economic & market outlook 2013-14
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Economic & Market Outlook 2013-14
December 5, 2012
Economic & Market Outlook2013-14
Warren Jestin, Chief EconomistCamilla Sutton, Chief Currency Strategist
Vincent Delisle, Investment Strategist
Economic & Market Outlook 2013-14
December 5, 2012
Warren JestinSenior Vice-President & Chief Economist
New World Rising
2013-14 Economic Outlook
Economic & Market Outlook 2013-14
December 5, 2012Gains In Global Growth Will Be Moderate & Uneven
China and other emerging market powerhouses will increasingly drive global activity, maintaining a wide growth lead over traditional developed nations.If the U.S. avoids a turn-of-the-year fiscal cliff, it should edge out Canada as the top G7 growth performer. It’s not a hard race to win.
Economic & Market Outlook 2013-14
December 5, 2012
Sluggish growth and ongoing fiscal drag will temper job creation, confidence levels and spending trends, particularly in Europe.
Developed Nations Confront Big Headwinds
Economic & Market Outlook 2013-14
December 5, 2012Europe Battles Long-term Challenges
Europe’s debt crisis is far from over, with severe austerity measures undermining growth prospects well beyond mid-decade. A number of debt-heavy nations, locked in recession, are experiencing substantial social and political fallout from sky-high youth unemployment rates.
Economic & Market Outlook 2013-14
December 5, 2012Emerging Markets Increasingly Drive Global Growth …
Robust growth in China and a number of other emerging markets will provide important support to global trade flows & commodity prices.
Economic & Market Outlook 2013-14
December 5, 2012… Supported By Rising Income & Financial Resources
Domestic demand is underpinning growth in China and other emerging markets, supported by rapid income gains and large financial resources.
Economic & Market Outlook 2013-14
December 5, 2012Monetary Policies Remain Geared To Reviving Growth
Slow growth, low inflation & fiscal austerity point to a continuation of pedal-to-the-metal monetary stimulus in many developed economies.
Economic & Market Outlook 2013-14
December 5, 2012The Loonie Will Continue Flying High
The Canadian dollar is supported by strong commodity earnings, rising foreign investor interest and relatively favourable fiscal and financial fundamentals.
Economic & Market Outlook 2013-14
December 5, 2012Fiscal & Financial Strains Less Intense In Canada
The U.S. housing market is beginning to revive, but a return to more balanced conditions is still years away. Canada’s fiscal advantage provides a competitive edge as the U.S. and other nations confront the need to substantially boost taxes & scale back spending on key programs.
Economic & Market Outlook 2013-14
December 5, 2012U.S. Begins To Play Catch-up In Employment …
Despite recent U.S. job gains, over 4 million jobs are still needed to return to pre-recession peaks. Canadian employment is setting new records, with skilled labour shortages putting upward pressure on wage trends.
Economic & Market Outlook 2013-14
December 5, 2012… And Big-Ticket Purchases
Jobs gains, improving confidence & years of deleveraging are putting U.S. households in a mood to increase their spending.With home ownership at record highs, tighter mortgage rules and high household debt levels are cooling home sales in Vancouver and Toronto.
Economic & Market Outlook 2013-14
December 5, 2012Non-Res Construction Much Stronger In Canada
Canadian non-residential construction continues to benefit from big resource projects, infrastructure development and more balanced commercial markets.
Economic & Market Outlook 2013-14
December 5, 2012Resource Sector Drives Job & Income Gains
Canada’s resource-rich provinces will continue to lead in job and income gains.
Economic & Market Outlook 2013-14
December 5, 2012
Camilla SuttonChief Currency Strategist
Making Progress
2013-14 Foreign Exchange Outlook
Economic & Market Outlook 2013-14
December 5, 20122012 Forecast vs Performance
FORECASTING ACCURACY SUMMARY FROM 2012 (to November 29)CAD – direction and magnitudeJPY – direction and magnitudeGBP – direction and magnitude
AUD – direction but over estimated riseEUR – failed on both direction and estimate; as we had forecasted weakness & EUR is flat
-8
-4
0
4
8
JPY CAD GBP AUD EUR% re
turn
SCOTIA'S FORECASTACTUAL RETURNS YTD
SCOTIABANK FORECASTS VS ACTUAL RETURNS (2012)
Economic & Market Outlook 2013-14
December 5, 2012Scotiabank’s Forecast
FX - USD performance is mixed2011 2012f 2013f 2014f
USDCAD 1.02 0.97 0.96 0.94
CADUSD 0.98 1.03 1.04 1.06
AUDUSD 1.02 1.04 1.06 1.09
EURUSD 1.30 1.29 1.25 1.21
GBPUSD 1.55 1.62 1.64 1.66
USDJPY 77 80 87 90
USDCNY 6.30 6.25 6.10 6.04
Economic & Market Outlook 2013-14
December 5, 2012FX Themes – Year-to-Date
Main themes in 2012:
1. Europe
2. Global growth outlook
3. Central bank policy response
Main themes in 2013
1. Global growth outlook
2. Europe
3. The US backdrop
4. Central bank policy
5. Politics: new leadership in China; Elections in Italy, Japan, Germany, etc.
Economic & Market Outlook 2013-14
December 5, 2012THEME 1: Growth – US & China vs EU & Japan
• Can growth in China and the US offset weakness in Europe and Japan?• A soft landing in China with 2013 GDP of 8.0%.
Economic & Market Outlook 2013-14
December 5, 2012THEME 1: Growth – European Recession Ends
• Europe exits recession; headlines should improve.
• Growth remains moderate at best and complicated by demographics.
Economic & Market Outlook 2013-14
December 5, 2012THEME 2: Europe – Making Progress
Problem Developments to date Still needed Remaining tail risk
1. LTRO - provided liquidity
2. Banking union plans
Euro exit OMT - fiscal burden sharingPolitics: A framework for a
closer fiscal uniondecreasing
Government debt AusterityBalance between growth & austerity a challenging one
unchanged
GrowthDecelerating faster than
expected; most countries in or entering recession
This is biggest risk increasing
Bank Solvency decreasingResolution fund & deposit
guarantee facility
Economic & Market Outlook 2013-14
December 5, 2012THEME 3: The US Backdrop
• The fundamental USD story is not a strong one.
• US economy needs a weak USD; just like Eurozone needs a weak EUR.
Source: Bloomberg & Scotia FX Strategy
Economic & Market Outlook 2013-14
December 5, 2012THEME 3: The US Lacks A Fiscal Plan
• US fundamentals are typically those associated with a weak currency• Short-term: fiscal cliff uncertainty lays foundation for temporary USD strength
• 2013 fiscal drag is expected to be between 1 and 2% -- assumes agreement• Medium term: lack of credible fiscal plan should create USD weakness
US FISCAL & DEBT FORECAST FORECASTED US FISCAL DRAG As % of GDP
Economic & Market Outlook 2013-14
December 5, 2012THEME 4: Central Bank Response – FX Impact
• Positive CAD – BoC has one of few hawkish central bank bias in advanced economies.• Negative USD – QE3, rates on hold until mid 2015 & threat of QE3 expansion.
Economic & Market Outlook 2013-14
December 5, 2012THEME 4: Central Bank Response – QE
• Difficult to measure exact impact of QE programs.• Fed: QE1 decreased 10-year bond yields by 40 to 110bpts;
• while QE2 decreased them by 15 to 45bpts. • Expect QE3 to be expanded in December to include Treasurys.
Economic & Market Outlook 2013-14
December 5, 2012THEME 4: Central Banks – The Fed’s Timeline
FED'S TIMELINE
QE3 launched - $40bn MBS/mth Q4 12
QE3 expasion - $20 to 45bn Treasurys / mth Q4 12
Q1 13
Q2 13
QE3 - Fed signals end of QE Q3 13
Q4 13
Q1 14
Q2 14
Halt reinvestment of MBS Q3 14
Halt reinvestment of Treasurys Q4 14
Q1 15
Fed hikes rates Q2 15
Q3 15Source: Scotiabank FX Strategy & Economics
Economic & Market Outlook 2013-14
December 5, 2012THEME 4: Central Banks – Global Timelines
FED'S TIMELINE GLOBAL CENTRAL BANK RATE HIKES
QE3 launched - $40bn MBS/mth Q4 12
QE3 expasion - $20 to 45bn Treasurys / mth Q4 12
Q1 13 Mexico & Indonesia
Q2 13 Brazil and Chile
QE3 - Fed signals end of QE Q3 13 Korea & Thailand
Q4 13 Australia, Norway & Columbia
Q1 14 Canada & China
Q2 14
Halt reinvestment of MBS Q3 14 India
Halt reinvestment of Treasurys Q4 14
Q1 15 UK (BoE)
Fed hikes rates Q2 15 Europe (ECB)
Q3 15Source: Scotiabank FX Strategy & Economics
Economic & Market Outlook 2013-14
December 5, 2012
CAD Drivers & Outlook
Source: Bloomberg & Scotia FX Strategy
CAD STRENGTH CAD WEAKNESSCe
ntra
l ba
nks FED's QE program juxtaposed against neutral
to hawkish BoC
• China expected to have a soft landing (GDP, 2012 7.7%; 2013 8.0%; 2014 8.4%)
Domestic risks: housing market, household debt, slowing employment growth
• US moving into stronger recovery
Sove
reig
n
Triple A rated with a credible fiscal plan
Flow
s CAD positive flows - Triple A rating; FX reserves; M&A
Oil Oil (Scotiabank Economics forecasts WTI oil
to average $95 in 2013)Oil risks: Brent-WTI spread & US self reliance
Politi
cs
Stable government until October 2015
Senti
men
t
Sentiment is bullish with traders holding CAD net long - however moderating
Risk
s
CAD vol at decade lowsExternal risks: Europe, US fiscal cliff &
geopolitics - but none are our base case
Gro
wth
CAD FORECAST: STRENGTHENS TO 1.04 IN 2013
Economic & Market Outlook 2013-14
December 5, 2012Scotiabank’s Forecast
FX - USD performance is mixed2011 2012f 2013f 2014f
USDCAD 1.02 0.97 0.96 0.94
CADUSD 0.98 1.03 1.04 1.06
AUDUSD 1.02 1.04 1.06 1.09
EURUSD 1.30 1.29 1.25 1.21
GBPUSD 1.55 1.62 1.64 1.66
USDJPY 77 80 87 90
USDCNY 6.30 6.25 6.10 6.04
Economic & Market Outlook 2013-14
December 5, 2012Major Risks
MAJOR RISKS TO FORECAST
• Fiscal cliff – no compromise – major global growth consequences
• Global growth – China fails to engineer soft landing
• Inflation – central bank policy stems significant inflationary pressures
• Oil – geopolitical tensions rise; oil rallies and threatens global economy
• Europe – Escalates beyond current expectations
Economic & Market Outlook 2013-14
December 5, 2012
Vincent DelisleInvestment Strategist, Portfolio Strategy Group
Bottom Line Trumps Headlines
2013-14 Equity Market Outlook
Economic & Market Outlook 2013-14
December 5, 2012Revisiting 2012: Equities Surviving Policy Fears
• Equities edging bonds in 2012; U.S., Mexico, Germany leading.
• Canada lagging; Brazil & China bucking trend with losses.
Global Market Returns (in USD, total return) - 2012 YTD & H2 27-Nov-12
Source: Scotiabank GBM, Bloomberg
-15%
-10%
-5%
0%
5%
10
%
15
%
20
%
25
%
30
%
Germany
Mexico
U.S. (S&P 500)
MSCI AC World
U.K.
Canada (TSX)
Canada Govt Bond Index
Japan
US$ per C$
U.S. Govt Bond Index
DXY Index
CRB Index
China
Brazil
-15
%
-10
%
-5%
0%
5%
10
%
15
%
20
%
25
%
30
%
H2/2012
2012 YTD
Economic & Market Outlook 2013-14
December 5, 2012Revisiting 2012: Earnings Leadership Rules
• Positive earnings revisions in the U.S. and Germany…
• …negative trends in China, Brazil, and Canada.
Earnings Revisions Since January 2012
Source: Scotiabank GBM, Thomson Financial.
90
92
94
96
98
100
102
104
106Ja
n-12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
90
92
94
96
98
100
102
104
106
TSX
MSCI Germany
MSCI China
MSCI Brazil
MSCI Mexico
S&P 500
Economic & Market Outlook 2013-14
December 5, 2012Revisiting 2012: TSX Lag Due to Resources
• Mining, Golds, and Energy hurt…
• non-resources + dividend payers shine. Total Return Performance: 2012 YTD, H1/12, and H2/12As of Nov 27, 2012 2012 YTD H1/12 H2/12Non Dividend Payers -8.3% -16.2% 9.4%Low Dividend Payers 1.5% -2.5% 4.2%High Dividend payers 8.4% 1.6% 6.6%
TSX 4.0% -1.5% 5.6%
Energy -3.1% -7.7% 5.0%Materials -6.1% -10.7% 5.1%
Mining -13.9% -17.9% 4.9%
Gold -10.5% -16.0% 6.5%
Industrials 9.7% 5.0% 4.5%Cons. Discretionary 16.2% 13.2% 2.6%Cons. Staples 13.8% 8.8% 4.6%Healthcare 19.0% 11.5% 6.8%Financials 13.0% 5.5% 7.1%
Banks 12.2% 3.8% 8.2%
Insurance 15.8% 6.3% 9.0%
REITs 14.7% 14.4% 0.3%
Technology -4.5% -11.4% 7.7%Telecoms 8.5% 1.9% 6.5%Utilities 0.1% 0.6% -0.5%Source: Scotiabank GBM estimates, Bloomberg.
Economic & Market Outlook 2013-14
December 5, 2012Revisiting 2012: P/E Expansion Provides Lift
• Valuations improved in 2012, Mexico premium jumps.
• Ex-Mexico, P/E multiples still below historical averages.
Forward P/E ratios (1992-2012)
Source: Scotiabank GBM, Thomson Financial.
0
5
10
15
20
25
Jun
-92
Jun
-93
Jun
-94
Jun
-95
Jun
-96
Jun
-97
Jun
-98
Jun
-99
Jun
-00
Jun
-01
Jun
-02
Jun
-03
Jun
-04
Jun
-05
Jun
-06
Jun
-07
Jun
-08
Jun
-09
Jun
-10
Jun
-11
Jun
-12
Jun
-13
0
5
10
15
20
25TSX
S&P 500
MSCI Brazil
MSCI Mexico
Economic & Market Outlook 2013-14
December 5, 2012Stronger U.S. & China Momentum in 1H13
• Manufacturing surveys bottomed in Q3-12, expect recovery in 1H13.
• U.S. and China growing, Eurozone still negative. Major Manufaturing PMI Indices (2005-2012)
*China PMI: average of HSBC China PMI and official China PMI
Source: Scotiabank GBM, Bloomberg.
30
35
40
45
50
55
60
65Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
30
35
40
45
50
55
60
65
U.S. ISM
Eurozone PMI
China PMI*
Economic & Market Outlook 2013-14
December 5, 2012Post-China Easing supports TSX Gains
• Positive reversal from a year ago.
• TSX and Latam (Brazil) hurt when China is tightening.
China Lending Rate, TSX and MSCI LatAm (1997-2012)
Source: Scotiabank GBM, Bloomberg.
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%M
ay-
97
Ma
y-9
8
Ma
y-9
9
Ma
y-0
0
Ma
y-0
1
Ma
y-0
2
Ma
y-0
3
Ma
y-0
4
Ma
y-0
5
Ma
y-0
6
Ma
y-0
7
Ma
y-0
8
Ma
y-0
9
Ma
y-1
0
Ma
y-1
1
Ma
y-1
2
Ma
y-1
3
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
China Lending Rate YoY - LHS
TSX YoY - RHS
MSCI LatAm YoY - RHS
Economic & Market Outlook 2013-14
December 5, 2012TSX versus S&P500 Return Recovering
TSX vs. S&P 500 - Relative Performance YoY in US$ (1978-2012)
Source: Scotiabank GBM, Bloomberg.
-9%
-29% -28%-31%
-39%
-26%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%Ja
n-7
8
Jan
-80
Jan
-82
Jan
-84
Jan
-86
Jan
-88
Jan
-90
Jan
-92
Jan
-94
Jan
-96
Jan
-98
Jan
-00
Jan
-02
Jan
-04
Jan
-06
Jan
-08
Jan
-10
Jan
-12
Jan
-14
S&P 500 Outperforming
TSX Outperforming
+1 St. Dev.
-1 St. Dev.
• TSX coming back from extreme underperformance versus S&P500.
Economic & Market Outlook 2013-14
December 5, 2012Sub-9% China GDP = Muted CRB Gains
• Commodity upside limited by moderate China recovery…
• …will challenge TSX and EM leadership.
China GDP Growth and Commodity Price Impact (2001-2012)
Source: Scotiabank GBM, Bloomberg.
6%
7%
8%
9%
10%
11%
12%
13%Ja
n-01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
-60%
-40%
-20%
0%
20%
40%
60%
80%China Real GDP YoY - LHS
CRB Index YoY - RHS
Economic & Market Outlook 2013-14
December 5, 2012Positive Reversal for Global Earnings
• Recovering manufacturing positive for earnings outlook...
• …should support risk appetite in 1H13.
World PMI vs. MSCI AC World EPS (1998-2012)
Source: Scotiabank GBM, Bloomberg, Thomson Financial.
30
35
40
45
50
55
60
65
70
Jan
-98
Jan
-99
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
Jan
-13
Jan
-14
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
World Manufacturing PMI - LHS
MSCI AC World 12M Fwd EPS YoY - RHS
Global earnings growth YoY
Economic & Market Outlook 2013-14
December 5, 2012Sporadic Risk-On/Risk-Off Leadership to Continue
• Market environment remains volatile, challenging for buy-and-hold.
U.S. Risk-On/Risk-Off Indicator* (2002-2012)
*S&P 500 less long-term government bonds (TLT) 3M rolling relative return
Source: Scotiabank GBM, Bloomberg
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%O
ct-0
2
Ap
r-03
Oct
-03
Ap
r-04
Oct
-04
Ap
r-05
Oct
-05
Ap
r-06
Oct
-06
Ap
r-07
Oct
-07
Ap
r-08
Oct
-08
Ap
r-09
Oct
-09
Ap
r-10
Oct
-10
Ap
r-11
Oct
-11
Ap
r-12
Oct
-12
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Risk-Off Trade
Extended
Risk-On Trade Extended
S&P 500 "relative" Overbought
Bonds "relative" Overbought
Economic & Market Outlook 2013-14
December 5, 2012U.S. Housing/Employment Recovery
• Stay constructive on S&P500/equities as long as U.S. housing and payrolls improve.
U.S. Housing Starts and Unemployment Rate (1990-2012)
Source: Scotiabank GBM, Bloomberg.
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400Ja
n-9
0
Jan
-92
Jan
-94
Jan
-96
Jan
-98
Jan
-00
Jan
-02
Jan
-04
Jan
-06
Jan
-08
Jan
-10
Jan
-12
Jan
-14
3
4
5
6
7
8
9
10
U.S. Housing Starts ('000s) - LHS
U.S. Unemployment Rate (inverted) - RHS
Economic & Market Outlook 2013-14
December 5, 2012Recommended Asset Mix
Scotiabank GBM Asset Mix - Q4/12 Update
Change FromBenchmark Recommended Last
Equities 60% 62% Canada (TSX) 5% 7% U.S. (S&P 500) 22% 22% Europe (U.K./Germany) 12% 13% Japan 6% 4%
Far East ex-Japan 10% 10% LatAm 5% 6%
Bonds 40% 36% Government 30% 22% Corporate 10% 14%
Cash (91-D Tbills) 0% 2%Source: Scotiabank GBM estimates
Asset Mix
• Modest Equity over Bond bias extended through 1H13.
• TSX and Latam could have strong start, but S&P500 should be among leaders again in 2013.
Economic & Market Outlook 2013-14
December 5, 2012Canadian Index - Sector Strategy
TSX Sector Strategy - November 2012SectorsEnergy (Producers over Integrated)Materials (Fertilizers/Forest/Mining OW)Industrials (Capital Goods over Transport)DiscretionaryStaplesHealthcareFinancials (Insurance Over Banks)TechnologyTelecoms (Telco over Cables)UtilitiesSource: Scotiabank GBM estimates.
RecommendationOverweightOverweightOverweight
MarketweightUnderweightUnderweight
UnderweightMarketweightMarketweightUnderweight
• Global over domestic focus to kick off the year.
• Base Metals, Forest Products, Energy, Industrials, Insurance focus.
Economic & Market Outlook 2013-14
December 5, 2012
Disclaimer
TM Trademark of The Bank of Nova Scotia. Used under license, where applicable.
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.
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