Macroeconomic Analysis J Essay
Economic Analysis To be able to make a proper asset allocation decision, we use here a top-down allocation in order to prevent a biases selection of a certain industry, which wouldn’t allow am efficient diversification. In that case, we need to start with the global economy. In order to do so we used both services from Morgan Stanley Research, Robbing Global Economics analysis of macroeconomic data Feeds and Foam’s projections for the next years, which provided an outlook about the economic scenario, and a good basis to our macroeconomic analysis.
We start by introducing heir views globally, per relevant area, and then per asset, followed by our view and expectations after those bases. Summing up the global macroeconomic expectation we have Erosion’s recession, temporary Chinese rebound and U. S fiscal drag. Also emerging markets will hold up while Developed markets will decelerate on coordinated fiscal austerity. Which is supportive for markets.
Since the beginning of China’s investments fall estimated marginal prospects have weakened in 2014, displacing some key DMs. Robbing Global Economics believes in a individual probability of a possible storm of tails asks, meaning that there is a risk of an investment movement grater than three standard deviations from the mean,
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Table [ 1 ] – Global Market Since May/22 markets have been presenting more volatility. Table  – Global Make Table  – Risk July/2013 We are facing a situation of tranquility about Europe and discomfort in emerging markets, with assets with duration risk and liquidity risk (credit) suffering (WHYS for example), the dollar getting stronger and an increase on the volatility implying higher sis premium.
Focusing on US we have an expectation of growth at 1,8% in short term (first semester), according to Morgan Stanley prediction, due to the fiscal drag, even with the private final demand showing recovery, private final demand acceleration from a recovered housing market and resilient consumption pose upside risk, and sequestration remains a downward force. Also, we expect that FED will continue to buy assets through 2013, ending on mid-2014.
MS also forecasted a growth of 2% in 2013, which is worst than the members of the Federal Open Market Committee restated before, superannuating potential GNP. Macroeconomic Analysis July/2013 By patriarchal Table [ 5] – FOMCL Projections (excess of p. A. In the optimistic scenario: 0,6+1 ,5+1 To Justify the apparent decision of initiating the moment of reduction in the rhythm of the buying in assets FED is now worrying too much about the disinflation and deflationary risk.
Superannuating the fall of the unemployment rate for the next two years. Figure [ 1 ] – Labor Market: Evolution of the Participation Rate There are signals that unlaundered process of families finished in the SQ/2012. The deed of funding for families went from -2% of the GNP to -0. 9% Figure  – End of enlarge? We can also see a stabilization of rates in the American interest-curves.
Figure  – American Economic Uncertainty Index Focusing on Rezone now we have a prediction that 2013 may continue to be another year of “muddle through” that avoids the most extreme tail risks, with fundamentals vulnerabilities of peripheries remaining the same: lack of growth and competitiveness, slow implementation of structural reforms, high and potentially unsustainable levels of private and/or public debts, with both fiscal austerity and reedit crunch keeping the Rezone GAP in contraction before stagnation and return weak growth in 2014 (and Germany outperforming).
We also see a decrease likelihood of tail risks due to more fiscal cutback and tighter monetary policy than other DMs, bringing a stronger Euro, what could weigh on competitiveness. Talking about China, we have an outbreak in investments from 2008 that led to a massive increase in bad debts, and that will possibly suppress investments in the future, having the possibilities of a “muddle” scenario, a more probable “slow grind” scenario where the government offers a partial bailout for existing debts, but all stakeholders share the burden of adjustment, and a “crash and burn” scenario.
At least, analyzing Iran and the Oil situation, we have the punishments likely to tighten in the face of stagnated diplomacy, with the expectation that regional elections and political notation will reduce the chance of a conflict in 2013, with political risks keeping prices higher than warranted by fundamentals. After understanding the macroeconomic, we can better analyze the implication for global equity, government bond/rates, and emerging markets.
Commodities will face large downsides risks on prices in reaction to China slowing down sharply on investment crashes, a growth in supply due to the risk, particularly for oil with Middle east and North Africa political instability and Iron tension, with valuations remaining extended. When talking about currencies, we assume the expectations that China slowdown will become more pronounced in SQ, that commodity FIX will be less bullish than China growth rebound suggest and also EURO/NOOK and EURO/SEEK have found support on their historical lows.
For the credit situation we have SASS forecast for US GIG (110) and WHY spread target 400), constructive on DMS credit outside Europe, and, within Europe there’s favor to Italian and Spanish risk relative to core risk. Also, we see that higher volatility and risk is compensated with through higher yields, and senior bank debt is not inviolable.
We are constructive on Global equity given attractive relative valuation, favorable positioning, better medium-term growth prospects and increasingly accommodative CBs (pushing yields search into equity), targeting for S;IPPP on the end of 2013 of 1700 and upside scenario is 1780. For government bonds yields remain at their historical laws but bull market’s gains ill not unravel: SUSIE will drift upward on reflection but will beat up cash and remain a good defensive hedge, and Germany and KIKUYU will stay low given renewed Erosion’s concerns and continuing recession, with inflation concerns being overblown.
Finally, for emerging markets we predict a brighter outlook for ME assets as Rezone and US tail risks have declined and Chinese growth has stabilized. Emerging Markets’ debt, especially local currency, should outperform strongly and stronger growth in China will support ME Asia assets through most of 2013, softening t year-end.