to any legal restrictions in the context of transaction execution. It is the responsibility of the recipient to comply with any applicable legal restrictions.