Global Markets Brief. June David Simmonds

Transcription

1 Global Markets Brief June 28 David Simmonds 1

2 An FX view of the world in one picture Deviation from 1Y Real Effective Exchange Rate Average vs CA % of GDP Overshot? Deviation of Real FX BGN RON NZD HUF SKK ZAR USD AUD INR TRY GBP CZK COP IDR MXN BRL EUR ARS ECS PHP KRW ILS CAD JPY SEK TWD Undershot? CA % of GDP CNY RUB HKD VEB CHF MYR NOK SGD Source: RBS, EcoWin 2

3 Timing is everything (of course) 3 Dominoes (Numbers based on Nominal GDP as % of W orld Total) U.S GBP, ZAR, ISK, RON, HUF, T R Y, IN R CAD & MXN EUR EMGE ex HUF, RON AU D & NZD EMGA + JPY ex IN R EMGL ex MXN Middle East + NOK + RUB Source: IMF WEO 3

4 RBS Carry Trade Rich/Cheap Model (AUD, NZD vs CHF, JPY) Explanatory variables: 1y rate spreads, risk appetite (credit spreads, vol, US equities de-trended), commodity prices (food, metals detrended) and yield curves (AUD, NZD and JPY) Carry Trade Spot and Smoothed Fitted Trend* AUD, NZD vs CHF, JPY Short-term fair value Jan- Jan-2 Jan-4 Jan-6 Jan-8 *Hodrick-Prescott Filter Source: RBS GBM 4

5 C/A deficit and excess credit growth CA % GDP vs Change in Private Credit as Share of GDP (27) 2 Change in Private Credit as Share GDP (%) BGN RON Most Vulnerable PLN ZAR COP TRY INR HUF MXN KRW PEN BRL IDR ARS PHP RUB CLP VEB CNY THB MYR CA % of GDP 5

6 It s hard for the dollar to rally before the curve has stopped steepening. Has it? US curve shape and EUR/USD 2:1s Treasury spread and EUR/USD exchange rate Source: 27 RBS, EcoWin US 1Y-2Y Treas EUR/USD (RHS) 6

7 One (only!) macro picture: US consumer gets hurt this time. US real personal consumption expenditure and NAHB housing index NAHB Index Real PCE 7

8 RBS EUR/USD long term fair value model: when does it matter? EURUSD Long-term fair value M1 199M1 1995M1 2M1 25M1 8

9 June 28 Key issues for India

10 The story until now- above potential growth Trends in output and deviation from potential Jun-99 Dec-99 Jun- Dec- Jun-1 Dec-1 Jun-2 Dec-2 Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Potential non-farm GDP (INR bn) Non-farm GDP (INR bn) Output gap (%) Source: CEIC and RBS Global Banking and Markets 1

11 Inflation- reaching politically corrosive levels Trends in WPI Wholesale price inflation (WPI), the most important measure of inflation has risen to politically corrosive levels Food prices are at record highs Measures to tame inflation are largely fiscal Apr-5 Jul-5 WPI Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Manufactured product WPI Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Source: CEIC and RBS Global Banking and Markets 11

12 Inflation control measures fiscal deficit to deteriorate Past and projected trends in central government balance Fiscal consolidation has stalled FY9 (fiscal year ending March 29) budget deficit set to breach official target Expect higher than budgeted government bond issuance FY3 FY4 FY5 FY6 FY7 FY8 FY9 (official est) Central government balance (% GDP) FY9 (RBS est) Source: CEIC and RBS Global Banking and Markets 12

13 To restore competitiveness RBI appears keen to correct INR overvaluation-reer remains an important metric Garment/textile sectors are coming under pressure this is a politically important constituency Oil prices are being managed little need to appreciate INR Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Trends in REER REER (2:1) Trends in garment exports % Y/Y, 3MMA Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Readymade garments

14 Reserve accumulation still strong but off peak Trends in external reserve accretion Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Change in external reserves (ex-valuation) (USD bn) Source: CEIC and RBS Global Banking and Markets 14

15 Capital flows have eased for now Trends in FII investments in India securities Source: CEIC and RBS Global Banking and Markets 15 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-6 Apr-6 Jan-3 Apr-3 Jul-3 Oct-3 Jan-4 Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Foreign institutional investment (USD mn)

16 Long term trend is towards higher inflows Capital flows (% GDP) % GD 75% 7% Comparative demographic profile 8 65% Mar-4 Jun-4 Sep-4 Dec-4 Mar-5 Jun-5 Sep-5 Dec-5 Mar-6 Jun-6 Sep-6 Dec-6 Mar-7 Jun-7 Sep-7 Dec-7 FDI Portfolio investment Loans Banking Capital Other flows 6% 55% 5% India: Economically active (% population) China: Economically active (% population) World: Economically active (% population) (ex-india/china) Source: UN Population Division and RBS Global Banking and Markets

17 The importance of infrastructure US inventory/sales ratio, %, sa Paved roads World s 5 largest ports 1.7 China % of total 91 # of ports 9 TEUs 83, India , Indonesia ,282 Mexico Vietnam , Average 92-6 Source: RBS, World Bank, Container Management (25 data) Source: RBS, CEIC 17

18 This material has been prepared by The Royal Bank of Scotland plc ( RBS ) for information purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. This material should be regarded as a marketing communication and may have been produced in conjunction with the RBS trading desks that trade as principal in the instruments mentioned herein. This commentary is therefore not independent from the proprietary interests of RBS, which may conflict with your interests. Opinions expressed may differ from the opinions expressed by other divisions of RBS including our investment research department. This material includes analyses of securities and related derivatives that the firm's trading desk may make a market in, and in which it is likely as principal to have a long or short position at any time, including possibly a position that was accumulated on the basis of this analysis prior to its dissemination. Trading desks may also have or take positions inconsistent with this material. This material may have been made available to other clients of RBS before being made available to you. Issuers mentioned in this material may be investment banking clients of RBS. Pursuant to this relationship, RBS may have provided in the past, and may provide in the future, financing, advice, and securitization and underwriting services to these clients in connection with which it has received or will receive compensation. The author does not undertake any obligation to update this material. This material is current as of the indicated date. This material is prepared from publicly available information believed to be reliable, but RBS makes no representations as to its accuracy or completeness. Additional information is available upon request. You should make your own independent evaluation of the relevance and adequacy of the information contained in this material and make such other investigations as you deem necessary, including obtaining independent financial advice, before participating in any transaction in respect of the securities referred to in this material. THIS MATERIAL IS NOT INVESTMENT RESEARCH AS DEFINED BY THE FINANCIAL SERVICES AUTHORITY. United Kingdom. Unless otherwise stated herein, this material is distributed by The Royal Bank of Scotland plc ( RBS ) Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Company No RBS is authorised and regulated as a bank and for the conduct of investment business in the United Kingdom by the Financial Services Authority. Australia. This material is distributed in Australia to wholesale investors only by The Royal Bank of Scotland plc (Australia branch), (ABN ), Level 48 Australia Square Tower, George Street, Sydney NSW 2, Australia which is authorised and regulated by the Australian Securities and Investments Commission, (AFS License No ), and the Australian Prudential Regulation Authority. France. This material is distributed in the Republic of France by The Royal Bank of Scotland plc (Paris branch), 94 boulevard Haussmann, 758 Paris, France. Hong Kong. This material is being distributed in Hong Kong by The Royal Bank of Scotland plc (Hong Kong branch), 3/F AIG Tower, 1 Connaught Road, Central, Hong Kong, which is regulated by the Hong Kong Monetary Authority. Italy. Persons receiving this material in Italy requiring additional information or wishing to effect transactions in any relevant Investments should contact The Royal Bank of Scotland plc (Milan branch), Via Turati 18, 2121, Milan, Italy. Japan. This material is distributed in Japan by The Royal Bank of Scotland plc (Tokyo branch), Shin-Marunouchi Center Building 19F - 21F, 6-2 Marunouchi 1-chome, Chiyoda-ku, Tokyo 1-5, Japan, which is regulated by the Financial Services Agency of Japan. Singapore. This material is distributed in Singapore by The Royal Bank of Scotland plc (Singapore branch), 1 George Street, #1- Singapore 49145, which is regulated by the Monetary Authority of Singapore. RBS is exempt from licensing in respect of all financial advisory services under the (Singapore) Financial Advisers Act, Chapter 11 ( FAA ). In Singapore, this material is intended solely for distribution to institutional investors, accredited investors, and expert investors as defined under the FAA. United States of America. RBS is regulated in the US by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in the document comply with an applicable exemption from the registration requirements of the US Securities Act This material is only being made available to U.S. persons that are also Major U.S. institutional investors as defined in Rule 15a-6 of the Securities Exchange Act 1934 and the interpretative guidance promulgated there under. Major U.S. institutional investors should contact Greenwich Capital Markets, Inc., ( RBS Greenwich Capital ), an affiliate of RBS and member of FINRA, if they wish to effect a transaction in any Securities mentioned herein. The Royal Bank of Scotland plc. Registered in Scotland No Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The daisy device logo, RBS, The Royal Bank of Scotland and Make it happen are trade marks of The Royal Bank of Scotland Group plc. 18