2015 Macro Economic Outlook

2015 MACRO ECONOMIC OUTLOOK

Varun Gadia

2016 MBA Candidate M .J. Neeley School of Business varun.gadia@tcu.edu

CRUDE OIL WTI: 52.78 || BRENT: 56.93

CRUDE OIL:PRODUCTION • Has been increasing constantly since the start of 2014 • Expected to remain flat or slightly increase this year

CRUDE OIL:RESERVES • Saudi Arabia still controls the largest reserves and is the worlds largest supplier • OPEC will continue to control prices

CRUDE OIL:DEMAND • Demand is expected to decline in Q1 and Q2 • However expected to pick up to 94mb/d by 3Q 2014

CRUDE OIL:SUPPLY • Supply to be much higher than demand in Q1 and Q2 • Supply will return to normal levels and match demand from Q3-­‐Q4

CRUDE OIL:RIG COUNTS • Sharply decreasing and will continue to decrease throughout the year • Decrease competition by acquisition

CRUDE OIL:SUMMARY Complexities § Saudi Arabia will not reduce production § Slowing China will affect demand § No country will reduce production -­‐> Threat of competition § Rigs will continue shutting down § US may start exporting Oil § Winners: Turkey & India || Losers: US Shale, Russia, SA, Iraq, Iran, Venezuela

Results § Downward price pressure threat in Q1 and Q2 § Production to decrease in a slow stepwise manner across Q1 and Q2 § Prices to strengthen from Q3 § Prices will settle at $60-­‐$70 by Dec 2015

RATES GG10YR: 2.02 || FDFD: .12

RATES:10-­‐YEAR RATES • Have continued to fall in the last few years; Will continue to fall • Signs of strong domestic economic growth; Weak global growth

RATES:FED FUNDS • Have been balanced in the last 7 years trading between 0-­‐.25% • Expected to rise in Q2/Q3; Low Inflation a strong factor in delaying the increase

RATES:YIELDS AND RATINGS • US -­‐> Market with a strong positive outlook • US -­‐> Highest yield in comparable markets

RATES:SUMMARY Complexities § No other positive developed market present other than the US § Euro zone expected to slow down § China expected to slow down; Legal complications § Emerging economies pose currency risk § Fed needs a cushion to overcome the next slowdown § Low Inflation a factor for oil prices and not slowing growth

Results § 10-­‐Year Treasury yields to continue decreasing till they match UK,

Germany § Fed will increase rates by max 50 bps (0.5%) § Dollar will appreciate due to slowing world economy

INFLATION 2014: 1.6% || 2015: 1.3%

INFLATION:YOY • Inflation rate expected to be lower than last year • More consumer spending which will compensate for lower gas prices

INFLATION:DEFLATION • Potential signs of deflation due to lower gas price • Deflation is theoretical -­‐> Index biased towards a single commodity

INFLATION:SUMMARY Complexities § Oil imbalances the index § More consumer spending to outweigh low gas benefits § Fed in doubt whether to increase or keep the rates same § Global outlook is slim; Contracts with emerging economies is a strong positive

factor § Demand to be driven domestically

Results § Lower inflation when compared to the last few years § Inflation expected to be around 1.3%

CONSUMER SPENDING Complexities § Cheaper gas -­‐> Lower discretionary income: Approx: $750 per household § Lower rate of unemployment § Increase in levels of savings

Results § Increase in consumer spending

US GDP 2015: 3.0%-­‐3.3% Complexities § Lower Oil prices § Increase in consumption driven by consumer spending § Increase in investments; Excessive cash and growth potential § Strong dollar -­‐> Reduced exports § Decrease in oil imports § Potential for oil exports § Presidential Elections -­‐> Increase in government spending

Results § GDP will grow by 3 to 3.3% based on multifaceted public and private sector

issues

GOLD & SILVER Complexities § Lower Oil prices § Increase in consumer spending § Lower tax barriers in India § Increase in demand from China § Appreciating Dollar § Weak global economy -­‐> More dependence on Gold

Results § Gold a strong hedge against the dollar § Gold less attractive because of increase in Dollar § Demand will offset any price cut back § Gold prices set to increase in 2015 to around $1,350-­‐$1,400

S&P 2014: ~2000 || 2015: ~2100

S&P:CURRENT SCENARIO • US -­‐> lone-­‐star performer -­‐> Increase in FII • Impact of Oil -­‐> Not seen in current multipliers • Strong company growth results for Q4/Q1 • Fed postponed rate increase • Streamlined government spend

S&P: PRICE TO EARNINGS • S&P converges to its P/E 15 +/-­‐ 1 multiplier • S&P current multiplier is 18

S&P:SUMMARY Complexities § Valuations judge S&P to be overpriced § Strong consumer sentiment § Weak global outlook § Lower energy prices § Fed will increase interest rates § US presidential elections 2016

Results § In Q1 and Q2 S&P will surge ahead -­‐> European Crisis could be a setback § Fed interest rates hike will be a trigger to the S&P’s downfall § S&P will settle around 2,100

ASIA Complexities § Structural reforms across Asian economies § Lower oil prices -­‐> Predominately Oil importing countries § Currency depreciation -­‐> Strengthening dollar § Huge debt to GDP build up § Loose monetary policy § Lower inflation

Results § China to slow in shorter term for longer term benefits § Japan QE program, Pension funds and higher Corporate Cash to fuel

demand

§ India structural reform and lower inflation to boost consumption and

demand

India

China

Japan

6-­‐6.5%

6.8-­‐7.1%

1-­‐1.5%

EUROZONE Complexities § Euro depreciation & Dollar appreciation § Lower oil & other commodity prices § Threat of Greece & Spain – Leftist governments § $1.3 million QE program to stimulate demand in Eurozone § Deflationary pressure due to slowdown in France & Italy § Financial and Labor market reform

Results § Slow medium term outlook and Strong long term outlook § Increase in export competition § Increased private sector spending § Eurozone growth to be 1-­‐1.3%

France & Italy

Germany & Spain

Less than 1%

Greater than 1%