The Tricky Trio: US Dollar, Oil and Chinese Renminbi

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1 INVESTMENT DESK BULLETIN 9 th February 2016 The Tricky Trio: US Dollar, Oil and Chinese Renminbi Presented by Pau Morilla-Giner, Chief Investment Officer

2 Tug Of War Between Services and Manufacturing Sectors Manufacturing ISM Services ISM Source Citigroup, IMF 2

3 World Trade Has Weakened Dramatically Alternative Trade Indicators Oil & Metal Prices Source Citigroup 3

4 US Growth Entered 2016 With Soft Momentum ISM Manufacturing & Non Manufacturing Indices Source Pictet 4

5 Breaking Down US Industrial Production: Oil vs Rest US Industrial Production (Output Volumes, Rebased) Source Datastream

6 US Employment Picture Remains Robust Non Farm Payrolls Labour Utilisation Measures Source Pictet 6

7 Tailwind For US: Income Growth at 3% US Real Disposable Income (%, YoY Growth) Source Datastream

8 Housing Continues Gradual Recovery Consumption & Income Source Oxford Economics

9 Fed To Be Very Tentative Fed Funds Implied Odds Yield Curve Steepness Source Oxford Economics, Morgan Stanley 9

10 Summary Of Where US Stands Bumpy ride will continue for US Growth Risk of US Economic recession appear overblown: Consumption growth remains stable Recovery in the housing market is alive and kicking Solid labour market Public spending is at last growing more solidly Main Risks Wage Growth Policy mistakes Lingering EM Sluggishness 10

11 Euro Area Euro Area GDP & Composite PMI Eurozone GDP Indicator Source Oxford Economics 11

12 Oil Prices Taking Inflation Expectations Down Eurozone Inflation Expectations Source Bank Of America 12

13 Encouraging Signs Around Employment & Lending Eurozone Employment ECB Mortgage Lending Survey Source Oxford Economics 13

14 The Result: Confident Consumers Consumer Confident Retail Sales Source Oxford Economics 14

15 Summary Of Where Eurozone Stands Lower Oil Prices To Boost Growth In 2016 EUR depreciation and Monetary Easing Will Also Contribute Inflation Likely To Raise Only Slowly Relatively insulated from Chinese Slowdown if it remains a trade shock rather than FX rate shock ECB To Extend QE In 2016 Reform Agenda Still Unfulfilled Bouts Of Politically-Induced Volatility 15

16 China s Private Consumption Is Holding On Household Income vs Consumption Retail Sales Source Citigroup, IMF 16

17 Underlying Chinese Growth Between 4% to 7% China GDP Growth Estimates Source Oxford Economics, Goldman Sachs 17

18 EM Net Capital Outflows EM Net Capital Flows Source Quartz 18

19 The Three Sources Of Pain USD Strength Oil Price Weakness RMB Devaluation 19

20 RMB Exchange Rate RMB FX Rate Source Citigroup 20

21 Large RMB Depreciation Would Hurt Global Recovery World GDP In FX Spillover Source Oxford Economics 21

22 How Much More Before China Blinks? China FX Reserves Source International Energy Agency 22

23 Central Banks Have Still Some Munition

24 ECB Balance Sheet Has Further Room For Growth Fed Balance Sheet ECB Balance Sheet Source Datastream 24

25 The Shrinking Benefits Of Japanese Money Printing Source Bank Of Japan 25

26 Summary US GDP growth is softer, but recession risk is low European Euro area growth stable as region remains relatively insulated from China growth slowdown UK Growth to reduce on back of lower business spending, lower net exports and slower household incomes EMs in a delicate transition phase. Be selective Markets will continue to be very volatile 3 main sources of pain for risk markets: USD, Oil & RMB When pain becomes unbearable, policymakers will blink Inflationary pressures to remain muted 26

27 Downside Risks RMB Devaluation extends massive deflationary wave to rest of world Stronger-than-expected upturn in inflation, driven by rise in wage growth above productivity growth in US (showing the Fed to be behind curve) Political destabilisation in Europe Credit event in the weakest EMs (eg Brazil, Turkey), which could prompt a systemic crisis 27

28 Contact Us We hope you have found this document useful. If you would like to attend one of our weekly investment meetings please let a member of the London & Capital Team know. The meetings take place on a Tuesday morning from 8.15am to 9.15am (GMT) at our London offices and we are happy to reserve you a place. London & Capital 7 Triton Square Regent s Place London NW1 3HG T +44 (0) F +44 (0) E W londonandcapital.com Issued by London & Capital Asset Management Limited, authorised and regulated by the Financial Conduct Authority. The information is provided for information and discussion purposes only. The information does not constitute an offer, solicitation or recommendation to enter into any transaction or to buy, sell or hold any security, investment, loan or other financial product. 28 IDB - Our weekly investment updates 09/02/2016

29 Who we are About the Group We are an independently-owned wealth manager creating investment solutions that meet our clients needs. Established in 1986, we have US$ 3.7 billion of assets under management. We continue to grow because clients from around the world are looking for more specialist advice. Our investment teams create tailormade portfolios designed to perform when it matters most. It's a highly sophisticated process driven by multi-asset investing, open architecture and an obsession to preserve our clients wealth. Our specialist areas US Family Office Private Investment Office Institutional International Wealth and Immigration Adviser Solutions UK Wealth Asia Real Estate Our recent awards 29 IDB - Our weekly investment updates 09/02/2016

30 Thank you.

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