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GLOBAL MACRO LANDSCAPE

Fourth Quarter 2019

Worries Continue to Grow, But Hopes Buoyed by Policy

Guy Bruten Chief Economist―Asia Pacific ex China

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Global Macro Landscape 4Q19 |

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1


Market Backdrop: What’s The Consensus Narrative?

2

Source: AB

Market pricing and analysts’ views imply a consensus narrative along these lines:

Risk of recession rising but still not the most likely scenario, thanks to:

Monetary easing to support growth (Fed put)

China policymakers will do enough to stabilize growth (Xi put)

Lower likelihood of material escalation in trade war (Trump re-election put)

Inflation is dead

Together, the growth, inflation and policy picture puts a floor under asset prices

Worries Continue to Grow, But Hopes Buoyed By Policy Puts


As of September 30, 2019*USD termsSource: Bloomberg

Global Asset-Price Returns*

A Mixed September; But YTD Returns SolidMarket Backdrop

3

8.2%10.2%

15.3%

1.6%

23.1%

10.3%

6.3% 6.8%

(8.2)%

(4.3)%(1.5)% (0.7)%

15.6%13.5%

11.2%

8.0%

2.2%

(0.5)%

0.3%

(0.8)%

Global Equities EM USD Debt US High Yield Global Bonds

2016 2017 2018 2019 (Jan–Aug) 2019 (Sep)


The Macro Cycle

4


Global Macro Outlook: Key Controversies

5

As of September 30, 209Source: AB

Policy Effectiveness

US Dollar Policy

Manufacturing Spilloverinto Jobs/Investment

DM Monetary Policy Pivot

Crystallization of Geopolitical/Populist Risks

Coming Down The Track Moving Off The RadarOn The Radar

Shift to Fiscal (Dominance)

China/US TradeTension

China Policy Easing



AB Scenario Probabilities: New ScenariosAB Scenario Probabilities: Old Scenarios

Heading Into A Protracted DownturnGlobal Macro Outlook: Shifting Probabilities

6

10%

55%

35%

Downside(Deep Recession)

Central (ProtractedDownturn)

Upside(Muddle Through)

0

10

20

30

40

50

60

Aug 18 Jan 19 Jun 19

Per

cent

Central (Muddle Through)

Downside (Protracted Downturn)


AB Global Real GDP Growth Forecast by Vintage* AB 2020 Real GDP Forecasts

*World growth based on market exchange rates. Forecast years start in May: i.e. the first forecast for calendar-year 2011 is May 2010 and so on. Except for 2019 which starts in March 2018.As of September 30, 2019Source: Bloomberg, Haver and AB

Significant Downward Revisions, Especially To Europe & JapanGlobal Macro Outlook: Forecast Overview

7

1.5

2.0

2.5

3.0

3.5

4.0

4.5

12 13 14 15 16 17 18 19

2013 2014 2015 2016

2017 2018 2019 2020

Per

cent

age

Cha

nge

(0.4)%

0.3%

0.9%

1.5%

2.3%

3.5%

6.0%

0.5%

1.0%

1.4%

1.8%

2.6%

3.6%

6.0%

Japan

Euro

DM

US

Global

EM ex Ch

China

August 2019

September 2019



How Do We Go From “Challenging Environment” to “Protracted Downturn”?Global Macro Outlook: Roadmap

8

Round 2 Impact:

Spillover to Non-Manufacturing

Declines in Capital Spending

Labour Market Deterioration

Consumer Confidence

Consumer Spending

Initial Propagation:

Collapse in Trade Growth

Declining Business Confidence

Falling Manufacturing Output

Rising Inventory Levels

Triggers:

Soaring Uncertainty….

Trade

Geopolitics

Response:

Monetary Easing

Lower Bond Yields

Lower Oil Price

Fiscal Boost

Populism

Globalisation


As of September 30, 2019Source: Haver Analytics

Trade Conflict in ActionGlobal Macro Outlook: It Starts With Manufacturing And Trade

9

G7 Manufacturing Output & Final Domestic DemandWorld Trade Growth

(3)

(2)

(1)

0

1

2

3

4

12 13 14 15 16 17 18 19Yo

Y %

Chg

.

Manufacturing Output

Final DomesticDemand

(1)

0

1

2

3

4

5

6

12 13 14 15 16 17 18 19

YoY

% C

hg.;

3-M

th M

ovin

g A

ve.


1Exports plus imports of goods & services as a share of GDP (2018). Euro area countries exclude intra euro area trade. 2AB estimateAs of September 30, 2019Source: Haver Analytics and AB

Trade Openness & Policy FlexibilityGlobal Macro Outlook: Who’s Most At Risk?

10

Policy Flexibility and Trade Openness Manufacturing Share in Value Added (2018)

20

25

30

35

40

45

50

55

60

65

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Trad

e O

penn

ess1

, %

Policy Flexibility2

US

Japan

Euro Area

China

Germany

Italy

HighLow

UK

Australia

France

4.8%

9.0%

10.0%

11.2%

14.1%

15.0%

15.4%

15.6%

19.5%

20.7%

21.1%

29.3%

Australia

UK

France

US

DM

Italy

Euro

World

EM

Japan

Germany

China


* Business Conditions, NAB Business SurveyLHS: data through September 2019; RHS: data through August 2019.Source: Thomson Reuters Datastream

Australia Less Globally Exposed, But Has Home-Grown ProblemsAustralia’s Cyclical Picture: A Challenging Outlook

11

Business Sentiment* Slides Sharply….. Chart Title….As Housing Boom Turns to Bust

-40

-30

-20

-10

0

10

20

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Inde

x

Early 1990srecession

Commodity Boom

Commodity Bust

Housing Boom

0

20

40

60

80

100

120

2002

2004

2006

2008

2010

2012

2014

2016

2018

Num

ber,

‘000

, ann

ual r

ate

(3m

ma)

PermitsTowers

(>3 stories)

0

20

40

60

80

100

120

2002

2004

2006

2008

2010

2012

2014

2016

2018

Townhouses(<= 3 stories)

Permits: Detached Houses


RBA Trying To Get Ahead of the Game – But Is Conventional Easing Enough?Australia’s Cyclical Picture: A Challenging Outlook

12

LHS: Inflation data through Q2-2019. Core = average of trimmed mean, weight median and CPI ex Food and Energy. Unemployment rate through August 2019. RHS through 14/10/2019 Source: Thomson Reuters Datastream, Bloomberg

Core Inflation Low, As Unemployment Lifts…. Chart Title….As RBA Restarts Policy Easing

0

1

2

3

4

5

6

10 11 12 13 14 15 16 17 18 19

Perc

ent

3 Year Government Bond Yield

RBA Cash Rate

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

0

1

2

3

4

5

6

7

8

07 09 11 13 15 17 19

y/y

% c

hang

e

Core CPIHeadline CPI

RBA Target Band

Unemployment Rate (Q ave, RH)


Growth continues to struggle in export-exposed high income economiesAsia ex Japan: Trade Conflict Continues to Drag

13

*Hong Kong, Singapore, Korea, Taiwan (PPP weighted)As of September 30, 2019Source: Datastream, CEIC

Chart Title High Income East Asia* CPI InflationHigh Income East Asia* GDP growth “pulse”

(8)

(6)

(4)

(2)

0

2

4

6

8

10

12

04 06 08 10 12 14 16 18 20

q/q

saar

, 2q

ma

Trend growth 1999-2008 = 6%

Trend growth 2012–now = 2.75%

(1)

0

1

2

3

4

5

6

04 06 08 10 12 14 16 18y/

y %

cha

nge

Core CPIAverage inflation 1999–2008 = 1.8%

Average Inflation 2012–now = 1.4%

Headline CPI


Manufacturing & Trade Slump Fully Priced?Global Macro Outlook: Surprise Indexes Off Their Lows

14

As of September 30, 2019Source: Bloomberg

Citi Surprise Indexes: Level vs Monthly ChangeCiti Global Surprise Index

(40)

(30)

(20)

(10)

0

10

20

30

40

50

60

15 16 17 18 19

Inde

x

(120)

(90)

(60)

(30)

0

30

60

90

120

(60) (40) (20) 0 20 40 60Le

vel

Monthly Change

US

Japan

Euro Area

EM

Australia

Canada

UK

ChinaDM

Sweden

Global


Treading WaterAsia Trade Cycle

15

Trade data through August 2019; PMI through September 2019Source: Datastream

Bellwether Exporters: Korea + Taiwan + Singapore Chart TitleManufacturing PMIs: Korea and Taiwan

30

40

50

60

70

80

90

100

110

2007 2009 2011 2013 2015 2017 2019-40

-20

0

20

40

60

80

100

Perc

ent

Export Values (USD index)

YoY Percent Change(Left Scale)

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

2006 2009 2012 2015 2018-3

-2

-1

0

1

2

3

4

5

6

7

Z-score

Z-sc

ore

Taiwan

Korea (Left Scale)


*At market exchange rates.As of September 30, 2019Source: Haver Analytics and Markit

And It’s Spreading to The US Global Macro Outlook: Manufacturing Under Pressure

16

Manufacturing PMIsGlobal GDP Growth* and PMI TrackerWorld Trade Volume

96

100

104

108

112

116

120

124

12 13 14 15 16 17 18 19

Jan

2012

= 1

00; 3

-Mth

Mov

ing

Ave.

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

10 11 12 13 14 15 16 17 18 19

YoY

% C

hg.

PMI Tracker

Real GDP

Pre-Crisis Trend

44

46

48

50

52

54

56

58

60

62

14 15 16 17 18 19

Inde

x

China

US

Euro Area


Central Banks Are Looking to Counter Global Slowdown

Policy Response is Being Delivered….

Historical analysis and current forecasts do not guarantee future results.As of August 30, 2019Source: Bloomberg Barclays, Central Banks and AB

Central Banks Pivot

Bank of Japan has bias towards further easing, but question remains what is left in the toolbox

ECB rate cuts and more QE in the pipeline, but major doubts over effectiveness

The PBOC will need to provide additional stimulus to stabilize growth

Bank of Canada pauses on raising rates, as it monitors ongoing trade headwinds and a slowing global economy

Fed expected to cut rates another 100 basis points over the coming year

Lower Yields are Also Supportive 10-Year Government Bonds (Percent)

0.0

1.0

2.0

3.0

4.0

-1.0

0.0

1.0

2.0

3.0

Jan-18 May-18 Sep-18 Jan-19 May-19

Germany (LHS) Japan (LHS) US (RHS)

+1.5

-0.3

-0.7

17


As of September 30, 2019Source: Bloomberg

Dollar PolicyGlobal Macro Outlook: Coming Down The Track

18

US Dollars per Euro (Inverted)US Dollar Trade-Weighted Index (Major Currencies)

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.5010 11 12 13 14 15 16 17 18 19

EU

R/U

SD

65

70

75

80

85

90

95

100

10 11 12 13 14 15 16 17 18 19

Mar

ch 1

973

= 10

0


“It’s high time for fiscal policy to take charge” (Mario Draghi, September 2019)Global Macro Outlook: Coming Down The Track

19

*Hypothetical deterioration in the primary budget position that would keep the government debt/GDP ratio stable at current 10-year bond yields. Put differently, the difference between the current primary budget balance and debt-stabilizing primary budget balance at current 10-year bond yields.As of September 30, 2019Source: Haver Analytics and IMF

Hypothetical Fiscal “Space”*% of GDP”

General Government Budget Balances: 2019E% of GDP

(4.6)%

(3.3)%

(2.8)%

(2.7)%

(2.3)%

(1.5)%

(1.3)%

(1.0)%

(0.6)%

(0.4)%

0.0%

1.0%

1.1%

US

France

Japan

Italy

Spain

Australia

UK

Euro

Canada

Portugal

Ireland

N'lands

Germany

(0.1)%

0.3%

0.6%

1.1%

1.3%

1.4%

2.7%

3.0%

3.1%

3.5%

4.2%

5.5%

6.4%

US

Japan

Italy

Australia

France

Canada

UK

Euro

Spain

Germany

N'lands

Ireland

Portugal



Global Macro Outlook: Heading Into A Protracted Downturn

20

Growth: intensifying downturn with no clear end date in sight

Inflation: secular story points to higher inflation but cyclical inflation pressure is down

Fiscal Policy: rising pressure for fiscal response

China: aggressive stimulus helps counter downside growth risks

Populism: a persistent cloud on the investment landscape; set to crystallize (Brexit, trade war, currency war)?

Base Case

Global: easing cycle under way; significant doubts over policy effectiveness

Fed: expected to cut rates by another 100 basis points over the coming year

ECB: more rate cuts and QE in the pipeline; even the ECB doubts policy effectiveness

BOJ: biased towards further easing; anything left in the toolbox?

PBOC: additional stimulus still needed to stabilize growth

Central Bank Response

Risk Assets: the outlook has darkened and downside risks dominate; monetary easing to provide near-term support but policy effectiveness uncertain

Core Yields: broken monetary policy to anchor yields close to historic lows

USD: race to the bottom on monetary policy and possible currency war cloud the USD outlook

EM Risk: slower global growth and trade tensions vs. further DM monetary policy stimulus

Market Implications



Global Macro Cycle: Stuck

21

Growth Stable/Policy Tightening

Growth Slowing/Policy Stable

Growth Weak/Policy Easing

Growth Rising/Policy Stable

Risk Assets: -/+Duration: ++

Risk Assets: +Duration: -

Risk Assets: -Duration: +

Risk Assets: +/-Duration: -/-

Risk Assets: ++Duration: +

Risk Assets: -Duration: -/-

Risk Assets: -/-Duration: -

Risk Assets +Duration: ++

2017

2016

2019/2020

2018

2019 Jan



Global Macro Outlook: Cyclical & Market Dashboard

22

Economic Growth Inflation Monetary Policy

Recession Boom Deflation Overshooting Easier Tighter

Risk Assets Duration

Negative Positive

USD

Weaker StrongerNegative Positive

Trend Target No Change

Neutral NeutralNeutral


Source: AB

Biography

Guy Bruten joined AllianceBernstein (AB) in 2004 and is a member of the firm’s Global Economic Research team. In that role, he provides macro research coverage for a number of countries in the Asia Pacific region, and is also responsible for conducting thematic research—looking at the impact, for example, of demographic change, the commodity price supercycle and the global surge in populist politics on the outlook for economies and asset prices. Prior to joining AB, Bruten worked in economics and market strategy roles for Macquarie Bank’s Funds Management Group and for SBC Warburg. He started his career in the early 1990s at the Commonwealth Department of the Treasury in Canberra. Bruten holds a BEc from the University of Adelaide and a MEc from the Australian National University. Location: Melbourne

Guy Bruten

Chief Economist—Asia Pacific ex China

23


A Word About Risk

The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein L.P. or its affiliates.

Important Risk Information Related to Investing in Equity and Short Strategies

All investments involve risk. Equity securities may rise and decline in value due to both real and perceived market and economic factors as well as general industry conditions.

A short strategy may not always be able to close out a short position on favorable terms. Short sales involve the risk of loss by subsequently buying a security at a higher price than the price at which it sold the security short. The amount of such loss is theoretically unlimited (since it is limited only by the increase in value of the security sold short). In contrast, the risk of loss from a long position is limited to the investment in the long position, since its value cannot fall below zero. Short selling is a form of leverage. To mitigate leverage risk, a strategy will always hold liquid assets (including its long positions) at least equal to its short position exposure, marked to market daily.

Important Risk Information Related to Investing in Emerging Markets and Foreign Currencies

Investing in emerging-market debt poses risks, including those generally associated with fixed-income investments. Fixed-income securities may lose value due to market fluctuations or changes in interest rates. Longer-maturity bonds are more vulnerable to rising interest rates. A bond issuer’s credit rating may be lowered due to deteriorating financial condition; this may result in losses and potentially default, or failure to meet payment obligations. The default probability is higher in bonds with lower, noninvestment-grade ratings (commonly known as “junk bonds”).

There are other potential risks when investing in emerging-market debt. Non-US securities may be more volatile because of the associated political, regulatory, market and economic uncertainties; these risks can be magnified in emerging-market securities. Emerging-market bonds may also be exposed to fluctuating currency values. If a bond’s currency weakens against the US dollar, this can negatively affect its value when translated back into US-dollar terms.

24

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