economic & market outlook 2013-14

Economic & Market Outlook 2013-14

December 5, 2012

Economic & Market Outlook2013-14

Warren Jestin, Chief EconomistCamilla Sutton, Chief Currency Strategist

Vincent Delisle, Investment Strategist


December 5, 2012

Warren JestinSenior Vice-President & Chief Economist

New World Rising

2013-14 Economic Outlook


December 5, 2012Gains In Global Growth Will Be Moderate & Uneven

China and other emerging market powerhouses will increasingly drive global activity, maintaining a wide growth lead over traditional developed nations.If the U.S. avoids a turn-of-the-year fiscal cliff, it should edge out Canada as the top G7 growth performer. It’s not a hard race to win.


December 5, 2012

Sluggish growth and ongoing fiscal drag will temper job creation, confidence levels and spending trends, particularly in Europe.

Developed Nations Confront Big Headwinds


December 5, 2012Europe Battles Long-term Challenges

Europe’s debt crisis is far from over, with severe austerity measures undermining growth prospects well beyond mid-decade. A number of debt-heavy nations, locked in recession, are experiencing substantial social and political fallout from sky-high youth unemployment rates.


December 5, 2012Emerging Markets Increasingly Drive Global Growth …

Robust growth in China and a number of other emerging markets will provide important support to global trade flows & commodity prices.


December 5, 2012… Supported By Rising Income & Financial Resources

Domestic demand is underpinning growth in China and other emerging markets, supported by rapid income gains and large financial resources.


December 5, 2012Monetary Policies Remain Geared To Reviving Growth

Slow growth, low inflation & fiscal austerity point to a continuation of pedal-to-the-metal monetary stimulus in many developed economies.


December 5, 2012The Loonie Will Continue Flying High

The Canadian dollar is supported by strong commodity earnings, rising foreign investor interest and relatively favourable fiscal and financial fundamentals.


December 5, 2012Fiscal & Financial Strains Less Intense In Canada

The U.S. housing market is beginning to revive, but a return to more balanced conditions is still years away. Canada’s fiscal advantage provides a competitive edge as the U.S. and other nations confront the need to substantially boost taxes & scale back spending on key programs.


December 5, 2012U.S. Begins To Play Catch-up In Employment …

Despite recent U.S. job gains, over 4 million jobs are still needed to return to pre-recession peaks. Canadian employment is setting new records, with skilled labour shortages putting upward pressure on wage trends.


December 5, 2012… And Big-Ticket Purchases

Jobs gains, improving confidence & years of deleveraging are putting U.S. households in a mood to increase their spending.With home ownership at record highs, tighter mortgage rules and high household debt levels are cooling home sales in Vancouver and Toronto.


December 5, 2012Non-Res Construction Much Stronger In Canada

Canadian non-residential construction continues to benefit from big resource projects, infrastructure development and more balanced commercial markets.


December 5, 2012Resource Sector Drives Job & Income Gains

Canada’s resource-rich provinces will continue to lead in job and income gains.


December 5, 2012

Camilla SuttonChief Currency Strategist

Making Progress

2013-14 Foreign Exchange Outlook


December 5, 20122012 Forecast vs Performance

FORECASTING ACCURACY SUMMARY FROM 2012 (to November 29)CAD – direction and magnitudeJPY – direction and magnitudeGBP – direction and magnitude

AUD – direction but over estimated riseEUR – failed on both direction and estimate; as we had forecasted weakness & EUR is flat

-8

-4

0

4

8

JPY CAD GBP AUD EUR% re

turn

SCOTIA'S FORECASTACTUAL RETURNS YTD

SCOTIABANK FORECASTS VS ACTUAL RETURNS (2012)


December 5, 2012Scotiabank’s Forecast

FX - USD performance is mixed2011 2012f 2013f 2014f

USDCAD 1.02 0.97 0.96 0.94

CADUSD 0.98 1.03 1.04 1.06

AUDUSD 1.02 1.04 1.06 1.09

EURUSD 1.30 1.29 1.25 1.21

GBPUSD 1.55 1.62 1.64 1.66

USDJPY 77 80 87 90

USDCNY 6.30 6.25 6.10 6.04


December 5, 2012FX Themes – Year-to-Date

Main themes in 2012:

1. Europe

2. Global growth outlook

3. Central bank policy response

Main themes in 2013

1. Global growth outlook

2. Europe

3. The US backdrop

4. Central bank policy

5. Politics: new leadership in China; Elections in Italy, Japan, Germany, etc.


December 5, 2012THEME 1: Growth – US & China vs EU & Japan

• Can growth in China and the US offset weakness in Europe and Japan?• A soft landing in China with 2013 GDP of 8.0%.


December 5, 2012THEME 1: Growth – European Recession Ends

• Europe exits recession; headlines should improve.

• Growth remains moderate at best and complicated by demographics.


December 5, 2012THEME 2: Europe – Making Progress

Problem Developments to date Still needed Remaining tail risk

1. LTRO - provided liquidity

2. Banking union plans

Euro exit OMT - fiscal burden sharingPolitics: A framework for a

closer fiscal uniondecreasing

Government debt AusterityBalance between growth & austerity a challenging one

unchanged

GrowthDecelerating faster than

expected; most countries in or entering recession

This is biggest risk increasing

Bank Solvency decreasingResolution fund & deposit

guarantee facility


December 5, 2012THEME 3: The US Backdrop

• The fundamental USD story is not a strong one.

• US economy needs a weak USD; just like Eurozone needs a weak EUR.

Source: Bloomberg & Scotia FX Strategy


December 5, 2012THEME 3: The US Lacks A Fiscal Plan

• US fundamentals are typically those associated with a weak currency• Short-term: fiscal cliff uncertainty lays foundation for temporary USD strength

• 2013 fiscal drag is expected to be between 1 and 2% -- assumes agreement• Medium term: lack of credible fiscal plan should create USD weakness

US FISCAL & DEBT FORECAST FORECASTED US FISCAL DRAG As % of GDP


December 5, 2012THEME 4: Central Bank Response – FX Impact

• Positive CAD – BoC has one of few hawkish central bank bias in advanced economies.• Negative USD – QE3, rates on hold until mid 2015 & threat of QE3 expansion.


December 5, 2012THEME 4: Central Bank Response – QE

• Difficult to measure exact impact of QE programs.• Fed: QE1 decreased 10-year bond yields by 40 to 110bpts;

• while QE2 decreased them by 15 to 45bpts. • Expect QE3 to be expanded in December to include Treasurys.


December 5, 2012THEME 4: Central Banks – The Fed’s Timeline

FED'S TIMELINE

QE3 launched - $40bn MBS/mth Q4 12

QE3 expasion - $20 to 45bn Treasurys / mth Q4 12

Q1 13

Q2 13

QE3 - Fed signals end of QE Q3 13

Q4 13

Q1 14

Q2 14

Halt reinvestment of MBS Q3 14

Halt reinvestment of Treasurys Q4 14

Q1 15

Fed hikes rates Q2 15

Q3 15Source: Scotiabank FX Strategy & Economics


December 5, 2012THEME 4: Central Banks – Global Timelines

FED'S TIMELINE GLOBAL CENTRAL BANK RATE HIKES

QE3 launched - $40bn MBS/mth Q4 12

QE3 expasion - $20 to 45bn Treasurys / mth Q4 12

Q1 13 Mexico & Indonesia

Q2 13 Brazil and Chile

QE3 - Fed signals end of QE Q3 13 Korea & Thailand

Q4 13 Australia, Norway & Columbia

Q1 14 Canada & China

Q2 14

Halt reinvestment of MBS Q3 14 India

Halt reinvestment of Treasurys Q4 14

Q1 15 UK (BoE)

Fed hikes rates Q2 15 Europe (ECB)

Q3 15Source: Scotiabank FX Strategy & Economics


December 5, 2012

CAD Drivers & Outlook

Source: Bloomberg & Scotia FX Strategy

CAD STRENGTH CAD WEAKNESSCe

ntra

l ba

nks FED's QE program juxtaposed against neutral

to hawkish BoC

• China expected to have a soft landing (GDP, 2012 7.7%; 2013 8.0%; 2014 8.4%)

Domestic risks: housing market, household debt, slowing employment growth

• US moving into stronger recovery

Sove

reig

n

Triple A rated with a credible fiscal plan

Flow

s CAD positive flows - Triple A rating; FX reserves; M&A

Oil Oil (Scotiabank Economics forecasts WTI oil

to average $95 in 2013)Oil risks: Brent-WTI spread & US self reliance

Politi

cs

Stable government until October 2015

Senti

men

t

Sentiment is bullish with traders holding CAD net long - however moderating

Risk

s

CAD vol at decade lowsExternal risks: Europe, US fiscal cliff &

geopolitics - but none are our base case

Gro

wth

CAD FORECAST: STRENGTHENS TO 1.04 IN 2013


December 5, 2012Scotiabank’s Forecast

FX - USD performance is mixed2011 2012f 2013f 2014f

USDCAD 1.02 0.97 0.96 0.94

CADUSD 0.98 1.03 1.04 1.06

AUDUSD 1.02 1.04 1.06 1.09

EURUSD 1.30 1.29 1.25 1.21

GBPUSD 1.55 1.62 1.64 1.66

USDJPY 77 80 87 90

USDCNY 6.30 6.25 6.10 6.04


December 5, 2012Major Risks

MAJOR RISKS TO FORECAST

• Fiscal cliff – no compromise – major global growth consequences

• Global growth – China fails to engineer soft landing

• Inflation – central bank policy stems significant inflationary pressures

• Oil – geopolitical tensions rise; oil rallies and threatens global economy

• Europe – Escalates beyond current expectations


December 5, 2012

Vincent DelisleInvestment Strategist, Portfolio Strategy Group

Bottom Line Trumps Headlines

2013-14 Equity Market Outlook


December 5, 2012Revisiting 2012: Equities Surviving Policy Fears

• Equities edging bonds in 2012; U.S., Mexico, Germany leading.

• Canada lagging; Brazil & China bucking trend with losses.

Global Market Returns (in USD, total return) - 2012 YTD & H2 27-Nov-12

Source: Scotiabank GBM, Bloomberg

-15%

-10%

-5%

0%

5%

10

%

15

%

20

%

25

%

30

%

Germany

Mexico

U.S. (S&P 500)

MSCI AC World

U.K.

Canada (TSX)

Canada Govt Bond Index

Japan

US$ per C$

U.S. Govt Bond Index

DXY Index

CRB Index

China

Brazil

-15

%

-10

%

-5%

0%

5%

10

%

15

%

20

%

25

%

30

%

H2/2012

2012 YTD


December 5, 2012Revisiting 2012: Earnings Leadership Rules

• Positive earnings revisions in the U.S. and Germany…

• …negative trends in China, Brazil, and Canada.

Earnings Revisions Since January 2012

Source: Scotiabank GBM, Thomson Financial.

90

92

94

96

98

100

102

104

106Ja

n-12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

90

92

94

96

98

100

102

104

106

TSX

MSCI Germany

MSCI China

MSCI Brazil

MSCI Mexico

S&P 500


December 5, 2012Revisiting 2012: TSX Lag Due to Resources

• Mining, Golds, and Energy hurt…

• non-resources + dividend payers shine. Total Return Performance: 2012 YTD, H1/12, and H2/12As of Nov 27, 2012 2012 YTD H1/12 H2/12Non Dividend Payers -8.3% -16.2% 9.4%Low Dividend Payers 1.5% -2.5% 4.2%High Dividend payers 8.4% 1.6% 6.6%

TSX 4.0% -1.5% 5.6%

Energy -3.1% -7.7% 5.0%Materials -6.1% -10.7% 5.1%

Mining -13.9% -17.9% 4.9%

Gold -10.5% -16.0% 6.5%

Industrials 9.7% 5.0% 4.5%Cons. Discretionary 16.2% 13.2% 2.6%Cons. Staples 13.8% 8.8% 4.6%Healthcare 19.0% 11.5% 6.8%Financials 13.0% 5.5% 7.1%

Banks 12.2% 3.8% 8.2%

Insurance 15.8% 6.3% 9.0%

REITs 14.7% 14.4% 0.3%

Technology -4.5% -11.4% 7.7%Telecoms 8.5% 1.9% 6.5%Utilities 0.1% 0.6% -0.5%Source: Scotiabank GBM estimates, Bloomberg.


December 5, 2012Revisiting 2012: P/E Expansion Provides Lift

• Valuations improved in 2012, Mexico premium jumps.

• Ex-Mexico, P/E multiples still below historical averages.

Forward P/E ratios (1992-2012)

Source: Scotiabank GBM, Thomson Financial.

0

5

10

15

20

25

Jun

-92

Jun

-93

Jun

-94

Jun

-95

Jun

-96

Jun

-97

Jun

-98

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

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Jun

-07

Jun

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Jun

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Jun

-10

Jun

-11

Jun

-12

Jun

-13

0

5

10

15

20

25TSX

S&P 500

MSCI Brazil

MSCI Mexico


December 5, 2012Stronger U.S. & China Momentum in 1H13

• Manufacturing surveys bottomed in Q3-12, expect recovery in 1H13.

• U.S. and China growing, Eurozone still negative. Major Manufaturing PMI Indices (2005-2012)

*China PMI: average of HSBC China PMI and official China PMI

Source: Scotiabank GBM, Bloomberg.

30

35

40

45

50

55

60

65Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

30

35

40

45

50

55

60

65

U.S. ISM

Eurozone PMI

China PMI*


December 5, 2012Post-China Easing supports TSX Gains

• Positive reversal from a year ago.

• TSX and Latam (Brazil) hurt when China is tightening.

China Lending Rate, TSX and MSCI LatAm (1997-2012)


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%M

ay-

97

Ma

y-9

8

Ma

y-9

9

Ma

y-0

0

Ma

y-0

1

Ma

y-0

2

Ma

y-0

3

Ma

y-0

4

Ma

y-0

5

Ma

y-0

6

Ma

y-0

7

Ma

y-0

8

Ma

y-0

9

Ma

y-1

0

Ma

y-1

1

Ma

y-1

2

Ma

y-1

3

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

China Lending Rate YoY - LHS

TSX YoY - RHS

MSCI LatAm YoY - RHS


December 5, 2012TSX versus S&P500 Return Recovering

TSX vs. S&P 500 - Relative Performance YoY in US$ (1978-2012)


-9%

-29% -28%-31%

-39%

-26%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%Ja

n-7

8

Jan

-80

Jan

-82

Jan

-84

Jan

-86

Jan

-88

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

Jan

-14

S&P 500 Outperforming

TSX Outperforming

+1 St. Dev.

-1 St. Dev.

• TSX coming back from extreme underperformance versus S&P500.


December 5, 2012Sub-9% China GDP = Muted CRB Gains

• Commodity upside limited by moderate China recovery…

• …will challenge TSX and EM leadership.

China GDP Growth and Commodity Price Impact (2001-2012)


6%

7%

8%

9%

10%

11%

12%

13%Ja

n-01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

-60%

-40%

-20%

0%

20%

40%

60%

80%China Real GDP YoY - LHS

CRB Index YoY - RHS


December 5, 2012Positive Reversal for Global Earnings

• Recovering manufacturing positive for earnings outlook...

• …should support risk appetite in 1H13.

World PMI vs. MSCI AC World EPS (1998-2012)

Source: Scotiabank GBM, Bloomberg, Thomson Financial.

30

35

40

45

50

55

60

65

70

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

World Manufacturing PMI - LHS

MSCI AC World 12M Fwd EPS YoY - RHS

Global earnings growth YoY


December 5, 2012Sporadic Risk-On/Risk-Off Leadership to Continue

• Market environment remains volatile, challenging for buy-and-hold.

U.S. Risk-On/Risk-Off Indicator* (2002-2012)

*S&P 500 less long-term government bonds (TLT) 3M rolling relative return

Source: Scotiabank GBM, Bloomberg

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%O

ct-0

2

Ap

r-03

Oct

-03

Ap

r-04

Oct

-04

Ap

r-05

Oct

-05

Ap

r-06

Oct

-06

Ap

r-07

Oct

-07

Ap

r-08

Oct

-08

Ap

r-09

Oct

-09

Ap

r-10

Oct

-10

Ap

r-11

Oct

-11

Ap

r-12

Oct

-12

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Risk-Off Trade

Extended

Risk-On Trade Extended

S&P 500 "relative" Overbought

Bonds "relative" Overbought


December 5, 2012U.S. Housing/Employment Recovery

• Stay constructive on S&P500/equities as long as U.S. housing and payrolls improve.

U.S. Housing Starts and Unemployment Rate (1990-2012)


400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400Ja

n-9

0

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

Jan

-14

3

4

5

6

7

8

9

10

U.S. Housing Starts ('000s) - LHS

U.S. Unemployment Rate (inverted) - RHS


December 5, 2012Recommended Asset Mix

Scotiabank GBM Asset Mix - Q4/12 Update

Change FromBenchmark Recommended Last

Equities 60% 62% Canada (TSX) 5% 7% U.S. (S&P 500) 22% 22% Europe (U.K./Germany) 12% 13% Japan 6% 4%

Far East ex-Japan 10% 10% LatAm 5% 6%

Bonds 40% 36% Government 30% 22% Corporate 10% 14%

Cash (91-D Tbills) 0% 2%Source: Scotiabank GBM estimates

Asset Mix

• Modest Equity over Bond bias extended through 1H13.

• TSX and Latam could have strong start, but S&P500 should be among leaders again in 2013.


December 5, 2012Canadian Index - Sector Strategy

TSX Sector Strategy - November 2012SectorsEnergy (Producers over Integrated)Materials (Fertilizers/Forest/Mining OW)Industrials (Capital Goods over Transport)DiscretionaryStaplesHealthcareFinancials (Insurance Over Banks)TechnologyTelecoms (Telco over Cables)UtilitiesSource: Scotiabank GBM estimates.

RecommendationOverweightOverweightOverweight

MarketweightUnderweightUnderweight

UnderweightMarketweightMarketweightUnderweight

• Global over domestic focus to kick off the year.

• Base Metals, Forest Products, Energy, Industrials, Insurance focus.


December 5, 2012

Disclaimer

TM Trademark of The Bank of Nova Scotia. Used under license, where applicable.

This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.

economic & market outlook 2013-14

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