GLOBAL ECONOMICS, REAL ESTATE PRICING & OUTLOOK FOR 2017 RICHARD BARKHAM GLOBAL CHIEF ECONOMIST
BREXIT
TRUMPISM
EURO-TRUMPISM 4 ECONOMICS, PRICING & OUTLOOK FOR 2017
LET S GET GEOPOLITICS IN PERSPECTIVE G7 COUNTRIES, UNEMPLOYMENT RATE (%) 8 FALKLANDS WAR US EMBASSY IN BEIRUT BOMBED SYRIA WAR JAPANESE TSUNAMI 7 6 REAGAN SHOT IRAN-IRAQ WAR STARTS GLASNOST IN USSR INDIRA GANDHI KILLED IRAN-IRAQ WAR ENDS LOCKERBIE BOMBING 1ST GULF WAR IRAQ INVADES KUWAIT BERLIN WALL FALLS MAASTRICHT TREATY BOSNIAN WAR ENDS FALL OF THE SOVIET UNION BRITISH RULE IN EUROZONE CREATED 5 1980 1982 1983 1984 1985 1987 1988 1989 1990 1992 1993 1994 1995 1997 1998 1999 2000 2002 2003 2004 2005 2007 2008 2009 2010 2012 2013 2014 2015 9 / 11 US INVASION OF IRAQ MADRID TRAIN BOMBING GAZA WAR RUSSO-GEORGIAN WAR ISIS EMERGES PARIS BOMBING CRIMEA ANNEXED BREXIT VOTE / TRUMP Source: Research, Macrobond, IMF, WEO. 5 ECONOMICS, PRICING & OUTLOOK FOR 2017
ONLY THE CYCLE MATTERS G7 Countries Unemployment Rate (%) 9.0 8.5 8.0 7.5 7.0 We are close to the cyclical trough 6.5 6.0 5.5 5.0 Source: Research, Macrobond, IMF, WEO. 6 ECONOMICS, PRICING & OUTLOOK FOR 2017
THE CYCLE DRIVES WORLD EQUITY VALUES MSCI Equities 2Y-o-2Y (%) G7 Unemployment (%) 100 4.0 80 60 40 20 0-20 -40-60 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 Source: Research, Macrobond, MSCI, 2016. G7 Unemployment (inverted) MSCI World Equities Index (2y/2y) 2 year lag 7 ECONOMICS, PRICING & OUTLOOK FOR 2017
AND WORLD REAL ESTATE VALUES G7 Unemployment and Global Composite Office Yield (%) 8.00 7.00 6.00 5.00 4.00 Source: Research, Macrobond, 2016. Global Composite Office Yield G7 Unemployment 8 ECONOMICS, PRICING & OUTLOOK FOR 2017
AND FUNDAMENTALS (EUROPEAN OFFICE VACANCY ) European Office Vacancy (%) G7 Unemployment (%) 14 9 12 10 8 6 SLUGGIS H 8 7 6 4 5 2 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 4 European Office vacancy G 7 Unemployment Source: Research, Macrobond 9 ECONOMICS, PRICING & OUTLOOK FOR 2017
AND RENTAL PRESSURE Euro Office Rental Growth (%) G7 Unemployment (%) 40 30 20 10 0-10 -20 SLUGGIS H 9 8 7 6 5 4 3 2 1-30 1987 1989 1990 1991 1993 1994 1995 1997 1998 1999 2001 2002 2003 2005 2006 2007 2009 2010 2011 2013 2014 2015 0 Average Euro Offices G7 Unemployment SOURCE: RESEARCH, MACROBOND. 10 ECONOMICS, PRICING & OUTLOOK FOR 2017
GEOPOLITICS RARELY BRINGS THE CYCLE TO AN END
INTEREST RATES ARE KEY TO THE END OF THE CYCLE G7 INTEREST RATE, DEVIATIONS FROM TREND AND G7 UNEMPLOYMENT G7 Unemployment(%) 9 8 7 6 5 Interest Rate (%) Spike Spike Spike 5 No Spike 4 3 2 1 0-1 4-2 1980 1982 1983 1985 1986 1988 1989 1991 1992 1994 1995 1997 1998 2000 2001 2003 2004 2006 2007 2009 2010 2012 2013 2015 2016 G7 Unemployment G7 Interest rate, deviations from trend Source: Research, Macrobond, 2016. 12 Economics, Pricing & Outlook For 2017
SO WHY IS IT NOT HAPPENING?
ITS BEEN A VERY TOUGH RECOVERY
THE U.S. WAS VERY BADLY DAMAGED BY THE GFC U.S. UNEMPLOYMENT (U3 AND U6, %) 18 17.1% 16 14 12 9.0% 10 8 6 4 2 0 1994 1997 2000 2004 2007 2010 2014 2017 U6 Unemployment U3 Unemployment U3 Unemployment forecast U6 Unemployment forecast Source: Research, BLS, Q3 2016. 15 ECONOMICS, PRICING & OUTLOOK FOR 2017
THE EUROZONE CRISIS WAS A MAJOR HICCUP Eurozone Unemployment (%) 13 12 Four wasted years 11 10 9 8 7 6 2000 2003 2006 2009 2012 2015 2018 Unemployment Unemployment Forecast What might have been Source: Research, Macrobond, Q3 2016. 16 ECONOMICS, PRICING & OUTLOOK FOR 2017
THE RISE AND SLOWDOWN IN CHINA IS PART OF THE STORY China GDP Growth Y-O-Y (%) 16 14 12 10 AVERAGE 10% AVERAGE 9% 8 NEW NORMAL 6% 6 4 1992 1993 1994 1995 1996 1997 Source: Research, Macrobond. 1998 1999 2000 2001 2002 2003 2004 GDP growth 2005 2006 2007 2008 2009 2010 GDP growth forecast 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 17 ECONOMICS, PRICING & OUTLOOK FOR 2017
MOST RECENTLY AN EMERGING MARKETS CRISIS Average annual GDP growth (%) 12 10 8 6 4 2 0-2 -4 China Emerging Markets Brazil Russia Opec 2002-2013 2014-2016 Source: Research, Macrobond. 18 ECONOMICS, PRICING & OUTLOOK FOR 2017
DEMAND SHOCKS HAVE KEPT INFLATION DANGEROUSLY LOW Core CPI Inflation vs. Target 2.5 2.0 1.5 1.0 0.5 0.0 Canada France Germany Italy Japan UK U.S. Core Source: Research, Macrobond, Q3 2016. 19 ECONOMICS, PRICING & OUTLOOK FOR 2017
THERE IS A BIGGER PROBLEM OF GLOBALIZATION 20 ECONOMICS, PRICING & OUTLOOK FOR 2017
TRADE SHOCK FROM CHINA Share Of World Manufacturing Output (%) 35 30 25 20 15 10 5 0 Canada France Germany Italy Japan UK U.S. Brazil China India Russia Source: Research, Macrobond. 2000 2016 21 ECONOMICS, PRICING & OUTLOOK FOR 2017
REMEMBER THE FIRST OIL SHOCK?
CAPITAL RECYCLING THEN 1970s OPEC THE WEST 23 ECONOMICS, PRICING & OUTLOOK FOR 2017
CAPITAL RECYCLING NOW Now OPEC CHINA EMs THE WEST 24 ECONOMICS, PRICING & OUTLOOK FOR 2017
THE WORLD HAS FAILED TO DE-LEVER Change In Debt To GDP By Country 2007 To 2014 (%) 4 3.5 3 2.5 2 1.5 1 0.5 0 Canada France Germany Italy Japan UK U.S. Brazil China India Russia 2007 2014 Source: McKinsey Global Institute, Research, 2016. 25 ECONOMICS, PRICING & OUTLOOK FOR 2017
BACK TO THE CYCLE? 26 ECONOMICS, PRICING & OUTLOOK FOR 2017
Budget balance, % of GDP THE CHINESE STARTED IT China, Central Government Budget Balance, % of GDP 1 0 (1) Major fiscal boost (2) (3) (4) (5) Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Source: Research, Macrobond, 2016. 27 ECONOMICS, PRICING & OUTLOOK FOR 2017
TRUMP IS ALSO ON THE CASE
5.0% REAL WAGES ARE GROWING STRONGLY US REAL EARNINGS GROWTH 4.0% 3.0% 2.0% 1.0% REAL EARNING GROWTH AVERAGE 0.0% -1.0% -2.0% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 SOURCE: RESEARCH, MACROBOND 29 ECONOMICS, PRICING & OUTLOOK FOR 2017
4.0% 3.5% 3.0% INFLATION IS TRENDING UP US CORE CPI 2.5% 2.0% CORE-CPI TARGET 1.5% 1.0% 0.5% 0.0% 1993 1994 1996 1998 1999 2001 2003 2004 2006 2008 2009 2011 2013 2014 2016 SOURCE: RESEARCH, MACROBOND 30 ECONOMICS, PRICING & OUTLOOK FOR 2017
A MONETARY POLICY RESPONSE SHOULD BE EXPECTED
Jan 1995 Jan 1996 Jan 1997 Jan 1998 Jan 1999 Jan 2000 Jan 2001 Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 SHORT RATES HEADING UP Fed Funds Rate (%) 8 6 4 2 0 U3 Unemployment (%) 11.0 10.0 Cyclical low last 20 years 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Fed funds U.S. forecast (Oxford) Fed dots Forward curve Unemployment Unemployment (forecast) Source: Atlanta Federal Reserve, Bureau of Labor Statistics, Macrobond, Research. 32 ECONOMICS, PRICING & OUTLOOK FOR 2017
12/1990 12/1991 12/1992 12/1993 12/1994 12/1995 12/1996 12/1997 12/1998 12/1999 12/2000 12/2001 12/2002 12/2003 12/2004 12/2005 12/2006 12/2007 12/2008 12/2009 12/2010 12/2011 12/2012 12/2013 12/2014 12/2015 12/2016 LONG RATES HAVE ALREADY MOVED US Government 10 Year Bond Yield (%) 10 8 6 4 2 0 Source: Macrobond, Research, 2016. 33 ECONOMICS, PRICING & OUTLOOK FOR 2017
AN ERA OF DANGEROUS DOLLAR STRENGTH S&P 500 CORPORATE EARNINGS, USD NOMINAL TRADE WEIGHTED EXCHANGE RATE 260 240 220 200 180 160 140 EXCHANGE RATE (USD) CORPORATE EARNINGS (USD, BN) 120 100 2012 2013 2014 2015 2016 130 120 110 100 90 80 S&P 500 Corporate Earnings SOURCE: RESEARCH, MACROBOND & ST. LOUIS FED USD Nominal Trade Weighted Exchange Rate 34 ECONOMICS, PRICING & OUTLOOK FOR 2017
Czech republic Thailand China Malaysia Taiwan Israel South Korea South Africa Phillippines Poland Russia India Qatar Mexico Indonesia Hong Kong Colombia Singapore Chile Turkey Brazil EMERGING MARKET $ DEBT Exports of Good Services & Income Receipts (%) 200 160 120 80 40 0 Private sector Loans Private sector Source: CreditSights, Bloomberg Business review, BIS, BAML Index Data, Haver, 2016. 35 ECONOMICS, PRICING & OUTLOOK FOR 2017
OUTLOOK FOR GLOBAL REAL ESTATE PRICING 36 ECONOMICS, PRICING & OUTLOOK FOR 2017
WORLD REAL ESTATE PRICES G7 Unemployment and Global Composite Office Yield (%) 8.00 7.00 6.00 5.00 4.00 Source: Research, Macrobond, 2016. Global Composite Office Yield G7 Unemployment 37 ECONOMICS, PRICING & OUTLOOK FOR 2017
3/1/1990 12/1/1990 9/1/1991 6/1/1992 3/1/1993 12/1/1993 9/1/1994 6/1/1995 3/1/1996 12/1/1996 9/1/1997 6/1/1998 3/1/1999 12/1/1999 9/1/2000 6/1/2001 3/1/2002 12/1/2002 9/1/2003 6/1/2004 3/1/2005 12/1/2005 9/1/2006 6/1/2007 3/1/2008 12/1/2008 9/1/2009 6/1/2010 3/1/2011 12/1/2011 9/1/2012 6/1/2013 3/1/2014 12/1/2014 9/1/2015 6/1/2016 ACTUALLY TWO KEY DRIVERS GLOBAL OFFICE YIELDS VERSUS G7 BOND RATES AND G7 UNEMPLOYMENT G7 Unemployment (%) 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 Global Office Yield, G7 Average Bond Rate (%) 12.00 10.00 8.00 6.00 4.00 2.00 0.0 0.00 Source: Research, Macrobond, 2016. G7 Unemployment Global Composite Office Yield G7 bond rate 38 ECONOMICS, PRICING & OUTLOOK FOR 2017
KEY COEFFICIENTS 70 bps G7 bonds 50 bps G7 unemployment SOURCE: RESEARCH 39 ECONOMICS, PRICING & OUTLOOK FOR 2017
CONCLUSIONS
Globalisation has thrown up many problems Political volatility will be with us for some time Fiscal stimulus - immediate response correct Trade and immigration checks longer term response - wrong Capital glut diminishing Rates depressed in medium term, but end in sight? Cycle alive and well Demand shocks had moderating impact this will reverse End of cycle Will driven by the U.S. will unfold in emerging markets 41 ECONOMICS, PRICING & OUTLOOK FOR 2017
Real estate (firm conclusions) Fundamentals and rent pressure will protect values for 24 months But the era of yield compression is over bond rates win in medium term Next recession probably reasonably mild Real estate (speculative conclusions) Regime shift back to a higher inflation higher interest rate world More higher yielding bonds to compete with prime real estate Questions to be answered Will de-globalisation affect cross border capital flows? 42 ECONOMICS, PRICING & OUTLOOK FOR 2017
THANK YOU PROFESSOR RICHARD BARKHAM PHD MRICS GLOBAL CHIEF ECONOMIST +44 20 7182 2665 RICHARD.BARKHAM@.COM