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					MACRO INSIGHT
Issue Number 16 | December 2012




Outlook 2013: Lower Risk of Disaster Scenarios
Our scenario makes three fundamental assumptions
 The fiscal cliff will only produce a moderate slow-down in the US economy
 The euro will survive intact with all its members
 The Chinese economy will grow sufficiently to make up for the slack in the West

We discuss a number of features of the world economy of today
 Inflation is not a concern at this stage
 Improving macro-economic imbalances are a big positive
 Structural reform is needed to safe-guard and raise the potential growth rate

For the markets we see a good year
 Loose monetary policy and low inflation are supportive
 Confidence is returning as disaster scenarios abate
 However, modest growth and unresolved issues will likely cap gains

In general and relative terms our scenario should
 Keep markets range bound
 Penalise safe-havens
 Favour Europe and Emerging markets
Table of Contents

The Big Picture                                                                                  Page 3
   The greatest potential game changers in 2013: The US fiscal cliff and the euro’s survival
   China: Where world growth is coming from
   Inflation: Not a concern at this stage
   Macro imbalances: Improving
   Oil price: Rather growth friendly
   Economic policy: Not what it used to be
   The need for structural reform
   Key forecasts



Regional Overview                                                                               Page 13
   Growth
   Country Ranking



Main Markets                                                                                    Page 15
   Low Interest rates and inflation
   Artificial, policy driven, bond prices
   Stocks yield more than bonds
   Profits are still high
   New markets
   Low valuations
   Currencies



Other Asset Classes                                                                             Page 19
   Gold: Structural demand
   Real estate: Still not the time to move up the risk curve
   Private equity: Abundant opportunities



Macro Conclusions for the Markets                                                               Page 23



Appendix 1: Multipliers                                                                         Page 24



Appendix 2: Official Interest Rates
                                                                                                Page 26


Charts, Tables & Sources                                                                        Page 27



Contacts                                                                                        Page 28




Macro Insight: Issue Number 16| 2
The Big Picture

                               The greatest potential game changers in 2013: The US fiscal cliff and euro’s
                               survival
The US fiscal cliff            It is hard to exaggerate the potential threat to the US and world economies of the im-
would, if left un-             pending fiscal cliff. The cliff is a potential mix of budgetary spending cuts and tax in-
checked, plunge the            creases of about USD 700bn (4.5 per cent of GDP, see Table 1) in store for January 1 st
US into recession              2013. Including the Sequestration (automatic spending cuts over 10 years), the total
                               climbs to 5.3 per cent of GDP.
                               Politicians will have to take offsetting decisions to delay or reverse the fiscal cliff. Not
                               taking any offsetting decisions would almost certainly cause a major recession. The op-
                               timal outcome would be a bi-partisan agreement on a medium-term fiscal strategy. As
Some degree of fiscal          that is not very likely, the second best solution could be just kicking the legislation down
tightening seems in-           the road, to be dealt with later. Delay could be good for growth but would likely cause
evitable.                      credit rating downgrades and debt ceiling issues. All in all, caught between action and
                               inaction, the most likely solution will probably lie somewhere in the middle, and some
                               degree of fiscal tightening seems inevitable.
                               The impact on growth that the fiscal tightening would have depends on the fiscal multi-
Its impact on the real         plier (see Appendix 1). The multiplier is hard to estimate with accuracy. On past US
economy depends on             data, the multiplier tends to be estimated at between 1.3-1.8, a touch under the OECD
the fiscal multiplier          countries as a group for which it is often put at 1.8, because the US is a relatively less
                               open economy. For any degree of openness of the economy, the fiscal multiplier tends to
                               be several times larger in times of loose monetary policy. If the US fiscal multiplier
                               were 2 today say, any fiscal tightening would have double impact on the economy. Thus
In all probability, the        even if only a minor share of the total cliff goes through, the effect on GDP is likely to
outcome will be ra-            be noticeable.
ther benign and only
slow the US GDP                We assume a fiscal tightening of around 1.5 per cent of GDP, and expect US GDP to be
growth marginally              1.6 per cent in 2013. This reflects a rather rosy view of the US economy as it implies
                               that it would have potentially produced some three per cent GDP growth or more, de-
                               pending on the size of the multiplier, in the absence of fiscal tightening. Clearly, this is a
                               game-changing issue: even if we assign a low probability to the full cliff hitting the US,
                               a recession in the world’s greatest economy would bring out the bears en masse.

                               TABLE 1: US FISCAL CLIFF




Europe is a formida-           Source: Congressional Budget Office, Crédit Agricole Private Banking
ble continent, repre-
senting close to 20%           We have long held a rather optimistic view on the second biggest question in the mar-
of world GDP…                  kets as well – that of the euro’s survival or demise – believing in the former rather than
                               the latter. It is not economics that is holding the euro together – it is politics. In our
...and revealing con-          minds, it is inconceivable that 60 years of European construction could be sacrificed on
siderable political            account of a country the size of Greece. The Euro Zone generates close to 20 per cent of
commitment to the              the world’s GDP (around EUR 10 tr), has a superior fiscal position to that of the US,
euro                           and is well capable of paying for the monetary union if only the political will is there.
                               2012 has revealed considerable political will: a new treaty, new institutions, more for-
                               malised policy cooperation and soon in all probability a European-wide banking-
                               supervision authority.

Macro Insight: Issue Number 16| 3
The Big Picture
                               This amounts to substantial evolution, especially compared to the US’ stale-mate on
                               budget issues. To further the US comparison, it is worth noting that the US transfer un-
Nevertheless, the              ion came to light only as part of the New Deal after the Great Depression. The US dollar
Europeans still have           had a history of some 150 years before that date, which makes the European rate of pro-
unresolved issues              gress look positively aerodynamic.
                               Nevertheless, there are still many hurdles in the way before confidence in the euro can
Gratefully, Mr                 be completely restored. Greece, Spain, and Cyprus are all likely to request (further) as-
Draghi’s wand has              sistance from the EU and uncertainty about the numbers and process involved will likely
created sufficient             cap the markets. On the other hand, the ECB’s Governor Draghi has created magic with
illusion to put a floor        his OMT (Outright Monetary Transactions) wand and for now the illusion is sufficient
under the markets              to put a floor under the markets. As and when the ECB might put its words into action
                               the mood could change. Moreover, the risks to the already very weak European growth
We retain the view             outlook are stacked on the downside. Further slippage in the finances of Greece in par-
that the euro will             ticular, but also of course in those of Spain, Portugal and Italy, could still potentially
survive with all its           lead to a blow-up of the monetary union. This is a low-probability scenario in our view,
members                        but it remains a big tail risk in the markets which, should it occur, would turn our sce-
                               nario upside-down.

                               China: Where world growth is coming from
                               China is still the country where most of the world’s growth is coming from and as such
The third potential            it is the third most crucial variable in today’s world markets. China’s share in world
game changer is                GDP is over ten per cent (Chart 1), half that of the US, but it’s contribution to global
China                          GDP growth is twice that of the US’ currently: US growth at two per cent with a weight
                               of 20 per cent allows it to make a contribution of 0.4 percentage points, whereas Chi-
China weighs 10% in            nese growth at eight per cent with its ten per cent weight means that the country gener-
the world economy              ates 0.8 percentage points. It is also important to bear in mind that as the country grows
but contributes over           bigger, each percentage point of growth represents a growing number of yuan/renminbi
25% of world GDP               or dollars. Real GDP in 2012 will reach around RMB 16.6 tr with a growth rate of ap-
growth                         proximately eight per cent, adding some RMB 1.2 tr of output to the economy compared
                               to the 2011 level. This can be compared to the year 2007 for example, when growth was
                               a stunning 14.4 per cent in real GDP, but the output generated in renminbi terms did not
Hence, sustained               exceed 1.2 tr; and to the years prior when growth was similarly in double digits but the
growth in China is             gain in total yearly output was lower. Clearly, the world economy needs Chinese growth
key to our scenario            to hold up given the soft spots in the Western world’s business cycles. Thankfully
for 2013                       though, even at slower rates of growth, its wealth creation continues apace.
                               A further point to recall in the current atmosphere of depressed Western demand for
                               Chinese exports is that exports is not what has made the most important contribution to
                               Chinese growth – instead it is investment that plays that crucial role. Chinese export de-
Thankfully, even at            pendence is not negligible, but it is much smaller than what appears to be the commonly
slower rates of                held view about this aspect of the Chinese economy. China is about twice as export de-
growth, Chinese                pendent as the US but only half as much as Germany. Nevertheless, the fact that China’s
wealth creation con-           main export markets are the US and the EU suggests that exports are likely to make less
tinues apace                   of a positive contribution to Chinese growth this year and next. The rebalancing needed
                               of the Chinese economy is away from investments rather away from exports, with do-
                               mestic consumption taking up the slack, and this is what we expect for 2013.
                               CHART 1: SHARE IN WORLD ECONOMY (NOMINAL GDP)




                               Source: National data, Crédit Agricole Private Banking


Macro Insight: Issue Number 16| 4
The Big Picture

                               Inflation: Not a concern at this stage
                               With a world economy characterised by sub-par growth, high unemployment, spare ca-
                               pacity, yet too much debt in many places, and not much credit creation; it is still defla-
The biggest worry              tion rather than inflation that looks like the greater threat. Barring an outright recession
regarding inflation at         in the US and a sharper downturn in Europe, deflation should nevertheless remain a the-
the moment concerns            oretical threat; prices are not likely to fall much. Unemployment is receding in the US;
the inflation-fighting         Germany has concluded wage deals that are in excess of the rate of inflation, and com-
central banks them-            modity and food prices will continue to ensure an upward bias in consumer prices due to
selves                         the structural demand generated by a growing world population. Hence, the main con-
                               cern about prices does not stem from the business cycle. Instead, it is generated by the
                               inflation-fighting central banks themselves. Unprecedented injections of liquidity have
                               boosted the main central banks’ balance sheets to heights in the vicinity of 30 per cent of
                               GDP for Japan and the Euro Zone, and around 20-25 per cent for the Bank of England
                               and the Fed (Chart 2).

                               CHART 2: CENTRAL BANKS’ BALANCE SHEETS, % GDP




Central banks’ un-
precedented injec-
tions of liquidity
could arguably be
inflationary




                               As this is an entirely new situation, it creates a lot of anxiety about how the central
                               banks will be able to downsize their balance sheets as and when the situation might war-
                               rant it. If one lacks faith in that process, the central banks’ policies could be deemed in-
                               flationary: putting into circulation too much of a currency which thereby sees its value
                               debased.

                               Firstly, for this to be a real concern there would have to be a sustained increase in mon-
                               ey supply. In chart 3 we see that in spite of years of loose monetary policy, the Japanese
                               have experienced only a very modest increase in money supply (M2). The US, UK and
                               Euro Zone have all seen their money in circulation increase more sharply. In the US,
                               money supply has risen faster since 2011whereas in the UK the trend seems not to have
                               changed significantly in the wake of the Big Recession and in spite of all the quantita-
                               tive easing. In the Euro Zone, the rate of increase has clearly slowed. None of this looks
                               particularly inflationary at this stage.




Macro Insight: Issue Number 16| 5
The Big Picture
                               CHART 3: M2 GROWTH (INDEXED): US, JAPAN, EURO ZONE AND UK

                                    300

So far, there are few               250
signs of inflation
stemming from exces-                200

sive money creation
                                    150


                                    100


                                    50
                                          Jan 98          Jan 00               Jan 02               Jan 04              Jan 06               Jan 08               Jan 10              Jan 12
                                               (INDEX) M2 Money Supply, Sa - United States
                                               (INDEX) Money Stock, M2, Average, Sa, Hundred Mil Jpy - Japan
                                               (INDEX) Monetary Aggregates, Level s (End-Of-Peri od), Monetary Aggregate M2 (Euro Area Changi ng Composi ti on, Sa, Bil . Euros) - Eurozone
                                               (INDEX) Gbr Monetary Aggregate M2 (Cash And Retail Deposits In M4) Sa, Stock Or Quantum, Sa, Gbp (Mil li ons) - Uni ted Ki ngdom


                               Source: Factset
                               The next question is whether the size of central banks’ balance sheets affects what they
                               can do if things do start to look inflationary. Two things can be said about bigger bal-
                               ance sheets: it undoubtedly means greater exposure to market risk; and it will arguably
                               one day turn central banks into large sellers of securities (bills or bonds). In that capaci-
                               ty, they could become a competing debt issuance agency in addition to national treasur-
                               ies and that could cause market rates to rise higher faster. Both these points are interest-
                               ing; neither is incapacitating.
Central banks have
many arrows in their           Central banks can raise their policy rates at any point in time and totally irrespective of
quivers—enough to              the size of their balance sheets. Although we are frustrated currently that low policy
conduct an appropri-           rates fail to ignite the economy, as long as private sectors hold debt which cost is linked
ate monetary policy            to official interest rates, there is every reason to believe that higher policy rates would be
in spite of the size of        more effective on the way up than they have been on the way down. Moreover, central
their balance sheets           banks can also use reverse repos, collect fixed-term deposits, increase minimum reserve
                               requirements, issue central bank debt securities, and sell their assets outright. With so
                               many arrows in central banks’ quivers, there ought not be any doubts about their ability
                               to conduct an appropriate monetary policy even with bloated balance sheets.

                               Macro imbalances: Improving
The likelihood of dis-         The likelihood of disaster scenarios is diminishing. One very important aspect of the
aster scenarios is             improved outlook is that the fundamental imbalances that were very much at the root of
diminishing                    the 2008 crisis are being dealt with, if more by accident than by design. The issues at
                               hand are firstly the current account deficit in the US and the corresponding surplus in
                               China, and secondly the analogous situation between Southern Europe and Germany. In
                               essence, China and Germany were not consuming enough, and their savings paid for
                               years of over-consumption in the US and peripheral Europe, a situation that we now
                               know with painful clarity not to be sustainable.




Macro Insight: Issue Number 16| 6
The Big Picture
                               CHART 4: US AND CHINA: CURRENT ACCOUNT, % GDP

                                    12
                                    10
Fundamental macro
                                     8
imbalances are slow-
                                     6
ly returning to nor-
                                     4
mal
                                     2
                                     0
                                     -2
                                     -4
                                     -6
                                     -8
                                     Jan 82 Jan 85 Jan 88 Jan 91 Jan 94 Jan 97 Jan 00 Jan 03 Jan 06 Jan 09 Jan 12
                                                             C urrent Ac c ount, As A Perc entage Of Gdp - U nited S tates
                                                             C urrent Ac c ount, As A Perc entage Of Gdp - C hina




                               Source: Factset
China’s and Germa-             In chart 4 we see the extra-ordinary gap between the US and Chinese current accounts
ny’s under-                    from 1993 to 2008. This gap is now returning to normal, mostly from the Chinese sur-
consumption paid for           plus coming down (through a rebalancing of its economy and from slower export
years of over-                 growth), although the US deficit has also declined. The US current account deficit cur-
consumption in the             rently stands at -3.1 (second quarter of 2012) and the Chinese surplus had dropped to 2.8
US and in the South            at the end of 2011 - both now for all intents and purposes virtually at sustainable levels.
of Europe
                               Similarly, chart 5 shows how the gap in trade performance widened between Germany
                               and its European trading partners during the period 2000-2008. Since then, the current
                               accounts of Italy, Spain and Portugal have improved markedly, as has the trade balance
                               of Greece. Germany too is doing its bit to rebalance the economy. Wage deals in 2012
                               were above the rate of inflation for the first time in about a decade. Adding purchasing
                               power to the German consumer will in all likelihood bring about higher imports and a
                               lower current account surplus. Clearly, the Southern European countries are still in dire
                               need of further structural reform in order to become truly competitive in international
                               markets, but the progress already made is there for all to see.

                               CHART 5: GERMANY AND OTHER EURO ZONE: CURRENT ACCOUNT, % GDP

Southern Europe’s                   10                                                                                          0
current accounts are
improving as Germa-                  5                                                                                          -500

ny’s surplus is ad-                                                                                                             -1,000
justing to stronger                  0
domestic demand                                                                                                                 -1,500
                                     -5
                                                                                                                                -2,000
                                    -10                                                                                         -2,500

                                    -15                                                                       -3,000
                                          Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
                                                     Current Account, As A Percentage Of Gdp - Germany (Lef t)
                                                     Current Account, As A Percentage Of Gdp - Italy (Lef t)
                                                     Current Account, As A Percentage Of Gdp - Spain (Lef t)
                                                     Current Account, As A Percentage Of Gdp - Portugal (Lef t)
                                                     Trade Balance, Total, Extra-Eurozone16, Mil Of Euro, Sa - Greece (Right)


                               Source: Factset




Macro Insight: Issue Number 16| 7
The Big Picture

                               Oil price: Rather growth friendly
                               Bloomberg consensus forecasts for Brent oil in USD per barrel is 102 for 2013. The
Our central scenario           consensus is expecting progressively lower oil prices, with a peak in the fourth quarter
is based on essential-         of 2012 at USD 107 per barrel and falling each year to USD 92 per barrel in 2016, as
ly stable oil prices           much is being made of new discoveries of oil reserves in the US in particular but also in
                               other corners of the world outside of the Gulf countries. An oil price below USD 100
                               per barrel would herald less growth in the Middle East and Russia although the overall
                               impact on global growth prospects would probably be positive. In our base-line fore-
                               casts we are expecting an oil price in the vicinity of USD 100 per barrel based on the
                               assumption that structurally increasing demand will mop up any boosts to supply. It
                               must also be stressed that there is significant geo-political risk, particularly in connec-
                               tion to events in Syria and Iran, which tensions induce an upward bias in energy prices.

                               Economic policy: Not what it used to be
                               Monetary policy is accommodative generally speaking and fiscal policy is becoming
Monetary policy does           less restrictive notably in the Euro Zone. Real interest rates are negative in many coun-
not have the impact            tries (Appendix 2), and official interest rates in the West are set to remain low until mid-
on the real economy            2015. Central banks’ balance sheets have been inflated in an unprecedented fashion. In
it used to have                spite of all this unparalleled easing, the effect on the real economies has been limited as
                               the impact has been reduced by factors such as deleveraging and weak bank balance
                               sheets. Economists talk about multipliers in this context. A multiplier is the number that
                               decides how much of any dollar (or euro, yuan, etc.) worth of policy measure yields in
                               terms of effect in the real economy. If the multiplier is equal to one, each dollar spent
Governor Draghi                yields a dollar of extra growth; if it is two, the effect is doubled, and if it is zero any eas-
calls this problem             ing of policy could be in vain. Money multipliers are a big topic in economics that we
“the broken mone-              touch upon in appendix 1. Governor Draghi prefers to talk about monetary policy trans-
tary policy transmis-          mission channels rather than money multipliers, and he states clearly that they are bro-
sion channels”                 ken and in need of urgent repair.

                               There is of course interaction between monetary and fiscal policy, and lax monetary pol-
                               icy tends to push up the fiscal multiplier (see appendix 1). A higher fiscal multiplier
                               means that any austerity measures will have a greater negative growth impact than it
                               might have had in a different monetary policy setting. This has of course aggravated the
                               business cycle particularly in Europe in the face of its fiscal austerity programmes.
Moreover, loose                Atypical multiplier effects such as these, on both the monetary and fiscal side, have
monetary policy can            meant that growth has failed to live up to expectations basically on all continents. That
increase the impact            this is a phenomenon shared by all major economies is evident in chart 6 which shows
of fiscal policy, mak-         the collapse of money multipliers as estimated by the ECB, and it is also a major factor
ing austerity bite             behind the slow and gradual recovery from the Big Recession, as well as a reason why
harder                         we are likely to see a few more years yet of sub-par growth.

                               CHART 6: BROAD MONEY MULTIPLIERS: EZ, US, JAPAN (IN MULTIPLES OF THE MONE-
                               TARY BASE)




                               Sources: ECB, BIS



Macro Insight: Issue Number 16| 8
The Big Picture
                               On the fiscal side, Italy, Spain, Portugal and to a lesser extent Ireland and Greece will all
2013 will see less             see less austerity in 2013 (Table 2). What is not reflected in the table below is the fact
fiscal austerity in            that Germany has launched a fiscal stimulus package worth some 0.7 per cent of GDP in
Europe…                        2013. Moreover, in France, it is uncertain whether President Hollande will opt for fiscal
                               rectitude or open the faucets. None of this lesser austerity is enough to send growth soar-
                               ing, but it does point to an end in the deterioration of the European growth cycle.

                               TABLE 2: FISCAL AUSTERITY IN EUROPE AND REST OF WORLD
                                Fiscal austerity, % GDP        2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
                                EUROPE
                                Euro Zone
...but more austerity           Germany                         -0.4     0.5    0.4    0.7       0.6    1.0    -0.3   -0.8   -0.9   1.2    -0.1   0.0
in the US                       France                          -1.2    -0.7    0.5   -0.1       0.6    -0.6   0.1    -2.7   0.8    1.9    1.1    1.2
                                Italy                           -0.3    -1.7    0.2   -0.6       1.5    0.7    -0.4   -1.0   1.1    0.2    3.0    1.0
                                Spain                            0.4    -0.4    0.5    0.4       0.4    -0.9   -5.5   -3.6   2.9    1.6    4.2    3.5
                                Portugal                         1.3     0.3   -1.0   -0.5       1.9    0.8    -0.6   -4.2   0.8    2.9    3.2    2.4
                                Ireland                         -1.6     1.1    1.1    0.0       0.6    -3.5   -3.9   -0.3   2.4    2.0    2.0    1.7
                                Greece                          -0.9    -2.5   -1.7    0.8       -1.9   -1.1   -1.7   -2.8   5.9    4.6    2.8    2.3
                                Other Europe
                                United Kingdom                  -2.8    -1.8   -0.4    1.5       -0.6   -0.8   -1.2   -3.3   1.3    1.7    0.3    1.5
                                REST OF WORLD
                                USA*                            -3.0    -1.0    0.1    1.0       0.6    -0.4   -2.6   -2.9   0.6    1.0    1.0    1.5
                                Canada                          -0.9    -0.5    0.6   -0.1       -0.5   -0.5   -2.1   -1.9   -1.2   0.5    0.8    0.8
                                Japan                           -1.2     0.1   -0.3    1.3       1.3    0.1    0.1    -3.9   -0.3   -0.6   -0.2   0.3

                                * US excluding expiry of payroll tax relief and Bush tax cuts.

                               Source: OECD


                               The need for structural reform
                               The IT revolution has played a singularly important part in the stronger world growth
Perturbed monetary             observed since the early 1990s. A formidable force of growing populations seeking to
and fiscal policy ef-          catch up with the living standards of the West has accompanied that stronger growth.
fects highlights the           The productivity gains from IT might have peaked if a study by Dale W. Jorgenson and
need for structural            Khuong M. Vu is accurate. It estimates lower potential growth in both productivity and
reform                         GDP over the 2009-2019 horizon compared to the 1989-2008 period. The Big Recession
                               has also most likely lowered potential growth. Years of under-used cash in the world
                               economy have not only put a brake on consumption; it has also tipped companies into
                               bankruptcy and curbed investment. The result is not only slower growth today but also a
                               lower long-term growth potential in the countries concerned which inevitably has spill-
                               over effects on the world economy at large. Current economic policies are attempting to
                               stimulate both consumption and investment with, alas, as we all know, less success than
                               one might have expected.




Macro Insight: Issue Number 16| 9
The Big Picture
                               CHART 7: WORLD GDP AND CPI, %

                                     40

Structural reform is a               30
prerequisite for rais-
                                     20
ing the potential
growth rate                          10

                                     0

                                 -10

                                 -20
                                   Jan 70   Jan 74    Jan 78   Jan 82   Jan 86       Jan 90     Jan 94      Jan 98      Jan 02   Jan 06   Jan 10
                                                                  Gdp V olu me % Ch ang e - Perce nt Pe r Ann um - W orld
                                                                  Cpi % Ch ang e - Perce nt Pe r Ann um - W orld



                               Source: Factset, IMF

                               That leaves one avenue to explore that has been relatively eschewed during much of the
                               post-crisis period: structural reform. There is not a country on the globe that would not
                               benefit from structural reform. Germany might have done more than most in this area,
                               but that does not mean that it has exhausted the potential of this route to higher growth.

                               Take services as an example. Services represent around 75 per cent of rich countries’
                               GDP, and manufacturing thus the remaining 25 per cent. For an expansion of either sec-
Liberalising services          tor of a given size, that of the service sector yields three times the effect on growth com-
could propel Europe            pared to manufacturing’s one time. If you have a euro to spend on growth promoting
into a new growth              measures, would you put it in services or in manufacturing?
era
                               The Maastricht Treaty paves the path for a single market in services but the EU has
                               made scant progress since. The area is rife with vested interests, cartels and protection-
                               ism. In Switzerland for instance, taxis are basically run as a cartel. The number of li-
                               cences is fixed and somebody has to retire in order for a new entrant to be able to enter.
                               This new entrant has to have a formidable amount of savings to his name because the
                               price of the licence is steep. As a result taxi rides are among the most expensive in the
                               world (Table 3), and taxi drivers are far from over-worked. Removing these barriers
                               would allow employment for many new taxi drivers, prices would drop, more people
                               would use this service, and mutually beneficial economic transactions would spawn
                               throughout the economy as a result. The only people who would lose out on the deal are
                               those who are currently reaping the oligopolistic profits from the cartel.

                               TABLE 3: THE WORLD’S MOST EXPENSIVE TAXI RIDES
                                                               Average price for a 3 km city
                                Country
                                                                        ride, USD
                                Zurich, Switzerland                         24
                                Oslo, Norway                                    22
                                Monaco, Monaco                                  18
                                Amsterdam, Netherlands                          17
                                Helsinki, Finland                               16
                                Nice, France                                    15
                                Stockholm, Sweden                               14
                                Tokyo, Japan                                    14
                                Dublin, Ireland                                 14
                                Munich, Germany                                 14
                               Source: www.priceoftravel.com




Macro Insight: Issue Number 16| 10
The Big Picture
                               In addition to the service sector, labour markets are of course a prime target for structur-
                               al reform. Without wanting to reduce workers’ quality of life, it has to be said that mini-
                               mum wages and high redundancy costs protect those in work and not those out of work.

                               The IFC and the World Bank produce an Ease of Doing Business ranking. The top per-
                               former in the “Starting a Business” category of the 2012 issue of the ranking puts New
Liberalising adminis-          Zealand in first place and it takes only one day to start a business there (Table 4). That it
trative procedures             takes as much as 137 days in Equatorial Guinea or a stunning 694 days in Suriname is
can free up the entre-         perhaps not so surprising, but few would know, we dare to purport, that it only takes
preneurial spirit              five days in Saudi Arabia. Such business friendly procedures are contributing to making
                               Saudi Arabia the hub for business in the region. The Doing Business report leaves no
                               doubt about the correlation between its ranking and competitiveness and, in a wider
                               sense, between structural reform and growth and development.

                               We could cite many more examples of how deregulation and structural reform increases
Liberalising trade is          the potential growth rate. One that has to be cited is China’s accession to the World
what put China on its          Trade Organisation, which event brought about a wave of trade liberalisation and fuelled
exceptional growth             the Chinese economic miracle. Just imagine what free trade in services could do to the
trend                          European continent.

                               Without expecting anything quite so drastic, the reform trend is positive nevertheless.
                               However, should the pace of structural reform slacken, the world economy could actual-
Further structural             ly be close to its full potential, and the future would look distinctly more inflationary.
reform is also needed
to combat inflation            TABLE 4 : EASE OF STARTING A BUSINESS, BY CATEGORY
                                Procedures (number)                                       Cost (% of income per capita)
                                Fewest                       Most                         Least                              Most
                                Canada                   1   Suriname             13      Denmark                     0.0    Zimbabwe                   148.9
A lower potential               New Zealand              1   Algeria              14      Slovenia                    0.0    Benin                      149.9
growth rate leads to            Australia                2   Argentina            14      South Africa                0.3    Djibouti                   169.8

inflationary pres-              Georgia                  2   China                14      Ireland                     0.4    Central African Republic   175.5

sures sooner                    Kyrgys Republic          2   Bolivia              15      New Zealand                 0.4    Comoros                    176.2
                                Rwanda                   2   Brunei Darussalam    15      Canada                      0.4    Togo                       177.2
                                Slovenia                 2   Philippines          15      Sweden                      0.6    Gambia, The                206.1
                                Armenia                  3   Uganda               16      Puerto Rico (US)            0.6    Chad                       208.5
                                Belgium                  3   Venezuela, RB        17      Australia                   0.7    Haiti                      314.2
                                Finland                  3   Equatorial Guinea    21      Singapore                   0.7    Congo, Dem. Republic       551.4



                                Time (days)                                               Paid-in minimum capital
                                Fastest                      Slowest                      Most                       USD     % of income per capita
                                New Zealand              1   Zimbabwe             90      Sao Tomé and Principe      4,032              336
                                Australia                2   Lao PDR              93      Chad                       2,070              345
                                Georgia                  2   Brunei Darussalam 101        M ali                      2,090              348
                                Hong Kong SAR, China 3       Timor-Leste         103      Burkina Faso               2,053              373
                                M acedonia, FYR          3   Haiti               105      Guinea-Bissau              2,153              399
                                Rwanda                   3   Brazil              119      Guinea                     1,548              407
                                Singapore                3   Equatorial Guinea   137      Djibouti                   6,002              434
                                Belgium                  4   Venezuela, RB       141      Central African Republic   2,083              453
                                Hungary                  4   Congo, Rep.         160      Togo                       2,132              484
                                Canada                   5   Suriname            694      Niger                      2,103              584

                                Note: 82 economies have no paid-in minimum capital requriement.
                               Source: Doing Business database
                               Source: Doing Business database




Macro Insight: Issue Number 16| 11
The Big Picture

                               Key forecasts
                               In this cycle, most forecasters have over-estimated growth and under-estimated infla-
Our scenario for               tion. The first is intimately connected with the changing multipliers and the second is
2013 is for growth to          largely driven by oil prices and administered prices. We stand by our long-held view
remain below poten-            that growth will be below potential for years to come. We also stand by our view that
tial                           one must guard against too much trend extrapolation of recent data which will by defini-
                               tion see-saw when growth is largely horizontal. Our scenario hinges on three fundamen-
Growth will slow               tal convictions: that the euro will survive intact, that the US fiscal cliff will be dealt with
somewhat in the US             in a relatively benign fashion, and that Chinese growth continues to make up for the
                               slack in the West. In spite of that optimism, our forecasts remain cautious, and from this
Europe will recover            prudent stance the greatest risks to our world view are still on the down-side.
gradually in 2013

China’s growth is              In a nutshell, we expect US growth to slow somewhat in 2013 while growth in Europe
expected to be broad-          should pick up gradually during the year. China, India and Russia will in all likelihood
ly stable                      maintain broadly stable growth rates. Brazil is the greatest recovery story as the country
                               is set to bounce back after a bout of under-investment. Inflation will probably not rise
Brazil is the greatest         much in the current context, although it is not expected to fall much either.
recovery story
                               TABLE 5: KEY FORECASTS
Inflation will not fall                        USA    Japan    UK   EMU Germany France Italy Spain Brazil Russia India     China
much, nor will it pose         GDP 2012 yoy    1.9%    2.1% -0.1% -0.2%   1.0%    0.3% -2.0% -1.5% 1.8%     4.0%   6.0%    8.0%
a threat in the fore-
                               GDP 2013 yoy    1.6%    0.8% 1.0% 0.7%     1.2%    0.4% -0.3% -0.9% 4.4%     3.7%   6.2%    8.5%
seeable future
                               GDP 2014 yoy    2.0%    1.2% 1.5% 1.0%     2.0%    1.0%   0.3% 0.0%   4.0%   3.9%   6.4%    8.0%
                               CPI 2012 yoy    1.8%    0.0% 2.7% 2.3%     2.0%    2.0%   3.3% 2.0%   4.8%   5.2%   10.0%   2.6%
                               CPI 2013 yoy    2.1%    0.0% 2.2% 2.2%     2.0%    2.2%   2.2% 1.7%   5.3%   6.5%   9.0%    4.0%
                               CPI 2014 yoy    2.4%    1.0% 1.9% 2.4%     2.0%    2.0%   2.4% 2.0%   5.0%   6.5%   7.5%    4.0%
                               Source: Crédit Agricole Private Banking




Macro Insight: Issue Number 16| 12
Regional Overview

                               Growth
                               With the looming US fiscal cliff and the ever present possibility of a break-up of the
                               euro, we tend to think that the world economy is grinding to a halt. That is to ignore the
The OECD countries             significant growth in Asia outside of Japan, where China is of course the most formida-
have been under-               ble growth engine and saviour of the world economy currently. The Middle East and
performing other               Latin America are also clocking up growth rates in the five per cent vicinity although
areas of the world on          their contribution to world GDP is naturally smaller than that of Asia. Even Africa is
GDP growth over the            growing at around three per cent per annum, down from the levels of above five per cent
past decade                    before the crisis, but honourable nevertheless. By contrast, we see in chart 8 that the sev-
                               en major OECD countries have been underperforming the regions consistently over the
                               past decade.

                               CHART 8: REGIONAL GDP, %

                                     15

Africa (parts of), the               10
Middle East and Lat-
in America all see                   5
stronger growth
                                     0

                                     -5

                                 -10
                                          Jan 04    Jan 05       Jan 06       Jan 07       Jan 08      Jan 09       Jan 10       Jan 11       Jan 12
                                              Gdp Volume % C hange - Percent Per Annum - Af rica
                                              Gdp Volume % C hange - Percent Per Annum - Middle East
                                              Weo Forecast, Gross D omestic Product, Constant Prices, % Change, Percent - Latin America
However, as these                             Weo Forecast, Gross D omestic Product, Constant Prices, % Change, Percent - Asia, Dev eloping Countries
                                              (% 1YR ) Gross D omestic Product, Volume, Market Prices - 7 Major Oecd C ountries
countries weigh less
in the world econo-            Source: Factset
my, their higher
growth rates make a            Undoubtedly, this is partly a reflection of the level of maturity of the economy. As econ-
smaller contribution           omies mature their growth rates tend to slow, but the wealth that each percentage point
to world growth                of growth adds is greater. On that score, Africa ought to be able to grow at a faster clip.
                               However, any regional aggregate will by definition fail to highlight individual experi-
                               ences. Over the past 10 years, Africa was home to six of the world’s ten fastest growing
                               nations: Ghana, Liberia, Democratic Republic of Congo, Mozambique, Angola and
                               Ethiopia. Ghana is expected to grow by more than eight per cent this year and almost
Nevertheless, these            half of the continent is likely to grow in excess of six per cent. Qatar is the fastest grow-
regions merit greater          ing economy in the Middle East, and the IMF projects it to enjoy some six per cent GDP
attention from the             growth this year.
financial community
                               How to take advantage of the growth outside of the mature economies is not necessarily
                               straight forward. The Middle Eastern markets provide potential investors with more
                               choice than does Africa although both merit greater attention from the financial commu-
                               nity.

                               Country Ranking
Our country ranking            Seeking to discriminate further among countries, we have developed a country ranking
distils pure macro-            that takes six fundamental macro-economic variables into account: GDP, inflation, cur-
economic perfor-               rent account, unemployment, budget deficit-to-GDP ratio and debt-to-GDP ratio, and
mance                          calculates an un-weighted average of the performance across the variables. It obviously
                               abstracts completely from the type of political system, human rights, social conditions,
                               corruption, market maturity, liquidity aspects and a whole host of other very important
                               factors. Nevertheless, its simplicity allows one to distil pure macro performance and it
                               produced the following results at the end of October this year, and at the end of Sep-
                               tember 2011.


Macro Insight: Issue Number 16| 13
Regional Overview
                               TABLE 6: COUNTRY RANKING
                                                   27.09.11                    27.11.2012
Norway has risen to            Switzerland                1   Norway                    1
the top of our list            Taiwan                     2   U.A.E.                    2
                               Hong Kong                  3   South Korea               3
                               Norway                     4   Switzerland               4
                               South Korea                5   Sweden                    5
                               China                      6   China                     6
                               Chile                      7   Taiwan                    6
                               Sweden                     8   Chile                     8
                               Russia                     8   Australia                 9
                               U.A.E.                    10   Malaysia                  9
                               Malaysia                  10   Hong Kong                11
                               Indonesia                 12   Venezuela                12
                               Thailand                  13   Russia                   13
                               Netherlands               14   Thailand                 14
Germany is in 19th             Denmark                   15   Indonesia                15
place                          Austria                   16   Mexico                   15
                               Mexico                    17   Singapore                17
                               Argentina                 19   Philippines              18
                               Germany                   18   Germany                  19
                               Singapore                 20   Israel                   20
                               Israel                    21   Netherlands              21
                               Philippines               21   Denmark                  22
The US scores 33rd             Finland                   23   New Zealand              23
                               Venezuela                 23   Colombia                 24
                               Vietnam                   25   Vietnam                  24
                               Czech Republic            26   Austria                  26
                               New Zealand               26   Japan                    27
                               Australia                 28   Finland                  28
The Euro Zone 39th             Belgium                   29   Canada                   29
                               Colombia                  30   Argentina                30
                               Japan                     31   Belgium                  31
                               Brazil                    32   Brazil                   32
                               India                     33   United States            33
                               Hungary                   34   Turkey                   34
                               Turkey                    35   France                   35
                               Canada                    37   Czech Republic           36
                               South Africa              36   Ireland                  37
                               France                    39   South Africa             37
                               Eurozone                  40   Eurozone                 39
Oil producers and              Poland                    41   India                    39
small open econo-              Italy                     42   Egypt                    41
mies score highly in           Ireland                   37   Poland                   42
our ranking                    United States             43   Hungary                  43
                               Egypt                     44   Portugal                 44
                               Portugal                  45   United Kingdom           45
                               United Kingdom            46   Italy                    46
                               Spain                     47   Spain                    47
                               Greece                    48   Greece                   48

                               Source: Crédit Agricole Private Banking

                               Most Western investors would be surprised at this ranking. The United Arab Emirates in
                               second place is rather unexpected. Germany in 19th place seems perhaps reasonable but
                               who would have put the US in 33rd place? The Euro Zone is pushed down into 39th place
                               by the laggards in the table; few surprises there. However, that Portugal, Italy, Spain and
                               Greece should rank lower than Egypt and South Africa is rather more unforeseen. The
                               fact that Turkey ranks similar to France and that Argentina ranks close to Canada is
                               thought provoking and helps us think out of the box. Two features are common among
                               the top performers: oil production and/or small open economies – two useful themes for
                               investors as possible guiding principles.




Macro Insight: Issue Number 16| 14
Main Markets
                               When can we expect the big move out of bonds and into equity? Not yet, in our view, as
                               we believe we would need more growth for that. Nevertheless, there are factors that sup-
                               port the stock market:

                               Low interest rates and inflation
                               Inflation is on the whole low and not a real concern going into 2013. Oil, natural gas and
Low interest rates             many other commodities are sharply lower this year. This will increase operating mar-
and low inflation are          gins for manufacturers and purchasing power for consumers.
supportive of equity
markets                        Low and in some cases even negative real interest rates are unfortunate for savers (Chart
                               9 and Appendix 2), but positive for consumers and businesses because it makes it so
                               cheap to borrow. It also makes cash awfully unattractive relative to dividend-paying
                               stocks and relative to the rock-bottom bond yields as well.

                               CHART 9: OFFICIAL INTEREST RATES, MAIN ECONOMIES AND BRIC

                                 30

                                 25

                                 20

                                 15

                                 10

                                     5

                                     0
                                         Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
                                                     U S Federal Funds Target Rate - Y ield
                                                     Main Ref inancing Operations, F ixed Rate, Announcement D ate - European C entral Bank
                                                     Policy U ncollateralized O/ N C all Target R ate, Percent - Japan
                                                     Of f icial Bank Rate, Percent - U nited Kingdom
                                                     Ir, Benchmark Lending Rate, 1 Y ear, Percent - C hina, Peoples R ep Of
                                                     Brazil Target Selic Rate - Y ield
                                                     R epurchase Agreements, R epo Auctions, W eighted R ate, Percentage - R ussia
                                                     Monetary Policy Rate, Repo Cut-Of f Rate, Percent - India


                               Source: Factset


Bond markets are               Artificial, policy driven bond prices
manipulated by the             Bond prices are severely manipulated by the central banks, and thus cannot be said to
central banks                  represent a free market rate in today’s markets. Hence, bond yields that are notionally
                               supposed to compensate the investor for inflation and default risk today offer only scant
                               cover for either. It is the compensation for credit risk in particular that is compressed as
                               yields come down unless the rate of inflation also falls apace – a sobering thought per-
                               haps for many a potential bond investor. Broadly speaking, very low bond yields (Chart
Although the next              10) continue to make sense in a world of slow or moderate growth, modest inflation,
move is surely up,             still significant risk aversion and low policy rates. That said, yields cannot remain this
low bond yields are            low forever. The question is then essentially one of timing. In 2013 we could see the
likely with us for             bottom in bond yields as policy clarity improves and as global growth begins to revive.
some time yet                  Outright tightening of monetary policy is still years away for most countries, and rela-
                               tively low government bond yields are likely with us for some time yet.

                               Stocks yield more than bonds
                               In the first half of the twentieth century, if you had done nothing more than buy stocks
                               when they yielded more than bonds and sold them when they yielded less, you would
                               have timed the market perfectly. Unfortunately, this technique stopped working in 1958.
                               That was the last time that stocks yielded more than bonds - until last year. With bond
                               yields at all-time lows, stocks now yield more (Chart 11).




Macro Insight: Issue Number 16| 15
Main Markets
                               CHART 11: US 10-YEAR BENCHMARK BOND YIELD AND S&P 500 DIVIDEND YIELD

Dividend yields are              8
higher than bond                 7
yields—a very rare
phenomenon                       6

                                 5

                                 4

                                 3

                                 2

                                 1

                                 0
                                     Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
                                                                                  US Benchmark Bond - 10 Year - Yield
                                                                                  S&P 500 - Div idend Yield
                               Source: Factset


                               Profits are still high
Corporate profits are          Share prices tend to follow earnings and earnings are still outstanding in many sectors
still high                     (Chart 12). However, although corporate profits look strong on an absolute basis, year-
                               over-year earnings growth is beginning to slow.

                               CHART 12: US EMPLOYMENT COST, GDP, CORPORATE PROFITS AND NON-FINANCIALS’
                               PROFITS

                                 350

                                 300

                                 250

                                 200

                                 150

                                 100

                                     50
                                          Jan 03   Jan 04        Jan 05         Jan 06         Jan 07         Jan 08        Jan 09         Jan 10         Jan 11     Jan 12
                                                   (INDEX) Employment Cost Index Wages And Salaries All Ci vi lian All Workers Sa Dec. 2005=100 - United States
                                                   (INDEX) Gross Domestic Product, Bil. $, Saar - United States
                                                   (INDEX) Nonfinancial Corporate Business, Profits After Tax (Without Iva & Ccadj), Bil. $, Saar - Uni ted States
                                                   (INDEX) Nati onal Income, Corporate Profits After Tax (Without Iva & Ccadj ), Bil. $, - United States


                               Source: Factset


                               New markets
                               Domestic consumption is rising in Asia, Latin America and Eastern Europe. These mar-
Demand from emerg-
                               kets make up roughly 85% of the global population. As they strive to access the living
ing middle-classes
                               conditions of the West, demand will rise for housing, cars (Chart 13), computers, mobile
remains a key mega
                               phones, microwaves, dishwashers, credit cards, mortgages, health insurance and so on.
trend
                               This will spur global growth for years to come.




Macro Insight: Issue Number 16| 16
Main Markets
                               CHART 13: CAR SALES: US, CHINA, INDIA (INDEXED)

                                 450
                                 400
                                 350
                                 300
                                 250
                                 200
                                 150
                                 100
                                     50
                                         0
                                             Jan 04   Jan 05       Jan 06         Jan 07         Jan 08        Jan 09         Jan 10         Jan 11      Jan 12
                                                                                                    ,               ,
                                                       (INDEX) Moto r Vehi cl es, Do mesti c Sa le s Au tomo bi le s To tal - Chin a, Peop le s Rep Of
                                                       (INDEX) In d Passen ger Car Sal es Sa , Monthl y Leve l, Sa, Numb er - In dia
                                                                                         ti                           ,
                                                       (INDEX) Uni t Auto Sa les, Dome s c, Mi ll i ons Of Ve hi cle s Saa r - Uni te d States


                               Source: Factset


                               Low valuations
S&P at 12 times                The companies in the S&P 500 are selling for just 12 times earnings (Chart 14). That is
earnings is a low              well below the historical average P/E of 16 which does not necessarily mean that stocks
valuation, historical-         are cheap, but it confirms that they are at least low.
ly speaking
                               CHART 14: S&P PRICE/EARNINGS RATIO

                                 30


                                 25


                                 20


                                 15


                                 10


                                     5
                                         Jan 00       Jan 02              Jan 04               Jan 06               Jan 08               Jan 10           Jan 12
                                                                                     S&P 500 - Pri ce to Earnings Ratio


                               Source: Factset

The US dollar bene-            Currencies
fits from an exorbi-           On a trade weighted real effective basis, the US dollar has been on a depreciating trend
tant privilege...              since the early 2000s (Chart 15). With that in mind, along with the US’ poor perfor-
                               mance on many macro-economic variables, it is rather startling that the dollar and US
                               assets are still so much in demand. The explanation is of course what Barry Eichengreen
                               called the “exorbitant privilege” that stems from being the issuer of the world’s reserve
                               currency. Price fluctuations in the dollar do not deter people who need it anyway in or-
...and will probably           der to settle trade and business transactions. On top of the reserve currency status, the
continue to do so              US dollar also benefits from a liquidity premium. We prefer thinking about it as a li-
over the foreseeable           quidity premium rather than calling the US a safe haven, given the country’s macro-
future                         economic under-performance. So what if the deficit and debt are high? The US is still
                               the country with the world’s largest bond market, the world’s largest stock market, and
                               the place where you are the most likely to find a buyer or a seller when you need one. In
                               today’s risk-averse markets, that is worth paying for. Hence, confidence will have to
                               return in a more unambiguous fashion to Europe and to the euro before one can take the
                               more bearish view on the dollar that it deserves.


Macro Insight: Issue Number 16| 17
Main Markets
                               CHART 15: REAL EFFECTIVE EXCHANGE RATES: USD, EUR, CNY, JPY
In real effective
terms, the US dollar             140
has depreciated                  130
markedly and the
Chinese renminbi has             120
appreciated strongly             110

                                 100

                                     90

                                     80

                                     70
                                          Jan 98       Jan 00           Jan 02           Jan 04           Jan 06          Jan 08           Jan 10              Jan 12
                                                   R eal Trade-Weig hted Exchang e Rate Index, Broad D efinition, 3/1973=100 - U ni ted States
                                                   Emu R eal Effecti ve Exchang e Rates - C pi Based, Index, Publication Base Year (2000), 2005y - Euro Zone
                                                   IMF real effecti ve exchang e rate index - China
                                                   IMF real effecti ve exchang e rate index - Japan

                               Source: Factset




Macro Insight: Issue Number 16| 18
Other Asset Classes
                               In addition to the above discussion on the main financial asset classes, a private investor
                               might wish to incorporate other investment alternatives as well into his or her portfolio.
                               Gold, real estate, private equity and impact investment are only a few of the options
                               available to investors willing to go beyond stocks and bonds. While all such asset have
                               their interest, they do not pay dividends and they tend to be relatively illiquid (not the
                               case of gold). Hence, investing in these areas should preferably be motivated by the
                               pleasure derived from owning the asset and/or investors should be prepared to lock
                               away that part of their portfolio for a number of years.

                               Gold: structural demand
                               2011 was the tenth consecutive year in which the gold price increased. At the time of
Gold has had a spec-           writing the gold price stands at USD 1724 per ounce, a ten per cent rise from the USD
tacular run over the           1566 at the start of the year (Chart 16), clocking up another yearly gain.
past decade
                               CHART 16: GOLD, USD/TROY OZ (SHADED AREA US RECESSIONS)
                                      Gold (US$/Troy Oz)
                                                       M ax: 1895.00 (05-SEP-11), M in: 252.80 (20-JUL-99), Last: 1724.00 (21-NOV-12)
                                 2,000
                                 1,800
                                                                                                                             1724.00
                                 1,600
                                 1,400
                                 1,200
                                 1,000
                                     800
                                     600
                                     400
                                     200
                                      0
                                      Jan 83 Jan 86 Jan 89 Jan 92 Jan 95 Jan 98 Jan 01 Jan 04 Jan 07 Jan 10

                               Source: Factset. Shaded areas are US recessions.
Demand for gold is
likely to remain sus-          Demand for gold originates with the central banks, the jewellery industry, the industrial
tained, primarily              and dental sectors, and private investment. According to the World Gold Council, over
from emerging mar-             50 per cent of world gold stocks are held in jewellery, followed by some 18 per cent
ket central banks              held by central banks and around 16 per cent held for investment purposes. Industrial
                               and other users hold around 14 per cent of stocks. Given the relatively low percentage of
                               central banks’ asset allocation in gold in emerging markets such as China, there is every
                               reason to believe that these countries will continue to be net buyers of gold in 2013 and
                               beyond.

Loose monetary poli-           In the post-Lehman crisis environment of exceptionally easy monetary policy in the
cy and muted growth            West, demand for gold as an investment reached record highs in 2011. Nearly 80 per
prospects conspire to          cent of investment demand flowed into physical gold. The global macro scenario is both
preserve the shine of          depressed enough and potentially inflationary enough to preserve gold as an attractive
gold as an investment          insurance asset or store of value for many conservative investors in 2013. Geopolitical
                               risks, e.g. in relation to Iran, will support this position of gold as a safe haven further.




Macro Insight: Issue Number 16| 19
Other Asset Classes

                               Real Estate: Still not the time to move up the risk curve
                               Given the current exceptionally low interest rate environment, borrowing money and
Housing markets are            investing in real estate has rarely been a more attractive option. Anybody waiting to buy
not necessarily out of         a home should seriously consider taking this step going into 2013. Speculative real es-
the woods yet                  tate investors, however, will have to be patient before they see any significant returns on
                               their investments. The US housing market looks cheap in many areas and recent indica-
                               tors show an upturn in the making, but this is from very low levels and with many more
                               foreclosures still in the pipe line. The trounced housing markets in Spain and Ireland too
                               could look attractive at these levels, however, these countries are behind the US in the
                               business cycle and prices could fall further before turning around. Hence, outside of
                               buying a home to live in, the housing market does not look like the place to be in next
                               year. There ought to be somewhat more scope for investors in commercial real estate.

                               European prime office rents outside of Spain and Ireland began to recover in 2010 and
                               2011. However, as economic conditions and the labour market context again take their
                               toll, rent growth stagnated or tapered off in 2012.

                               The best performing office markets in 2012 were Germany and the Nordic countries and
                               it is the prime end of these markets in particular that has done well, according to CBRE.
The best performing
                               Secondary assets and locations across Europe are suffering from a lack of occupier de-
office markets are
likely to be found in          mand as corporates cut costs or upgrade into better quality buildings and locations. The
the most solid econo-          resulting increase in the supply of secondary stock in Europe is proving difficult to re-
mies                           let. Some landlords, in Amsterdam and Frankfurt for instance, are even considering
                               changing the building use in order to solve their vacancy problem, although such chang-
                               es or redevelopment tend to involve significant amounts of capital expenditure.

                               CHART 17: WORKPLACE HEADCOUNT EMPLOYMENT, ESTIMATED AVERAGE ANNUAL
                               GROWTH, 2013-2014




                               Source: Oxford Economics




Macro Insight: Issue Number 16| 20
Other Asset Classes
                               On the supply-side, office completions are likely to increase in 2013, but most of the
Investors should con-          new space is pre-let, which ought to limit the potential downside. The best performing
centrate on prime              markets are likely to be those in countries with the strongest expected GDP growth and
locations and good
                               employment prospects. Oxford Economics estimates the strongest workplace headcount
quality assets
                               increases in Munich, Stockholm and Hamburg, followed by Oslo, London and Helsinki
                               (Chart 17). With no radical change expected in the overall growth trends in the Europe-
                               an economy, the same countries and cities are likely to continue to outperform. Pro-
                               spects in the European periphery remain bleak. Although these markets have experi-
                               enced significant price slides, it is not certain that the bottom has been reached. Hence,
                               investors interested in real estate in 2013 ought to remain defensive and concentrated in
                               prime locations and good quality assets.

                               Private Equity: Abundant opportunities
                               2013 did not elevate a private equity executive to the White House, although Mitt Rom-
                               ney’s candidature for the Presidency certainly brought the asset class into the lime light.
                               As the public debate focused mostly on how to tax and regulate this area, the general
Private equity pro-            public probably still learned little about how private equity brings funding to private
vides sorely needed            companies, assists them in their transformation and strategic development and perhaps
liquidity to entrepre-
                               most importantly, how it provides sorely needed liquidity to entrepreneurs who have
neurs
                               suffered restricted access to traditional financial markets and banks.

                               The 2008 crisis created an environment that has enabled the private equity class to in-
                               crease its out-performance relative to world equity markets (Chart 18) as firms had an
                               urgent need for funding and capital on the one hand, and traditional funding options
Private equity has             were drastically reduced on the other hand. The crisis forced companies to transform in
outperformed the               order to attain critical size, exploit synergies and acquire external growth as the main
stock market over the          economies’ GDP growth stagnated. That investors continue to favour the sector was il-
past decade
                               lustrated by the USD 8.5 bn inflows to Advent International in November – an amount
                               well in excess of the initial objective of this major private equity player.

                              Last 10 years Private Equity Performance versus MSCI World Index INDEX
                               CHART 18: PRIVATE EQUITY PERFORMANCE VERSUS MSCI WORLD
                                275

                                250                                                                                                242

                                225

                                200

                                175

                                150
                                                                                                                                   131
                                125
                                         100
                                100

                                 75

                                 50

                                 25

                                     -
                                         2002   2003   2004       2005         2006      2007   2008    2009       2010   2011   2012


                                                       PrEQIn All Private Equity Index                 MSCI World Index

                               Source: Prequin, November 2012




Macro Insight: Issue Number 16| 21
Other Asset Classes
                               Over 1800 private equity funds are currently raising money across the globe. Being se-
Investing in private           lective, choosing the best strategies and the most talented fund managers is thus abso-
equity requires long-          lutely necessary in order to realise the out-performance that is warranted by the long-
er-term immobilisa-            term immobilisation of capital required in this asset class.
tion of capital                For 2013, “buy-and-build” strategies in the European mid-market are interesting be-
                               cause of the great number of companies for sale at attractive prices on the continent.
                               Distressed strategies built on the need for liquidity and restructuring of certain European
                               or US firms facing refinancing difficulties can offer more opportunistic possibilities. A
                               third theme for the year ahead is growth strategies, particularly involving Asia, that are
                               likely to present private equity investors with opportunities to get involved with the fu-
                               ture regional leaders.

                               Impact investment: Micro-medium finance, agriculture funds, distressed loan
                               portfolios, etc.
                               More and more investors hunger for a way to have an increasingly direct connection
Enhancing the com-             between their money and the impact that it can have in the world. Impact investing is the
mon good while mak-            act of choosing investment vehicles that deliver positive returns as well as positive
ing a profit—the goal          change—enhancing the common good. Impact investing encompasses a range of ap-
of a rising number of          proaches, including microfinance and private equity in developing markets that allow
investors                      institutions and individual investors to get involved in solving specific social and envi-
                               ronmental problems while also generating a return.

                               Mahatma Gandhi said: “Be the change that you wish to see in the world”. 2013 is a year
2013 will be a year            where injecting more cash into the “real” economy can indeed make a difference. Risk
where cash put into            aversion and high cash holdings starve productive investments of their oxygen. Growth
the real economy can           in the current cycle is lower as a result, and even potential growth is likely to be affected
make a significant             by “unnecessary” bankruptcies and unrealised investments. Putting cash to productive
difference                     use at the current moment has a unique chance of making a profit as well as a difference.




Macro Insight: Issue Number 16| 22
Macro Conclusions for the Markets
Be selective and dis-          Being selective and discerning, as well as not too greedy, was our recommendation for
cerning                        2012, and we maintain it for 2013. Markets will be capped by a shortfall of growth, but
                               protected by loose monetary policy. In such a range-bound environment markets tend to
                               be choppy and trends are more difficult to identify. A recovery play should favour Eu-
Don’t be too greedy
                               rope, Emerging Markets and Japan, in relative terms. A return of confidence as the risk
                               of disaster scenarios abates ought to be negative for safe havens. Bond yields are likely
                               to stay far below fair value as long as official interest rates are ultra-low in the effort to
                               deal with the lingering effects of the sub-prime crisis. As those economies gradually
                               recover, global conditions will eventually send yields higher, resulting in capital losses
                               for fixed-income investors. That is probably more likely to occur in 2014 than in 2013
                               and we thus think that the “great rotation” out of bonds and into equities is not for this
                               coming year.
Borrow some money
                               With official interest rates set to remain low until mid-2015, borrowing modest amounts
                               can be a better inflation hedge than both gold and inflation-linked bonds. In that context,
Perhaps buy a home             borrowing to buy a house to live in, or for one’s children to live in, could be a very good
                               thing to do in 2013. As for housing as a speculative investment, it is still important to
                               bear in mind that not all housing markets have bottomed.

Think about why you            Generally speaking, the global macro-economic environment is improving, albeit at too
own bonds                      slow a pace for most of our tastes. Concentrating on core strategies and convictions,
                               2013 should be able to be a good year for the discriminating investor.
Slow growth caps               TABLE 7: MACRO CONCLUSIONS FOR THE MARKETS
equity markets but
                               Macro trend                                             Market implication
loose monetary poli-
cy provides a floor            Slowing growth in the US                                Caps the markets
                               Improving growth in Europe                              Positive
                               Sustained growth in China                               Positive
2013 might be range-           Still low interest rates - until mid-2015               Positive
bound but it heralds           More quantitative easing should growth be even slower   Puts a floor under the markets
improving macro                Less fiscal austerity (except in the US)                Positive (Negative for the US)
fundamentals—a                 Inflation not a concern at this stage                   Positive
promising theme for            Global macro imbalances are improving                   Slow progress means still slow growth
2014...                        Source: Crédit Agricole Private Banking




Macro Insight: Issue Number 16| 23
Appendix 1: Multipliers

The Fiscal Multiplier
The fiscal multiplier is the response in output to a change in the fiscal deficit. The change in output due
to a tax hike/cut or government spending increase/decrease is not instantaneous and tends to be com-
pounded over several years. Hence there are several multipliers:

1. The impact multiplier =           ∆Y(t)
                                     ∆G(t)
where Y is output, G is the government deficit, ∆ stands for the rate of change and t is the time period concerned.

2. The multiplier at some time horizon N = ∆Y(t+N)
                                           ∆G(t)

3. The peak multiplier, the largest impact over any horizon N = max(N) ∆Y(t+N)
                                                                        ∆G(t)

4. The cumulative multiplier, the cumulative change in output over the cumulative change in the fiscal
position at some horizon N:

         =         ΣN j=0 ∆Y(t+j)
                   ΣN j=0 ∆G(t+j)

The size of the multiplier is greater if:

       the economy is relatively closed (imports low)
       monetary conditions are loose (higher interest rates would dampen the effect of any fiscal boost)
       the exchange rate is fixed
       the fiscal position after the stimulus is sustainable
       the marginal propensity to consume is large
       the size of the output gap is large

The IMF asserts that the multiplier can increase by a factor of 2 to 3 if monetary conditions are accom-
modative.

A fiscal multiplier can be negative, for instance if fiscal expansion creates serious concerns about the sus-
tainability of such a policy. Hence, the size of the fiscal multiplier varies across countries, over time, and
in function of prevailing circumstances.

A rule of thumb would put the multiplier between 1 and 1.5 for large countries, between 0.5 and 1 for
medium-sized countries, and around 0.5 or less for small open economies.




Macro Insight: Issue Number 16| 24
Appendix 1: Multipliers

The Money Multiplier
The money multiplier can be defined as:

MM        =        1 + C/D
                   R/D + C/D

Where C is money in circulation, D is deposits, R is banks’ reserves. This means that changes in the
money multiplier depends on changes in the cash-to-deposits ratio on the one hand and on changes in the
reserves-to-deposits ratio on the other hand.

Under normal circumstances, all other things being equal, if the central bank injects liquidity into the sys-
tem, banks will lend more, and consumers and companies will buy and invest more. Recent experience
has seen a significant decline in broad money multipliers as central bank action has not lead to a propor-
tionate reaction in money supply. However, modern central banks use interest rates as the tool and not
money supply. In that context, the central bank rate sets the official policy interest rates, and money sup-
ply can be adjusted to keep market rates in line with the policy rate. In this case, the money multiplier
theory loses its relevance. Instead, today money supply affects the economy through two transmission
channels: the availability of credit, and the effect of liquidity on portfolio asset allocation. These are in
turn affected by sentiment, risk aversion, and other factors, including access to international capital mar-
kets. Hence, the ECB’s Governor Draghi does not talk about money multipliers but about monetary poli-
cy transmission channels.




Macro Insight: Issue Number 16| 25
Appendix 2: Official Interest Rates
Country                Policy rate                   Current, %     Previous, %          Real rate, %

Australia              Cash Target rate                    3.25            3.50                  1.25
Brazil                 Selic rate                          7.25            7.50                  1.80
Canada                 O/N Target rate                     1.00            0.75                 -0.20
China                  Deposit rate                        3.00            3.31                  4.30
Denmark                Repo rate                           0.20            0.45                 -2.10
Euro Zone              Main refinancing rate               0.75            1.00                 -1.75
Hong Kong              Base rate                           0.50            1.50                 -3.30
Hungary                Base rate                           6.00            6.25                  0.00
India                  Repo rate                           8.00            8.50                 -1.14
Indonesia              Reference rate                      5.75            6.00                  1.14

Israel                 Base rate                           2.00            2.25                  0.20
Japan                  O/N Target rate                     0.10            0.30                  0.40
Malaysia               O/N Policy rate (OPR)               3.00            2.75                  1.70
Mexico                 O/N Target rate                     4.50            4.75                 -0.10
New Zealand            Official cash rate                  2.50            3.00                  1.70
Norway                 Sight deposit                       1.50            1.75                  0.40
Philippines            Central Bank rate                   3.50            3.75                  0.40
Poland                 Deposit rate                        3.00            3.25                  0.40
Russia                 Refinancing rate                    8.25            8.00                  1.75
South Africa           Repo rate                           5.00            5.50                 -0.60
South Korea            Base rate                           2.75            3.00                  0.65
Sweden                 Repo rate                           1.25            1.50                  0.85
Switzerland            Libor target                        0.00            0.25                  0.20
Thailand               1-day repo rate                     2.75            3.00                  0.57
Turkey                 One week repo                       5.75            6.25                 -2.05
UK                     BOE rate                            0.50            1.00                 -2.20
US                     Fed funds                           0.25            1.00                 -1.95


Note: Real rate is current rate minus latest available CPI inflation rate, year-on-year. Countries in bold
are those whose last action was to increase the policy rate.
Source: Bloomberg, Crédit Agricole Private Banking




Macro Insight: Issue Number 16| 26
Charts, Tables & Sources

Charts
1. Share in world economy (nominal GDP) - page 4
2. Central Banks’ balance sheets, % GDP - page 5
3. M2 growth (indexed): US, Japan, Euro Zone and UK - page 6
4. US and China current account, % GDP - page 7
5. Germany and other Euro Zone current account, % GDP - page 7
6. Broad Money Multipliers: EZ, US, Japan (in multiples of the monetary base) - page 8
7. World GDP and CPI, % - page 10
8. Regional GDP, % - page 13
9. Official interest rates, main economies and BRIC - page 15
10. US, German and Japanese benchmark 10-year yields, % - page 16
11. US 10-year benchmark bond yield and S&P 500 dividend yield - page 16
12. US employment cost, GDP, corporate profits and non-financials’ profits - page 17
13. Car sales: US, China, India (indexed) - page 17
14. S&P price/earnings ratio - page 17
15. Real effective exchange rates: USD, EUR, CNY, JPY - page 18
16. Gold, USD/Troy oz - page 19
17. Workplace headcount employment, estimated average annual growth, 2013-2014 - page 20
18. Private Equity Performance versus MSCI World Index - page 21

Tables
1. US fiscal cliff - page 3
2. Fiscal drag in Europe and rest of world - page 9
3. The world’s most expensive taxi rides - page 10
4. Ease of starting a business, by category - page 11
5. Key forecasts - page 12
6. Country ranking - page 14
7. Macro conclusions for the markets - page 23

Sources
 Crédit Agricole Private Banking, Macro Insight Nr 15: “Profit Margins: Expect Less Growth but Fa-

  vour Companies with High and Rising Margins”, October 2012
 ECB, “The Supply of Money – Bank behaviour and the implications for monetary analysis”, Monthly

  Bulletin, pages 63-79, October 2011
 Eichengreen, Barry, “Exorbitant Privilege”, Oxford University Press, 2011

 Fatas, Antonio, « How Big (Small) are Fiscal Multipliers? », Fiscal Policy, Stabilization and Sustaina-

  bility Conference, Florence, June 6, 2011
 IMF Staff position note, « Fiscal Multipliers », May 20, 2009, SPN/09/11

 IMF, “World Economic Outlook”, October 2012

 Jorgenson, Dale W. and Khuong M. Vu, “Potential Growth of the World Economy”, Harvard Universi-

  ty and the National University of Singapore, Journal of Policy Modelling, 32: 615-631.
 The World Bank, IFC, “Doing Business 2012”, 2012

 The World Gold Council, Statistics, www.gold.org




Macro Insight: Issue Number 16| 27
Contacts

CONTRIBUTORS                         CRÉDIT AGRICOLE SUISSE PRIVATE BANKING

Dr. Marie Owens Thomsen              Mikael Lok
Senior Economist-Strategist          Head of Discretionary Portfolio Management
+41 58 321 6681                      +0041 58 321 9490
marie.owensthomsen@ca-suisse.com     mikael.lok@ca-suisse.com

Dr. Paul Wetterwald
Chief Economist                      MIS SERVICES
+41 58 321 6506
paul.wetterwald@ca-suisse.com        Katia Civino
                                     Head of MIS Services
Victoria Scalongne                   +0041 58 321 9553
Real Estate Market Economist         katia.civino@ca-suisse.com
+41 58 321 6779
victoria.scalongne@ca-suisse.com     Nayla Daher
                                     MIS Services
Olivier Carcy                        +0041 58 321 6346
Global Head of Private Equity        Nayla.daher@ca-suisse.com
+41 58 321 9480
olivie.carcy@ca-suisse.com


MACRO RESEARCH GROUP

Indosuez Gestion

Thierry Martinez
Portfolio Manager and Strategist
+33 1 40 75 62 48
thierry.martinez@ca-indosuez.fr

Crédit Agricole Luxembourg

Michel Bourgon
Senior Portfolio Manager
+352 24 67 53 44
michel.bourgon@ca-luxembourg.com

Crédit Foncier de Monaco

Damien Liègeois
Discretionary Portfolio Management
+377 93 10 25 44
dliegeois@cfm.mc




Macro Insight: Issue Number 16| 28
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