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The 13th Seoul International Derivative & Alternative Investment Conference
Seoul, August 26, 2015Hung Tran
Fed’s Liftoff, China’s Devaluation: EM’s Perfect
Storm
Institute of International Finance 2
Source: Bloomberg, IIF.
0
1
2
3
4
5
6
7
t-6 t t+6 t+12 t+18 t+24
t=0 is month of first rate hike
First Rate Hike: Feb 1994
First Rate Hike: J une 2004 First Rate Hike: Expected
September 2015
FederalFunds Target Rates During Fed Tightening Cyclespercent, t in months, market expectations estimated from fed funds futures and Eurodollar contracts
Market Expectations (8/20/2015)
Median Fed Dots (6/17/2015)
Institute of International Finance 3
Source: Blue Chips Economic Indicators and Blue Chip Financial Forecasts.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
07-J ul 14-J ul 21-J ul 28-J ul 04-Aug 11-Aug 18-Aug
Blue Chip consensusAtlanta Fed GDPNow
Evolutionof Atlanta Fed GDPNow real GDP forecast for 2015:Q3quarterly percent change (SAAR)
Institute of International Finance 4
-8-6-4-2024681012-4
-3
-2
-1
0
1
2
3
4
5
00 02 04 06 08 10 12 14Real GDPU.S. broad trade-weighted dollar (rhs, inverted)
U.S. Trade Weighted Index vs. GDP percent, yoy, 4QMA (both scales)
Source: Federal Reserve, BEA, Bloomberg, IIF.
Institute of International Finance 5
1.5
2.0
2.5
3.0
3.5
4.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
AverageHourly Earnings for All Employees: Total Privatepercent change from a year ago
Source: FRED, IIF.
Institute of International Finance 6
70
75
80
85
90
95
100
105140
190
240
290
340
390
440
490
2005 2007 2009 2011 2013 2015
CRBUSD index (inverted, rhs)
ThomsonReuters/Core Commodity CRB level
Source: Bloomberg, IIF.
Institute of International Finance
1894-1932
1932-1971
1971-1999
1999-ongoing
Peak year 1817 1951 1973 2010Percent rise in prices during upswing
50.2% 72.0% 38.9% 81.3%
Percent fall in prices during downswing
-54.6% -43.3% -52.5% -
Length of the cycle (years)
38 39 28 -
Upswing 23 19 2 11Downswing 15 20 26 -
7
Total non-oil commodity prices
Source: UN Department of Economic and Social Affairs.
Institute of International Finance 8
0 50 100
US High Yield
HY ex-Energy
10yr Breakeven Inflation
US Treasuries 5s 30s
MSCI EM Equities
MSCI ACWI Equities
CADUSD
NOKUSD
LT percentile
current 6m correl.
Correlationto Oil Very Positive and Unsually Highpercent
Source: Bloomberg, Morgan Stanley Research.
Institute of International Finance 9
-2
0
2
4
6
8
10
2007 2008 2009 2010 2011 2012 2013 2014 2015
HeadlineConsumer Pricespercent change oya
Mature Economies
Emerging Economies
Global
Source: IIF.
Institute of International Finance 10
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
J un 10 J un 11 J un 12 J un 13 J un 14 J un 15
Monetary Policy Ratespercent (both scales)
EM excl. Brazil, Russia and Ukraine
EM Aggregate
Mature Economies
Source: Bloomberg, Datastream, IIF.
Institute of International Finance 11
38
40
42
44
46
48
50
2000 2005 2010 2015
Maufacturing/constructionServices
ChineseManufacturing and Services Sectorpercent of GDP
Source: MRB Partners.
Institute of International Finance 12
Source: Haver, IIF.
-10
-8
-6
-4
-2
0
2
4
6
8
10
0
3
6
9
12
15
18
21
2005 2007 2009 2011 2013 2015
real IP growth
PPI (rhs)
Chinese Producer Prices and Industrial Productionpercent yoy (both scales)
Correlation: 0.65
Institute of International Finance 13
35
40
45
50
55
60
65
2006 2008 2010 2012 2014
ManufacturingServicesComposite
Caixin China Output PMI50=no. of change on previous month, S. Adj. CaixinChina Output PMI50=no. of change on previous month, S. Adj. CaixinChina Output PMI50=no. of change on previous month, S. Adj.
Source: Haver, Markit/Caixin.
Institute of International Finance 14
6.2
6.25
6.3
6.35
6.4
6.45
Yuanholding pattern against USDlevel
Source: Bloomberg, IIF.
Institute of International Finance 15
Source: IMF, Haver, BIS, IIF.
-15
-10
-5
0
5
10
15
20
25-30
-20
-10
0
10
20
30
40
50
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Export growthNEER (rhs, inverted)
China: strongcurrency weighted heavily on exportspercent, yoy
Institute of International Finance 16
Source: Bloomberg, IIF.
7580859095
100105110115120125130
Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Feb 15 Aug 15
CNY twi
EM FX twi
CNY and EM FX Index, 8/1/2021=100
Institute of International Finance 17
0
0.5
1
1.5
2
2.5
3
3.5
4
J an 15 Feb 15Mar 15 Apr 15 May 15 J un 15 J ul 15 Aug 15
SHIBORpercent
Source: Bloomberg, IIF.
Institute of International Finance 18
Source: Bloomberg, IIF.
-500
0
500
1000
1500
2000
2005 2010 2015
ChinaNew Yuan Loansbillion yuan
Institute of International Finance 19
-60
-40
-20
0
20
40
60
80
2007 2008 2009 2010 2011 2012 2013 2014 2015
Emerging Economies
Mature Economies
NominalMerchandise Exportspercent change, 3m/3m saar
Source: Haver.
Institute of International Finance 20
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
0
2
4
6
8
10
12
14
16
18
20
10Q1 11Q2 12Q3 13Q4 15Q1
World Trade Volume vs. EM Asia Growthpercent, q/q saar, 4-quarter moving average, both scales
World Trade Volume
EM Asia RGDP
Source: CPB World Trade Monitor, IIF.
Institute of International Finance 21
Source: OECD-WTO, UNCTAD, Credit Suisse.
0
2
4
6
8
10
12
30 35 40 45 50 55 60Trade Similarity Index
Asia: Exposure to ChinaExports as %of GDP
HKTW
KR
MY
PH
SG
IN
IDTH
Institute of International Finance 22
0
10
20
30
40
50
60
70
80
90
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Non-financial corporationsGovernmentHouseholdsFinancial Sector
EmergingMarkets: Total Debt Outstandingpercent of GDP, GDP-weighted average
Source: BIS, IMF, OECD, McKinsey, IIF;*Brazil, China, Czech Republic, Hungary, India, Indonesia, Mexico, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey
Institute of International Finance 23
Source: Bloomberg, IIF.
0
50
100
150
200
250
USD loans
USD bonds
EM-30USD-denominated Corporate Debt OutstandingUSD billions, Q1 2015 or latest available; includes financial and non-financial corporate debt
Total:$ 1.97 trillion
Institute of International Finance 24
02468101214161820
-20
-10
0
10
20
30
40
50
2010 2011 2012 2013 2014 2015
EM corporate earnings
World trade (rhs)
EmergingMarket Corporate Earnings vs. World Tradepercent, y/y (both axes); earnings = 12m forward
Source: MSCI, Bloomberg, IIF.
Institute of International Finance 25
85
90
95
100
105
110
115
120
125
130
135
J an 14 Apr 14 J ul 14 Oct 14 J an 15 Apr 15 J ul 15
U.S.Emerging marketsEuro AreaJ apanChina
Global Equity Marketsindex, 1/1/2014 = 100
Source: Bloomberg, IIF.
Institute of International Finance 26
0
10
20
30
40
50
60
70
80
0.3 0.4 0.5 0.6 0.7
average of domestic, external and policy vulnerability indices in April*
*A higher value implies higher vulnerability and vice-versa. Source: IIF, Bloomberg.
IIF Heat MapVulnerability Measures vs. EMBIG Spreadschange in EMBIG spreads since mid-May 2015
ID ZACO
MY
PE
TR
HU RO
IN
RU
CL
MXPH
PLCN
Institute of International Finance 27
Source: EPFR, IIF estimates; includes mutual funds and ETFs.
6
7
8
9
10
11
12
13
14
10
12
14
16
18
20
22
2008 2009 2010 2011 2012 2013 2014 2015
Equity
Bond (rhs)
Emerging Markets: Fund Portfolio Weights, by Asset Class%of global bond/equity allocations, dashed line: 2008-15ytd avg.
Institute of International Finance 28
Source: Haver, NN Investment Partners, IIF.
-350
-250
-150
-50
50
150
250
350
2005 2007 2009 2011 2013 2015
C
Flawed Net Flows Estimates
Estimates of Net Capital Flows to Emerging Markets$ billion, dashes indicate incomplete source data
Correct Net Flows Estimates
Institute of International Finance 29
-2000
-1500
-1000
-500
0
500
1000
1500
2000
1996 1999 2002 2005 2008 2011 2014
Official Reserve Accumulation"Private" Resident OutflowsNon-Resident InflowsNet Flows (ex. Reserves)Net Flows (incl. Reserves)
EM Capital Flows by Residency of Investors$ billion
Source: IIF.
Institute of International Finance 30
0
1
2
3
4
5
6
7
8
9
1996–1998 2002–2004 2006–07 2011–2012 2015–2020
Potentialand Differential OutputGrowth in Mature and Emerging Marketspercent change oya, period averages
Mature Market Economies
Emerging Market
Differential
Source: IMF, IIF.
Institute of International Finance 31
-1.0
0.0
1.0
2.0
3.0
4.02015-2025
2005-2015
Average Annual Growth in Working Age Populationpercent, y/y, period average
Source: UN, IIF.
Institute of International Finance 32
40
45
50
55
60
65
70
75
80
1980 2000 2020 2040 2060 2080 2100
India: DependencyRatiodependents as percent of working-age1 population
India
World
Source: United Nations.1-Age 15-64 years
Institute of International Finance
percent Equities Bonds FX*2014-now -26.2 -3.4 -9.2Taper tantrum -15.7 -10.8 -1.5Financial crisis -66.1 -26.6 -5.2Dot-com crisis -53.1 12.9 -5.5Asian crisis -33.2 -3.1 -17.7
33
Change from peak to trough, EM Assets
*FX: GDP weighted average of 20 EM currencies vis-à-vis USD.Source: Bloomberg, IIF.
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