Queen s Global Markets A PREMIER UNDERGRADUATE THINK-TANK. QGM Predictions 2015

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1 Queen s Global Markets A PREMIER UNDERGRADUATE THINK-TANK QGM Predictions

2 Agenda 1. Evaluation of Last Year s Prediction 2. Global Overview of Special Prediction by First-Year Analysts 4. Regional Predictions a) North America b) Latin America c) Europe d) China e) Middle East and Africa f) Asia Pacific QGM 2

3 Last Year s Predictions North America QGM 3

4 Last Year s Predictions Latin America QGM 4

5 Last Year s Predictions Europe QGM 5

6 Last Year s Predictions China QGM 6

7 Last Year s Predictions MEA QGM 7

8 Last Year s Predictions Asia Pacific QGM 8

9 The March of the Reformers 2015 will be the year where we begin to see significant structural reforms in emerging markets Narendra Modi Joko Widodo Shinzo Abe The increasingly strong Prime Minister of India will continue to open its economy He has signaled his plans by an executive order raising caps on foreign ownership of insurance companies Recently elected as President of Indonesia, he started his term with several bold reforms Within a short time, he eliminated fuel subsidies and launched plans for a universal healthcare scheme Although the third arrow of Abenomics has been slow to come, Abe could proceed in 2015 with the TPP In a recent election, Abe affirmed his electoral mandate, giving him leverage for reform QGM 9

10 Queen s Global Markets A PREMIER UNDERGRADUATE THINK-TANK Regionalization in 2015 How a new area of nationalist leaders will sculpt the economic climate in 2015 Mark Martone, Tracy Li January 14, 2015

11 % Growth Prediction: A new era of nationalism fueled by the Chinese Dream and a marginalized Putin will result in regionalization, leading to decreased global trade during Global Growth and Trade Real GDP Growth Trade volume of goods and services Sources: (IMF, 2015) QGM 11

12 % Change YOY GDP Growth Prediction: A new era of nationalism fueled by the Chinese Dream and a marginalized Putin will result in regionalization, leading to decreased global trade during Outlook for Changes in Regional GDP Growth USA Japan EU UK China India Brazil Russia Sources: (Goldman Sachs, 2015) QGM 12

13 China As China moves away from its past manufacturing stronghold, it seeks investment in Asia, stronger alliances with Russia and the Chinese Dream Goodbye Great Powers A Warm Gesture to Putin The Chinese Dream China seeks to create an Asian community of shared destiny Development of Asian Infrastructure Investment Bank (AIIB) headed by China o $50 billion in capital o US encouraged allies not to join AIIB More trade conducted with East and Southeast Asia ($1.4 trillion) than US and EU combined. Development of the Silk Road, and Maritime Silk Road China seeks to strengthen its economic ties with Russia in addition. China offered to provide Russia financial aid to avoid an economic slowdown. o East Route Pipeline agreed with Russia in May China s manufacturing index will see greater dips in the future, as growth is generated by innovation and consumption, rather than exports and manufacturing.. Xi Jinping heads an agenda for constitutional reform, tightening rule by law, ousting corruption, and boosting innovation, and diplomatic influence. Thomson Reuters/INSEAD Asia Business Sentiment Index indicated that China s score slipped from 67 to 50 in 2014 based on a survey of 120 foreign companies. Sources: (Engdahl, F., 2015) (Reuters, 2015) (Donnan, 2014). QGM 13

14 Chinese Inward FDI and PMI Trends Chinese Inward FDI Chinese Average Manufacturing PMI Sources: (World Bank, 2015); (Trading Economics, 2015) QGM 14

15 The Distorted Views of Russian Policy The power of Putin and the path of nationalism. Russian Media Portrayal USD:RUB Exchange Rate Putin is not the cause, he is the solution Russian opinions driven largely by state television's carefully constructed version of reality and the Kremlin's methodical dismantling of every credible political alternative Putin will fix Russia s woes over the next two years Polls indicate 81% of the population still support him Confident that the Ruble will recover very soon Promised to diversify Russia s economy from energy Western Opinion The economy is in crisis The Ruble has lost about half its value GDP decreasing Aggression in Crimea/Ukraine has turned the country into an international pariah Source: Bloomberg, NORC, BBC News QGM 15

16 Confidence in the Economy is Slipping Russians are no longer getting what they want. Particularly true in Moscow Russians have become more accustomed to imported goods and travel Once-again off limits as a result of Ukraine situation March 2014 First Round of Sanctions In the wake of the annexation of Crimea by the Russian Federation Imposed to prevent certain Russian officials to travel to Canada, United States, and the European Union members April 2014 Second Round of Sanctions United States imposed ban on business transactions on multiple Russian officials and businesses European Union further travel bans on individuals Issued statement, sanctions are not punitive, but designed to bring about a change in policy or activity by the target country, entities or individuals. Third Round of Sanctions July 2014 December 2014 Involvement from more countries Discontinuation of trade with Russia Restrictions related to Russian energy and defense industries Further travel bans Discontinuation of loans/capital Banning the purchase of Russian goods Source: WSJ, CTV QGM 16

17 % Of Imports % of Exports Relationship with Major Trading Partners How the sanctions have caused friction with Russia Rounds of sanctions against Russia have reduced global trade The new sanctions are significant because of the extent Europe and Russia depend on one another for trade, primarily in Russian sourced fossil fuels Relationship with China: Both sides are wary about a hostile international environment and oversight dominated by the US China continues to enjoy the benefits of Russia s military technology November Resumption of hi-tech arms trade that were suspended several years ago Non-supportive of sanctions against Russia New joint naval exercises planned for 2015 Relationship with Germany: Use of heavier economic sanctions expected in near future Bring end to Ukraine conflict Not in Germany's or Europe's interest to bring about a Russian collapse Russian Import Origins Russian Export Destinations China Germany Ukraine Belarus Japan United States Italy Source: OEC, Business Spectator, QGM 17

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19 Background: 2014 Recap Trends and Reasoning

20 Thesis National Average Polls Strong Support in Alberta

21 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 Strong Trajectory Small Business Growth Unemployment rate

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23 Cuba s Economy Will Shrink by 2% Old foes become new allies, but can they do it in time? Overview For years, Cuba has relied on Venezuelan oil in exchange for doctors, teachers, and military advisors. Their partnership has been soured because of a decline in oil prices and Venezuela s worsening debt situation, it is not be possible for Venezuela to continue the deal (especially so close to a default). In the wake of all this, Obama has decided to lift trade embargo laws. USA Trade embargo is actually a set of laws that will need to be reversed. Removing embargo will require congressional approval. US still has $6.3 Billion in unsatisfied certified claims and they are unlikely to relinquish this debt. Cuba Deal will give Castro much needed sources in Cash (If it goes through). Without cheap oil Cuba s few industries will falter. Although Russia has written off 90% of Cuba s debt to the country, Cuba is still in a dire foreign debt situation ($13.6 billion in 2012).

24 Brazil Forecast A year of social unrest, corruption scandals, social reforms, and fiscal changes GDP Surplus/Growth Primary budget surplus is required to be 1.2% of GDP in 2015 to avoid S&P from dropping investment grade from BBB- to BB+ (junk bond status) QGM predicts that Brazil will not achieve this requirement as a result of Half of all primary public spending moving in line with the minimum wage which is to rise by 2.5% in 2015 and change on such a short notice is not possible Investment will stall in 2015 after a 7.2% drop in 2014 as a result of a lack of consumer confidence coinciding with the Petrobras corruption scandals Levy s New Policies Petrobras state oil company, kept prices artificially low to consumers by 20-25% to provide affordable energy and curb inflation. In order to meet the surplus needs and in response to the global oil price, QGM predicts that new Finance Minister Levy will drastically reduce the large oil subsidies Coinciding with the gradual removal of subsidies, will be a continuation of the increases in benchmark interest rates to 12.5% in order to control inflation Unemployment is currently at a near-record low of 5% and will rise as a result of Levy s austerity measures

25 New Argentine Presidential Election New President, Same Old Problems Overview Current President Cristina Fernandez de Kirchner is not allowed to run; inability to change constitution due to minority government QGM is predicting that Sergio Massa of the Renewal Front Party, a breakaway Peronist party, will win the Presidency Criticized Kirchner on various economic and social issues Kirchner s stance on business (export tariffs, protectionist policies) Doctoring of inflation statistics Inability to contain crime (Increase in homicides of 13% , highest rate of theft in S. America) Needs to enable Argentina to regain access to capital markets and begin negotiating with American courts to move Argentina out of default. Argentine public becoming frustrated with ineptitude of current government to create change and have desire to participate in competitive economy

26 Venezuela s Impending Default Barring an international bailout or generous aid from supporting states. Oil prices have fallen by over 50% since summer 2013 Oil prices have plunged from $100 in summer 2013 to under $50 (2014 beginning). As of 2013, oil constitutes 96.28% of Venezuela s exports. Venezuela provides oil at subsidized prices to ideologically friendly (socialist) governments in the region. Vast social programs keep politicians in power Increases in oil prices over the past decade allowed Hugo Chavez to expand social spending and boost Venezuela s international profile. President Nicolas Maduro, Hugo Chavez successor, narrowly defeated his opponent on promises of further expanding the welfare state. Since cuts are unlikely, a dangerous default looms Standard & Poor s cut Venezuela s credit rating to a CCC+. Venezuela s debt is now the most expensive to insure in the world. Venezuela s currency, the bolivar, has depreciated from 81 to 178 per dollar. Venezuela s official inflation rate is at 63.42%.

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28 Draghi s Whatever It Takes The ECB is on route to quantitative easing Prediction The European Central Bank will begin quantitative easing in the form of purchasing Italian and Spanish sovereign bonds and will not raise the main refinancing rate off of 0.15% or the overnight deposit rate of -0.1% in Rational The Bond Market Near Junk Level Bonds accounting for more than a quarter of the euro-zone bonds. ECB s two main areas of focus, deflation and low employment Bond market suggests secular stagnation Spare capacity in the euro-zone Greek Hostility Year Generic Yield January 22? Spain Italy Greece Source: The Economist, The Globe and Mail, Reuters

29 Challenges for the ECB Good vs. bad deleveraging Prediction A credit slowdown on both the demand- and supply-side will weigh on the Eurozone s ability to overcome slow economic growth and deflation and the ECB s ability to effectively and permanently inflate its balance sheet. Rationale Eurozone Loans to Private Sector Deleveraging in European banks Demand-side problems with stimulus Reduced lending alongside high government debt Deleveraging done wrong Expiry of LTROs Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 0% -1% -2% -3% -4% -5% -6% Source: European Central Bank, Fidelity, Centre for Economic Policy Research, Wall Street Journal

30 Recession in Russia in 2015 Russia to experience its first contraction since 2009 Prediction The Russian economy will experience a significant contraction in 2015, upwards of 3% ~ 4%. Russia faces this narrative for the next two years. Tough economic conditions will undermine President Vladimir Putin s high approval rating and could result in Russian actions against Western Sanctions. Rationale Rub/USD Trailing 6 months Falling oil prices - Reliance on tax revenues from the oil industry - Requires $105 per barrel of Brent Crude oil to maintain a balanced budget Economic stress arising from Western Sanctions - Inability for major Russian companies to access international financial markets - Unable to rollover debt, will require governmental assistance Futile attempt to prevent Ruble s fall - Depleting foreign reserve - Spike in deposit withdrawals Source: The Economist, The Globe and Mail, Reuters

31 GDP Growth Rate (%) Current polls in Greece indicate a threat to Eurozone Greek Election - Greek Political and Economic Crisis? Prediction The Greek socialist party Syriza, narrowly leading in the polls to date, will not have the support to win a majority in the January 2015 election due to the potential impact of a short-term crisis that will occur in Greece and the Eurozone. GDP Annual Growth Rate Rational Risks of adopting a far-left party in Greece outweigh the risks involved with staying with the current government Re-raises prospect of leaving the Eurozone currency Immediate term fallouts of a new government would predominantly be around their currency An exit from the Euro would lead to a significant decline in the living standards of Greek citizens. National Bank of Greece Per capita income would fall by 55% The new national currency depreciate by 65% in comparison to the Euro Recession which Greece has been in for five years would deepen to 22%, Unemployment would rise from its current 25% to 34% of the work force Inflation would soar to 30%. Source: Forbes, NBG, Bloomberg

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33 Phasing out Western IT Influence China will pass legislative restrictions on Western technology use in its military, government and SOEs in Access Denied Developing domestic technologies and ensuring cyber-security are two wings of a bird equally crucial to moving forward Xi Jinping China will see skyrocketing growth in its Information and Telecommunications Technology Industry in 2015 measured by increased R&D spending, and greater domestic consumption of Chinese-operated hardware, cloud computing, and ecommerce firms Edward Snowden s leaks solidified Chinese uneasiness about over-reliance on foreign firms like Microsoft and IBM for its technology needs Beijing aims to restrict all foreign technology from banks. SOEs and key government agencies by We will see this replacement process begin in Growth of domestic industries China s cloud and e-commerce leaders (Alibaba, Tencent, Baidu) will continue to grow in user outreach. The young and growing global cloud computing industry rate is five times higher than the global IT sector growth rate, meaning space exists to bid for market share. With the decline of China s manufacturing sector, we will see the growth of its technology sector Sources: (Capgemini, 2012) (World Bank, 2015) (Tiezzi, 2014)

34 RMB Internationalization to Accelerate In 2015, payments and trading in RMB will outpace the AUD and CAD to become the fifth most traded currency RMB Internationalization The internationalization of the RMB has been an increasingly important topic in global finance in recent years As per QGM s 2014 report, there are three stages: 1) Commercialization of the RMB 2) Structural Economic Changes and 3) Development of an RMB Fund Pool The evidence suggests that the RMB is undergoing stages (1) and (2): The RMB was the 8 th most traded currency in the world in January 2014, account for 1.38% of global trading, compared to being the 13 th most traded currency in January 2013 (accounting for only.63% of global trading) Xi Jinping s government has made economic rebalancing a key priority for their administration; the focus on sustainable growth is a key step towards true internalization QGM predicts that the RMB will continue its rapid acceleration in settling global payments, outpacing the AUD and CAD as these economies face headwinds coming in to 2015 RMB Share of Global Payment Volumes Sources: (SWIFT, 2014) (QGM Analysis, 2014)

35 Russian Stalemate Driven into his den, the bear will bide his time During 2015, the disposition of Russian forces will remain frozen Specifically: Crimea will remain a permanent part of the Russian Federation The areas around Donetsk and Luhansk currently controlled by Russian surrogates, will continue to be so held in a state of frozen conflict There will be no Russian military adventurism in the Baltic states or in Eastern Poland At the end of 2015, Vladimir Putin will continue to have a strong grip on power This status quo will be withheld notwithstanding: Either the continuation or extension of current sanctions Continued oil price weakness Collapse of the Ruble Strong domestic price inflation Deep economic recession Sources: (Syrian Free Press, 2014)

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37 Oil Prices Will Remain Below $70 The price of oil has fallen from $100 plus levels and it will not return to these levels in OPEC Oil prices crashed in November 2014 following OPEC s decision to maintain production levels OPEC has reiterated that they will not cut production, stating that they will and cannot cut production Saudi Oil Minister stated that we may not ever see triple digit oil prices again There is no longer the belief within OPEC that $100 is the fair price for oil as it is encouraging too many new inefficient producers OPEC has stated those who are the efficient producers will rule the market US Oil Supply Demand US oil production has expanded immensely with 2014 production amounting to 9mm barrels a day (up 80% from 2007) US oil is significantly more expensive to produce, with a break even production above $50 Rig count has continued to fall but output has remained stable Any significant effect on supply is not expected to occur until mid to late 2015 Source: Business Insider, Fortune, Seeking Alpha, Reuters

38 The Prevalence of Ebola UN Ebola Mission Chief s prediction of Ebola free Africa by end of 2015 is unconvincing. Cumulative reported case of virus in Guinea, Liberia, and Sierra Leone Eliminating Ebola by the end of 2015 is not feasible Drugs and vaccines in development are still a long way from receiving FDA approval Belief that Ebola is spread by witchcraft and resistance to adopting prevention techniques are hindering emergency efforts Heavy handed government initiatives to limit public interaction and spread of Ebola may be slowly lifted for economic and social purposes (ie. Elections, economy, lack of food and jobs) Source: Centre for Disease Control and Detection

39 U.S. will Invade Syria The United States will finally acquiesce to international pressure. Prediction Russia continues to boost military aid to Syrian President Bashar al-assad Assad continually bombards civilians with explosive barrels and banned cluster munitions. Other assaults have killed scores and forced as many as 500,000 to flee their homes. The regime's starvation and siege of entire communities, systematic torture of political prisoners, and other crimes against humanity have only worsened In light of recent terrorist attacks in Canada, Australia and Paris, the U.S. and other NATO countries are seeking increasingly aggressive policies to combat extremism; invading Syria falls in line with such an agenda Source: BBC, Huffington Post

40 Iran will End its Nuclear Program The Islamic Republic will finally acquiesce to international pressure. Rouhani rectifies Ahmadinejad's faux pas Efforts to create an agreeable resolution failed in November 2014, prompting a seven month extension Negotiations will result in a UN-brokered deal between Iran and the international community Rouhani, feeling pressure from existing sanctions and the slide in oil prices, succumbs to a UN-favored deal and ends the nuclear program As a result, sanctions against Iran will be eased, paving the way for further reduction. Iran begins to open up trade barriers and to permit the flow of investments into and out of the nation Rouhani gains widespread support from Iranian citizens and from the international community Oil price creates pressure Rouhani seeks to alleviate economy International sanctions permit Iran to export 1mm barrels of oil per day, resulting in revenue of $52B Iranian officials have warned citizens regarding cuts in spending and investment as Iran reportedly needs around a $100 crude price to balance its fiscal budget An ease in sanctions could allow Iran to export more oil, thus compensating for the fall in price Source: Bloomberg, Al-Monitor, Institute for International Finance

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42 Indian Economy Will Grow 6%+ Modi s reforms are paving the way for foreign investment that will provide a boost Modi Reforms Under Way Influx of Foreign Investment Falling Commodity Prices Jan Dhan Yojana removing exclusion from the banking sector Swachh Bharat Abhiyan, cleaning India by 2019 Technology for all Policies in place to attract foreign investment Manufacturing hub in the near future Infrastructure opportunities One of the world s largest net importers of oil Removal of the oil subsidy Consumer spending boost

43 The AUD will end the year below 0.75 USD With a slowing a strengthening American economy, Australia will see a weakening of its currency U.S. Growth United States is predicted to grow above 3% in 2015 Restored faith in the American economy is leading investors to buy USD China Slowdown Chinese economic growth at around 7%, far lower then historic levels of growth Australia is very reliant on Chinese imports, as China is producing less, it is demanding less Australian commodities and in turn less AUD Interest rates are currently at a record low of 2.5% Projected to remain at this level, or even lower, for the following year as slowing Chinese growth has meant lower growth for Australia Lower interest rates means lower demand for investments in that currency from financial investors, ceteris paribus Australian Central Bank Policy Source: EIU, Bloomberg, WSJ, BoA Merill Lynch

44 Low oil prices will force down inflation, leading the BOJ to invoke a negative interest rate policy Source: Financial Times, Bloomberg, Trading Economics, Yardeni Research

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