A new map for global

financial services:

The EIU’s views

April 2014

Steven Leslie, Lead analyst

Sujatha Krishnan-Barman, Analyst

Key economies

Three themes

Synchronised upturn in the major developed economies

US recovery is deepening

Europe is growing, though fitfully

Japan: Abenomics helping

Tighter financial conditions globally

It’s all about the Fed

Is there risk of an EM crisis?

Back to basics in emerging markets

China, India, Brazil: slowdown is both cyclical and structural

US growth strong in second half of 2013; slower of late

• Real GDP expanded by 3.3% in last six months of 2013

• Data was softer in Dec and Jan

• But likely due to bad weather

Coldest January since 1994

• Data looking better in February

• Is growth sustainable? Yes. More balanced; consumer spending, business investment, exports and even government contributing 0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2012

- Q1

2012

- Q3

2013

- Q1

2013

- Q3

Real GDP, % change

Real GDP, % change. Source: Bureau of Economic Analysis

Given that, what do we expect from the Fed?

• Continued reductions of QE bond purchases

Already cut three times; more expected

QE finished by year-end

• Fed would need to see big slump to stop

Fed believes it’s time to unwind the stimulus

Economy should do reasonably well in 2014

Fed’s balance sheet already over $4trn; diminishing returns

• Market interest rates will rise as Fed pulls back

Will force investors to reassess EM vs US returns; expect EM volatility

Long bond rates (US Treasuries) could rise 100bp in 2014, but….

Policy rate will not rise until mid-2015 at the earliest

Latam: Softer growth than during the 2004-10 boom

• Region grew by 2.5% in 2013—another tepid performance expected in 2014

• Cyclical factors

• Differences in macroeconomic

policy management

• Still high commodities prices

• We expect grow to pick up to average 3.5% in 2015-18

• Firmer global growth

• Drivers of domestic demand?

• Competitiveness-enhancing

reforms/ investment?

-2

-1

0

1

2

3

4

5

6

7

8

Venez

uela

Argen

tina

Jam

aica

Braz

il

El Salva

dor

Trin

idad

Cuba

Ecua

dor

Urugu

ay

Mex

ico

Hondu

ras

Guate

mala

Costa Rica

Chile

Domin

ican

Rep

Nicara

gua

Colo

mbi

a

Para

guay

Boliv

iaPe

ru

Pana

ma

Source: Economist Intelligence Unit, CountryData.

EU begins to recover in earnest

• The EU as a whole will expand output by 1.5% in 2014, up from just 0.1% last year

• There will be lots of variation,

as usual

• Non-Euro economies of north

and central Europe do better

• Only a couple of smaller crisis

countries--Cyprus and

Slovenia—will remain in

recession

• Two important consideration

• ECB indecision in the face of

possible deflation

• Banks approach stress tests

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0.50

1.00

1.50

2.00

2.50

3.00

3.50

Greec

e

Finl

and

Italy

Denm

ark

Fran

ce

Spain

Nethe

rland

s

Belgium

Austria

Czec

h Re

p

Germ

any

Portu

gal

Ireland

Bulgar

ia

Hunga

ry

Swed

en UK

Poland

Rom

ania

Source: Economist Intelligence Unit, CountryData.

Europe’s banks are not lending, holding back economy

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12

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r

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13

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n

20

13

- No

v

Bank lending, % change

Europe relies more on bank loans than capital markets to fund companies.

Banks are under pressure to improve their finances, so are not making

loans.

Financial institution lending, % change YoY. Source: Eurostat

Japan: No surge in sight, but better outlook

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-10

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10

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2014 - Q

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12Tankan business sentiment

Fixed capital investment

• ―Abenomics‖—fiscal stimulus,

structural reforms, money-printing

Twice as much easing as the US

Fed, as share of GDP

• Outlook has improved

Stronger business investment;

three quarters of +8-9% growth

• Inflation is back

• Consumption tax hike will hit

consumer confidence

• Population, workforce will contract

• Outlook? Not rapid growth, but

sustained, moderate growth

Tankan: diffusion index. Gross fixed capital formation, % change, annual rate.

Source: Tankan business survey, all enterprises; Cabinet office for investment

China will slow, but don’t panic!

• China’s rate of GDP growth is slowing…but it is now a US$10trn economy, so it

consumes more than ever in cash terms/quantities

• Policymakers keen on reducing ―moral hazard‖ – first domestic bond default, and

series of small bankruptcies – but not a ―Lehman moment‖

• Widening of Renminbi’s trading band – allowing (encouraging?) slight

depreciation. All seen as tools to rebalance domestic economy.

Repricing of EM risk in recent quarters

We don’t expect a full-blown EM crisis

• For Asia, this is not 1997-98

Less foreign debt, from 35% of

GDP in 1998 to 23% in 2013

Cost of servicing international

debt much lower

Value of foreign-exchange

reserves has increased 10-fold

• Asian EMs less tied to the US

More integrated with other

emerging markets

• Floating exchange rates

No peg to break 0

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Internationalreserves

Debt-servicepaid/GDP

International reserves, m US$, lh scale. Debt-service as share of nominal

GDP, rh scale. Source: EIU Country Data

Asian liquidity: Much stronger

Megatrends for financials

Economic centre of gravity is moving eastward

Economic centre of gravity is moving eastward

EIU estimates and forecasts

• Asia & Australasia will grow to account for nearly 45% of bank

loans by 2017, from around 28% in 2008

Giant, untapped need for simple financing, savings and

payment options

Fast-rising incomes, lower debt loads (both in government

and among households) will drive financial deepening

Banks in Asia will also face tighter rules (liquidity, Basel III) but

in most cases already comply with these standards

• But, competing in Asia is tough

Many developed-market lenders withdrawing: greater capital

requirements at home and/or onerous regulatory burden

Weak revenues and cost controls

• Financials find it tough to expand revenues, as seen this week at US banks

Some of this is cyclical, for example in mortgage refinancing and FICC trading

activity, and may recover later

Some is regulations driven: tighter mortgage rules, limits on prop trading and OTC

derivatives. This will not recover

A large share is simply due to finance’s reliance on mature markets

• Careful management needed to boost

earnings and bolster capital positions

Cost savings have become key to

achieve bottom-line targets

Also, items like reserves releases as

economy improves

Lower-cost business models, but with security concerns

• Internet and mobile strategies offer low-

cost models

Savings on expensive locations and

labour forces

Increasingly technologically

sophisticated customers

Wide diffusion of devices, including

soon smartphones in EMs

But security concerns may thwart use

of such channels

• Unconventional branches may work well as an alternative in some markets

Branch locations in grocers or post offices

Or even in vans, boats and other vehicles

Regulations: More to come

• Basel III rules advance for banks to 2019

Recent Basel report showed adoption of capital

rules not just in US and EU but also in other G-20

economies

Additional steps include leverage ratios, G-SIBs

and liquidity ratios

Many EM, US lender already meet standards that

are in place

• National/regional rules too

US leverage ratio is stiffer than minimum

Planned EU banking union

Regulators have leeway over systemically

important

• Tighter rules too for capital markets, investment

funds. HFT may be next

Nevertheless, New York and London have not been displaced, yet

• Shift of financial weight to Asia and EMs may imply rising challenger centres, but so far

this hasn’t happened

China still has a relatively closed market, despite liberalising moves. Other large

economies are closed or unwelcoming

Alternative fund management centres are small with limited hinterlands

New York taps it own large domestic market, while London holds on to EU business,

forex and exotic listings

• Real shift may be years away

China has recently signalled more

opening of the capital account

Great openness to foreigners is possible

Renminbi will continue to internationalise

Trends stretch beyond our five-year

outlook

Thank you

Steven Leslie

stevenleslie@eiu.com

1 (212) 698-9719

Sujatha Krishnan-Barman

sujathakrishnan-

barman@eiu.com

+44 (0)20 7576 8271