developed market structural economic model · y-axis: ev-to-ntm-ebitda ratio of benchmark equity...

© Hedgeye Risk Management LLC. All Rights Reserved.

DEVELOPED MARKET STRUCTURAL ECONOMIC MODEL

December 14, 2017

DARIUS DALE

2 © Hedgeye Risk Management LLC. All Rights Reserved.

DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management’s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management’s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at www.hedgeye.com.

LEGAL


INTRODUCING OUR PROPRIETARY MODEL QUANTIFY COUNTRY-LEVEL ECONOMIC AND POLITICAL RISK USING OUR PROPRIETARY STRUCTURAL ECONOMIC MODEL.

DATA SOURCE: OECD, BLOOMBERG, IMF, BIS AND WORLD BANK


DEMOGRAPHIC RISK: AGING EMPIRICAL EVIDENCE SHOWS THAT POPULATION AGING IS INVERSELY CORRELATED TO TREND RATES OF REAL GDP GROWTH AND INFLATION.

DATA SOURCE: WORLD BANK

19%

18%

20% 20%

21%

22% 23%

21%

24%

16%

13%

25%

21%

18%

24%

21% 21%

20% 19%

17%

20%

29%

17% 17%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

5Y Forward Old-Age Dependency Ratio (65+ Year-Olds as a Ratio of the Working-Age Population) MEDIAN


DEMOGRAPHIC RISK: POPULATION GROWTH POPULATION GROWTH IS A CRUCIAL FACTOR IN PROJECTING ECONOMIC OUTPUT – ESPECIALLY IN THE CORE CONSUMPTION DEMOGRAPHIC COHORT OF 35-54 YEAR-OLDS.


0.0% 0.1%

-1.2%

-0.6%

-1.5% -1.4%

-0.5% -0.5%

-2.0%

0.7%

2.1%

-2.2%

-1.7%

0.4%

-1.4% -1.5%

-0.0%

-0.4% -0.3%

1.4%

-0.8% -0.8% -0.6%

-0.3%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

35-54 Year-Old Population Cohort - 5Y Forward CAGR MEDIAN

© Hedgeye Risk Management LLC. All Rights Reserved. 6

WHY DO 35-54 YEAR-OLDS MATTER? BECAUSE ACCORDING TO BOTH EMPIRICAL EVIDENCE AND LIFE-CYCLE ECONOMICS THEORY, THIS IS THE WORLD’S CORE END CONSUMPTION DEMAND DEMOGRAPHIC.

DATA SOURCE: BLS CONSUMER EXPENDITURE SURVEY

$29,612

$57,274

$72,980

$79,845

$63,984

$49,079

$34,553 $32,797

$52,062

$65,334

$69,753

$58,781

$49,477

$38,123

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

$85,000

Under 25 Years-Old 25-34 Years Old 35-44 Years Old 45-54 Years Old 55-64 Years Old 65-74 Years Old 75+ Years-Old

U.S. Average Annual Disposable Income by Age Bracket U.S. Average Annual Expenditures by Age Bracket

Poly. (U.S. Average Annual Disposable Income by Age Bracket) Poly. (U.S. Average Annual Expenditures by Age Bracket)


ECONOMIC GRAVITY IN THE UNITED STATES

DATA SOURCE: BLOOMBERG; WORLD BANK

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%United States 35-54 Year-Old Population Cohort - YoY % Change United States Trend Real GDP YoY (Trailing 5Y Average)

Economic and financial crises ensue.

Coincidence? Probably not, but maybe.


ECONOMIC GRAVITY IN THE EUROZONE


-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%Eurozone 35-54 Year-Old Population Cohort - YoY % Change Eurozone Trend Real GDP YoY (Trailing 5Y Average)




ECONOMIC GRAVITY IN CHINA


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%China 35-54 Year-Old Population Cohort - YoY % Change China Trend Real GDP YoY (Trailing 5Y Average)




ECONOMIC GRAVITY IN JAPAN


-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%Japan 35-54 Year-Old Population Cohort - YoY % Change Japan Trend Real GDP YoY (Trailing 5Y Average)




GLOBAL ECONOMIC GRAVITY SUMMARY IN RATE-OF-CHANGE TERMS, THIS CRITICAL FACTOR FOR GLOBAL GROWTH BOTTOMED IN 2016 AND IS SET TO TREND MODESTLY HIGHER OVER THE NEXT 6-8 YEARS.


0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

World 35-54 Year-Old Population Cohort - YoY % Change

Economic and financial crises ensue, globally,

across asset classes, with the global manufacturing and earnings recessions culminating with sub-$30 crude oil. Coincidence?

Probably not, but maybe.


FOREIGN EXCHANGE RISK: CURRENT ACCOUNT COUNTRIES WITH DEEP, PERSISTENT CURRENT ACCOUNT DEFICITS FACE A HEIGHTED RISK OF PROTRACTED CYCLICAL SLOWDOWNS WHEN GLOBAL FINANCIAL CONDITIONS TURN SOUTH AND PERPETUATE CAPITAL OUTFLOWS.

DATA SOURCE: IMF

-2.8% -2.4%

1.6%

-1.1%

8.5%

3.2%

-0.2% -1.2%

7.9%

4.0% 3.0% 2.8%

9.8%

5.5%

0.5% 1.8%

4.0%

10.3%

-5.1%

-2.0%

4.6% 4.0%

-2.8%

18.8%

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Current Account Balance as a % of Nominal GDP MEDIAN


FOREIGN EXCHANGE RISK: FISCAL BALANCE COUNTRIES WITH DEEP, PERSISTENT FISCAL DEFICITS FACE A HEIGHTED RISK OF PROTRACTED CYCLICAL SLOWDOWNS WHEN GLOBAL FINANCIAL CONDITIONS TURN SOUTH AND FORCE AUSTERITY MEASURES.

DATA SOURCE: BLOOMBERG

-0.1%

-3.4%

-1.3% -1.5% -0.6%

-1.3% -0.9%

-3.3%

0.8%

-0.6%

-2.4%

1.2%

4.1%

-1.4%

-3.6%

1.3% 0.5%

-2.0% -1.5%

8.6%

-5.7%

1.5%

-0.3%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Sovereign Budget Balance as a % of Nominal GDP MEDIAN


ECONOMIC CYCLE RISK: SUPPLY OF CREDIT EXCESS GROWTH IN THE RATIO OF PRIVATE SECTOR CREDIT TO THE BROADER ECONOMY HAS HISTORICALLY BEEN A HARBINGER OF RECESSION AS FORCED DELEVERAGING TENDS TO FOLLOW PEAK RATES OF ADVERSE SELECTION.

DATA SOURCE: BIS

1.2

2.0

-1.2

1.3

-1.7

-1.4

0.0

1.9

-0.7

-1.5

-0.9

-1.6 -1.8

1.0

-1.5 -1.4

-0.2

1.6

-0.3

0.6

1.8

0.1

0.9

1.3

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Private Nonfinancial Sector Credit-to-GDP Gap (Z-Score, Trailing 5Y) MEDIAN


ECONOMIC CYCLE RISK: COST OF CREDIT EXCESS GROWTH IN PRIVATE SECTOR DEBT SERVICE RATIOS HAVE HISTORICALLY PERPETUATED RECESSION-INDUCING RATES OF DELEVERAGING.

DATA SOURCE: BIS

0.9

0.3

0.6

-0.8 -0.6

-0.7

0.3

-0.2

-1.5

-1.0 -0.8

-1.5

-0.7 -0.9 -0.9

-0.2

0.5

1.4

0.1

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Debt Service Ratio Gap (Z-Score, Trailing 5Y) MEDIAN


PROTECTIONISM RISK: INCOME INEQUALITY PERVASIVE INCOME INEQUALITY HAS BEEN SHOWN TO PERPETUATE BROAD-BASED DETERIORATION IN THE SOCIAL MOOD, AS WELL AS WIDESPREAD DEMANDS FOR THE GROWTH OF ENTITLEMENT SPENDING.


33.7

41.1

30.5

27.6

29.1

31.6

27.1

33.1

30.1

32.5

42.8

35.2

28.0

25.9

36.0 35.9

27.3

31.6 32.6

34.9

32.1

25

27

29

31

33

35

37

39

41

43

45

GINI Coefficient MEDIAN


PROTECTIONISM RISK: MISERY INDEX MUCH LIKE NOTICEABLE INCOME INEQUALITY, ELEVATED RATES OF INFLATION AND UNEMPLOYMENT BEEN SHOWN TO PERPETUATE BROAD-BASED DETERIORATION IN THE SOCIAL MOOD.

DATA SOURCE: BLOOMBERG

7.6% 6.5%

7.7%

9.0%

7.2%

10.5%

8.2%

10.9%

7.5% 6.7%

4.3%

12.3%

5.8% 5.1%

10.4%

18.5%

8.0%

4.0%

7.4% 7.3%

4.6%

3.0%

6.5%

2.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Misery Index (Unemployment Rate + Headline Inflation Rate) MEDIAN


COMPETITIVENESS RISK: BUSINESS CONDITIONS GOV’T REGULATIONS, BARRIERS TO ENTRY, LEGAL PROTECTIONS AND THE QUALITY OF ITS INFRASTRUCTURE ALL PLAY VITAL ROLES IN A COUNTRY’S ABILITY TO ATTRACT BOTH PORTFOLIO CAPITAL AND FOREIGN DIRECT INVESTMENT.


18

6

14

52

3

28

13

31

20 17

54

46

32

8

29 28

10

33

7

14

5

34

1 2

0

10

20

30

40

50

60

World Bank Ease of Doing Business Index - Global Ranking (Lower Is Better) MEDIAN


COMPETITIVENESS RISK: CORPORATE TAXES IN ADDITION TO THE AFOREMENTIONED FACTORS, CORPORATE TAX RATES PLAY AN OUTSIZED ROLE IN THE DIRECTION AND SUSTAINABILITY OF BUSINESS INVESTMENT IN MAJOR ECONOMIES.


21%

44%

52%

59%

25%

44%

38%

63%

49%

26% 28%

62%

40% 40% 40%

49% 49%

29% 31%

48%

23%

49%

34%

19%

10%

20%

30%

40%

50%

60%

70%

All-In Effective Corporate Tax Rate MEDIAN


PILLAR I: DEMOGRAPHIC RISK LEAD LOWER BY ITALY, GERMANY, PORTUGAL, SPAIN AND THE NETHERLANDS, THE EUROZONE’S ALREADY-IMMENSE DEMOGRAPHIC HEADWINDS ARE SET TO MATERIALLY DEEPEN OVER THE NEXT FIVE YEARS.


Canada United States

Austria

Belgium

Denmark Eurozone

Finland France

Germany

Ireland

Israel

Italy

Netherlands

Norway

Portugal Spain

Sweden

Switzerland United Kingdom

Australia

Hong Kong Japan New Zealand

Singapore

R² = 0.5337

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

x-axis: 5Y Forward Old-Age Dependency Ratio (65+ Year-Olds as a Ratio of the Working-Age Population);y-axis: 35-54 Year-Old Population Cohort - 5Y Forward CAGR

Linear (x-axis: 5Y Forward Old-Age Dependency Ratio (65+ Year-Olds as a Ratio of the Working-Age Population);y-axis: 35-54 Year-Old Population Cohort - 5Y Forward CAGR)


PILLAR II: FOREIGN EXCHANGE RISK THE EUROZONE SCREENS MODERATELY WELL WITH RESPECT TO HOW WE QUANTIFY SECULAR ECONOMIC RISK. THE U.K., U.S. AND FRANCE SCREEN RATHER POORLY.

DATA SOURCE: BLOOMBERG AND THE IMF

Canada

United States

Austria Belgium Denmark

Eurozone Finland

France

Germany

Ireland

Italy

Netherlands

Norway

Portugal

Spain

Sweden Switzerland

United Kingdom Australia

Hong Kong

Japan

New Zealand

Singapore R² = 0.0735

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10% -5% 0% 5% 10% 15% 20%

x-axis: Current Account Balance as a % of Nominal GDP;y-axis: Sovereign Budget Balance as a % of Nominal GDP

Linear (x-axis: Current Account Balance as a % of Nominal GDP;y-axis: Sovereign Budget Balance as a % of Nominal GDP)


PILLAR III: ECONOMIC CYCLE RISK JAPAN SCREENS FINE WITH RESPECT TO HOW WE QUANTIFY THE RISK OF RECESSION THROUGH THE LENS OF ADVERSE SELECTION AND TIGHTENING FINANCIAL CONDITIONS.

DATA SOURCE: BIS

Canada

United States

Belgium

Denmark Eurozone Finland

France

Germany

Italy Netherlands

Norway

Portugal

Spain Sweden Switzerland

United Kingdom

Australia

Hong Kong

Japan R² = 0.5031

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

x-axis: Private Nonfinancial Sector Credit-to-GDP Gap (Z-Score, Trailing 5Y);y-axis: Debt Service Ratio Gap (Z-Score, Trailing 5Y);bubble size: Banking Sector NPL Ratio

Linear (x-axis: Private Nonfinancial Sector Credit-to-GDP Gap (Z-Score, Trailing 5Y);y-axis: Debt Service Ratio Gap (Z-Score, Trailing 5Y);bubble size: Banking Sector NPL Ratio)


PILLAR IV: PROTECTIONISM RISK ALTHOUGH FOR DIFFERENT REASONS, THE U.S. AND EUROZONE BOTH SCREEN POORLY WITH RESPECT TO HOW WE QUANTIFY RISK OF RISING POPULISM, WITH THE LATTER BEING LED HIGHER BY ITALY, FRANCE AND PORTUGAL.

DATA SOURCE: BLOOMBERG AND THE WORLD BANK

Canada

United States

Austria

Belgium

Denmark

Eurozone

Finland

France

Germany

Ireland

Israel

Italy

Netherlands

Norway

Portugal Spain

Sweden


Australia

Japan R² = 0.0145

25

27

29

31

33

35

37

39

41

43

45

2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

x-axis: Misery Index (Unemployment Rate + Headline Inflation Rate);y-axis: GINI Coefficient

Linear (x-axis: Misery Index (Unemployment Rate + Headline Inflation Rate);y-axis: GINI Coefficient)


PILLAR V: COMPETITIVENESS RISK THE EUROZONE AS A WHOLE SCREENS QUITE POORLY WITH RESPECT TO HOW WE QUANTIFY COMPETITIVENESS, WITH ITALY, FRANCE, BELGIUM AND SPAIN LEADING TO THE DOWNSIDE.


Canada

United States

Austria

Belgium

Denmark

Eurozone

Finland

France

Germany

Ireland Israel

Italy

Netherlands Norway Portugal

Spain Sweden


Australia

Hong Kong

Japan

New Zealand

Singapore

R² = 0.1975

0%

10%

20%

30%

40%

50%

60%

70%

0 10 20 30 40 50 60

x-axis: World Bank Ease of Doing Business Index - Global Ranking (Lower Is Better);y-axis: All-In Effective Corporate Tax Rate

Linear (x-axis: World Bank Ease of Doing Business Index - Global Ranking (Lower Is Better);y-axis: All-In Effective Corporate Tax Rate)


SUMMARY OUTPUT ON BALANCE, HIGHER RANKED ECONOMIES TEND TO HAVE FAVORABLE DEMOGRAPHIC SETUPS, RELATIVELY POSITIVE BALANCE OF PAYMENTS AND FISCAL DYNAMICS, LOWER RISK OF A NEAR-TERM RECESSION, LOWER RISK OF PROTECTIONISM AND A FAVORABLE OPERATING ENVIRONMENT FOR BUSINESS.

DATA SOURCE: BLOOMBERG, IMF, BIS AND WORLD BANK

14

18

15

21

5

17

13

23

16

3 4

24

9

2

19 20

7 8

12 11

6

22

10

1

0

5

10

15

20

25

30

Hedge Macro DM Structural Economic Model (Higher Rank = More Attractive Destination for Long-term Capital; Rank in Ascending Order)


DOES THE MODEL WORK? YES COUNTRIES WITH GREATER DEGREES OF STRUCTURAL ECONOMIC AND POLITICAL RISKS HAVE TENDED TO EXPERIENCE VALUATION DISCOUNTS IN THEIR BENCHMARK EQUITY MARKETS RELATIVE TO THOSE WITH FEWER RISKS. SINGAPORE, SWITZERLAND AND THE U.S. LOOK A BIT RICH ON THIS METRIC, WHILE NORWAY LOOKS DEMONSTRABLY UNDERVALUED.

DATA SOURCE: BLOOMBERG, IMF, BIS AND WORLD BANK

Canada United States

Austria

Belgium

Denmark

Eurozone

Finland

France

Germany

Ireland

Italy

Netherlands

Norway

Portugal Spain

Sweden

Switzerland

United Kingdom

Australia

Hong Kong Japan

Singapore

R² = 0.2366

6

7

8

9

10

11

12

13

14

15

16

0 5 10 15 20 25 30

x-axis: Hedge Macro DM Structural Economic Model(Higher Rank = More Attractive Destination for Long-term Capital; Rank in Ascending Order);y-axis: EV-to-NTM-EBITDA Ratio of Benchmark Equity Market

Linear (x-axis: Hedge Macro DM Structural Economic Model(Higher Rank = More Attractive Destination for Long-term Capital; Rank in Ascending Order);y-axis: EV-to-NTM-EBITDA Ratio of Benchmark Equity Market)

developed market structural economic model · y-axis: ev-to-ntm-ebitda ratio of benchmark equity...

Documents