Sep 15, 2016 - GDP per capita, has reduced poverty and created great stability and prosperity ... Media, and Telecommuni
Monthly perspective | September 15, 2016 EMI and Franklin Templeton Investments Joint Collaboration
Monthly perspective | September 15, 2016
Globalization and its enemies SUMMARY Globalization has produced stability and prosperity in the world over the last seven decades. There are people who feel marginalized by globalization, particularly since the slow recovery following the 2008 financial crisis. Brexit and Trump are examples of how this marginalization has been underestimated, and advanced populist antiglobalization agendas around the world. In the face of populism, fiscal proposals to stimulate growth have been produced. It is possible that markets are beginning to discount this growth. Mexico, a clear beneficiary of globalization, has much to lose if populism advances, particularly in the US. The November elections in the US, and the consequences of Brexit in future years could determine the future of globalization. Markets currently reflect uncertainty on these two issues. Until there is visibility, debt, stocks, Fibras and commodities will continue volatile.
“Globalization is not a monolithic force but an evolving set of consequences - some good, some bad and some unintended. It is the new reality.” - John B. Larson
Globalization Globalization, since the end of World War II, has prevented major new conflicts, and, through the increase of GDP per capita, has reduced poverty and created great stability and prosperity (Figure 1). Globalization can be defined as the elimination of ideological and geographical barriers, encouraging the interchange of goods, services, ideas, people, Information and capital. The main cause of globalization has been technology, which drives economic growth, and, mainly in recent decades, has reduced geographical barriers through Technology, Media, and Telecommunications (TMT), culminating in the Internet. The advance of these technologies in the capitalist world contributed to the collapse of communist and socialist regimes, undermining protectionism and opening economies. Figure 1. GDP per capita 1960-2015 (current US$). Source: Franklin Templeton Investments
GDP per capita 1960-2015 12,000 10,000 8,000 6,000 4,000 2,000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
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BENEFITS Global markets The clearest benefit of globalization is the growth of trade to record levels, between developed, developing and transition economies (Figure 2). Over time, trade relations between countries have become ever more complex, depending on the comparative advantage of each country. Figure 2. Total global trade of goods 1948-2015. Source: Franklin Templeton Investments
Capital Global foreign direct investment has reached record levels since the 1980s (Figure 3) as emerging markets have been incorporated into global supply chains. Investment is accompanied by technology transfer. Some emerging markets companies that were only manufacturers have become leaders in innovation and production. Figure 3. Global Foreign Direct Investment flows and stock (% GDP). Source: Financial Times
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Migration Another benefit has been the more efficient movement of people to work where there is a need for labor for demographic reasons, or for qualified skills. The global number of migrants has increased from 153mn. in 1990 to 244mn. in 2015 (Figure 4), of which almost one half go to the US or Europe. 38% of migrants go from one developing country to another. These workers send remittances to their countries of birth. According to the World Bank in 2015 remittances totaled US$582 bn., and US$441 bn. were sent to developing countries, three times the figure for annual global development aid (Figure 5). The largest generators of remittances are the US, Saudi Arabia and Russia, and the largest recipients India, China, the Philippines and Mexico. Migrants who return to their countries are also a positive influence for advances in democracy and institutionalization. Figure 4. Migrants 1990-2015 (mn.). Source: UN
Figure 5. Global remittances (US$ bn.) Source: World Bank
PROBLEMS Inequality The benefits from globalization of increased income are undeniable, but these increases are not equal for all. Since 1891, there have been two peaks in inequality in developed and emerging markets: in the 1920s, and in the current era, at even higher levels (Figure 6). Figure 6. Income share by country (top 10% population). Source: Franklin Templeton Investments
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Recently, inequality, according to some measures, increased owing to the 2008 financial crisis. The recovery has led to an increase in the level of financial assets to levels higher (adjusted for inflation) than before the crisis (reflected in the level of the S&P 500 share index) but salaries have stagnated in real terms (Figure 7). Figure 7 Real median household income vs. inflation adjusted S&P 500. Source: Franklin Templeton Investments
Migration Migration to developed countries increases competition for labor and resources such as social security and housing. This has caused rejection of migrants in developed countries that receive them, accentuating cultural and religious differences between migrants and their hosts, and the use of stereotypes. It is but a short step from rejection to racism and nationalism. Protectionism Another result of globalization has been the migration of jobs to emerging countries, owing to cheaper labor. These can affect specific industries, for example, the migration of US auto plants or of British Steel companies. The rejection of this phenomenon easily turns into protectionism and the wish to impose tariffs on imports produced with foreign cheap labor, and to return manufacturing to the consumer country. Distrust of the political class The perception of inequality, the rejection of migration and imported cheap products, and the consequent political paralysis creates a perception among the electorate, sometimes justified, that the elites govern for their own benefit, are indifferent to electors´ needs, or simply incompetent. In the US, trust in Washington is at minimal levels since 1958 (Figure 8). In Europe, the European Parliament, European Commission, and the European Central Bank are at minimum levels since 2006. Figure 8. Trust in Washington 1958-2015 (%). Source: Pew Research
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Populism The combination of perceived inequality, racism, nationalism and protectionism is a natural breeding ground for populism. Demagogues appear, and present themselves as “outside” politics and representatives of “ordinary” people. They do not have articulate, coherent, or even plausible programs, but mainly make pronouncements against what we have defined as “globalization”. These movements have recently been underestimated, and have achieved unexpected victories, such as that of Brexit (where immigration was the most important issue) or the vote for Donald Trump as the Republican Party candidate for the presidency (where the main issue is protectionism). These movements in English-speaking countries have their equivalents in populist parties in other countries (Figure 9). Figure 9. Populist/nationalist parties: recent votes. Source: Franklin Templeton Investments
Country France Austria Philippines Germany Países Bajos Italy
Party National Front Freedom party of Austria PDP Laban Alternative for Germany Party for freedom Five Star Movement
Ideology Nationalist conservative Nationalist liberal Illustrated nationalism Conservative anti-migration Nationalist conservative Populist anti-global (left)
Previous vote European Parlament 2004 European Parlament 2004 Presidential 2010 Federal Parlament 2013 Congress 2006 European Parlament 2004
% Recent vote 9.8 European Parlament 2014 6.3 European Parlament 2014 NA Presidential 2016 4.7 European Parlament 2014 5.9 Congress 2009 NA European Parlament 2014
% 24.9 19.7 39 7.1 10.1 21.2
STIMULUS The best way to stall the advance of antiglobal populism is to ensure that economic growth, in a tangible and visible way, reaches those that have been marginalized and improves their living conditions as soon as possible. The main reason is that populist platforms often reach irrational and infeasible levels (e.g. Trump´s Mexican wall, and his antiNAFTA policies). Another reason is that establishment politicians wish to preserve their jobs. In order to stimulate the economy, politicians have three main tools: monetary policy, structural reform, and fiscal policy. Monetary policy. With low growth expected for future years, and US$ 10 trn. of global debt paying negative interest rates and another US$18 trn. paying less than 1%, many consider that monetary policy has been exhausted (Figure 10). An extreme option, which we consider in a previous report (Monthly Perspective June 2016) would be “helicopter money”, or the creation of money to apply to public expenditure. Meanwhile, the Fed has already raised its reference rate, and is considering a further hike in 2016. Figure 10. Sovereign bond index: value (US$trn.) and Yield to Maturity. Source: Franklin Templeton Investments
Structural reforms. Long term, the best option is to effect structural reforms to make economies more competitive in the global economy. In most countries it has not been possible to generate a political consensus of this kind of reform. And even if they are effected quickly, they do not achieve rapid results and are slow to take effect, and are therefore unlikely to affect antiglobalization sentiment in the short term.
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Fiscal policy. Politicians and monetary authorities have called for the coordination of monetary and fiscal policies to increase growth. In June 2016, Janet Yellen, President of the Fed, stated before the US Senate that “fiscal policy is not playing a support role in the effort to stimulate growth”. In July 2016, the chief economist of the ECB stated that “monetary policy alone cannot be the only solution to our current economic challenges”. Fiscal stimulus can be provided in either of two ways: lowering taxes and/or increasing public spending. Low interest rates make it attractive for governments to contract debt to finance spending programs. This vision has begun to be considered or implemented in several countries:
In the US, both presidential candidates have suggested broad infrastructure programs. In the United Kingdom deficit targets have been postponed to contain the economic effects of Brexit and an infrastructure spending package is being considered. Japan will try again to stimulate its economy with an ambitious investment program of US$45 bn. although previous programs were ineffective owing to poor execution. Canada announced a 10 year infrastructure investment program for C$120 bn. In the next months the first phase for C$11.9 bn will begin (Figure 11). Figure 11. First phase of infrastructure program. Source: Government of Canada
Germany, a paragon of fiscal discipline, is considering lowering taxes in the run up to the 2017 elections. Figure 12. DM and EM vs. Mexico: stocks (100=dec2015). Source: Bloomberg
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Observers are expecting fiscal stimulus to be announced in many countries, and this seems to the only explanation of the recovery in markets after their immediate fall after Brexit (Figure 12). In July 2016 the term “fiscal stimulus” appeared more than 800 times in Bloomberg, the first time since 2009, during the most severe financial crisis since the 1930s. RISKS Main risks of fiscal stimulus are: If stimulus is badly planned and executed (e.g. bridges to nowhere, airports without flights, or empty buildings), it can be counterproductive. The unemployed stay unemployed, and populism is unabated. If stimulus is attempted through tax cuts, consumers may decide not to spend the extra income but to use it to repay debts, or for savings. This would nullify its effect on growth. Stimulus could be applied as markets hope: sufficient, efficient and effective. But the increase in debt could cause a sudden rise in interest rates, with uncertain effects on the economy and financial markets. MEXICO Mexico is a beneficiary from globalization. It has 12 free trade agreements including 49 countries, of which the most important are NAFTA, signed in 1994, and the FTA with the EU. Proximity to the US, low production costs, and infrastructure have led to leadership in the production of autos, electronics and other manufactures. In 2015 there were 87 million tourists who generated US$17 bn. in revenues and 2016 figures are expected to be higher. Remittances of Mexican migrants, at US$24.8 bn. were Mexico’s second largest export in 2015. Many Latin American countries have movedfrom populism to centrist economic and social policies. Relevant examples are Argentina, with President Macri, Perú, with President Kuczynski, Brazil, with the recent destitution of Dilma Rousseff, and even Venezuela, where the Presidency of Nicolas Maduro is in danger. It is therefore unsurprising that, in Mexico, free trade and migration are generally not rejected. However, there is resentment against inequality and corruption, and therefore against politicians in general. As in other countries, it is imaginable that populist politicians could blame all the country’s problems on globalization, even though it is not strictly the cause. According to current polls, Donald Trump, who is against free trade and migration (the pillars of Mexico´s recent political, social and economic development) has a reasonable chance of winning the US presidential elections on November. His election could result, ironically in a populist, nationalist, and antiglobal reaction in Mexico, reversing the progress of the last two decades – against the trends in Latin America, but in line with trends in the US and the Europe. CONCLUSION The world is at a critical juncture, where the advance of populism, and what it implies for globalization and its consequences, should not be underestimated. On the one hand, there could be a positive outcome, as fear of populism could provide politicians, and society as a whole, with incentives to implement fiscal stimuli which trigger economies to break out from the current low growth trend. On the other, the stability and prosperity which has been achieved since World War II could go into reverse, if populist proposals become contagious, and succeed simultaneously around the world (see also our Monthly Perspective of July 2016 on the Kondratieff cycle). Markets current reflect uncertainty, about Fed monetary policy over the following months, US elections in November, and the outcome of the Brexit referendum, likely in 2017. Debt, stocks, commodities and Fibras will continue volatile until there is greater visibility on each of these issues.
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Main financial indicators: monthly and YTD performance (August 31, 2016) In August 2016, in Mexico the IPC rose 1.89%. Nominal rates rose for short term, and fell for medium and long term. Real rates rose for all terms. The US$ strengthened 0.41% against the peso. In the US, the DJ and S&P500 fell, and Nasdaq rose. Nominal and real rates rose for all terms. The Mexican oil mix increased 8.46% and WTI 7.45%. According to the Banxico business climate survey, optimism increased to 26% (15% previous), no change fell to 38% (53%), and pessimism increased to 35% (32%). Mexico Stock market and oil 31-Aug-16 IPC
29-Jul-16
31-Dec-15
Month
YTD
47,541.32
46,660.67
42,977.50
1.89%
Local currency (USD/MXN)
18.86
18.78
17.25
0.41%
10.62% 9.34%
Mexican oil mix (USD/bl)
38.96
35.92
27.37
8.46%
42.35%
Nominal rates 31-Aug-16
29-Jul-16
31-Dec-15
Month
CETES 28
4.29%
4.21%
3.05%
8 bps
YTD 124 bps
CETES 360
4.72%
4.84%
3.66%
-12 bps
106 bps
M5
5.59%
5.63%
5.55%
-4 bps
4 bps
M10
5.87%
5.97%
6.23%
-10 bps
-36 bps
M30
6.36%
6.42%
6.95%
-6 bps
-60 bps
Real rates 31-Aug-16
29-Jul-16
31-Dec-15
Month
UDIBONO 10
2.76%
2.58%
3.34%
18 bps
YTD -58 bps
UDIBONO 30
3.26%
3.15%
3.91%
11 bps
-65 bps
31-Aug-16
29-Jul-16
31-Dec-15
Month
1,308.97
1,351.28
1,061.10
-3.13%
23.36%
44.7
41.6
37.04
7.45%
20.68%
Commodities Gold WTI (USD/bl)
YTD
UMS 31-Aug-16
29-Jul-16
31-Dec-15
Month
UMS 10 years
2.55%
2.78%
3.87%
-23 bps
YTD -132 bps
UMS 20 years
3.84%
4.03%
5.30%
-19 bps
-146 bps
UMS 30 years
4.05%
4.23%
5.29%
-18 bps
-124 bps
Stock markets (US$) 31-Aug-16
29-Jul-16
31-Dec-15
Month
MSCI Developed
6,707.42
6,698.47
6,360.57
0.13%
YTD 5.45%
MSCI Emerging
1,883.80
1,837.52
1,640.30
2.52%
14.84%
MSCI Mexico
9,072.99
8,947.05
8,882.27
1.41%
2.15%
MSCI Brazil
4,962.17
4,917.84
3,051.99
0.90%
62.59%
US Stock market 31-Aug-16
29-Jul-16
31-Dec-15
Month
18,400.88
18,432.24
17,425.03
-0.17%
5.60%
S&P
2,170.95
2,173.60
2,043.94
-0.12%
6.21%
Nasdaq
5,213.22
5,162.13
5,007.41
0.99%
4.11%
DJ
YTD
Nominal rates 31-Aug-16
29-Jul-16
31-Dec-15
Month
Tbill 90
0.33%
0.28%
0.16%
5 bps
YTD 17 bps
Tnote 5
1.19%
1.03%
1.76%
16 bps
-57 bps
Tnote 10
1.58%
1.46%
2.27%
12 bps
-69 bps
Tbond 30
2.23%
2.18%
3.01%
5 bps
-78 bps
Real rates 31-Aug-16
29-Jul-16
31-Dec-15
Month
Tip 5
-0.08%
-0.28%
0.45%
20 bps
YTD -53 bps
Tip 10
0.11%
-0.03%
0.73%
14 bps
-62 bps
Tip 30
0.58%
0.56%
1.28%
2 bps
-70 bps
Bank of Mexico survey Indicator
2016 2016 anterior
PIB
2.16%
2.28%
Inflation
3.13%
3.19%
Cetes 28
4.54%
4.50%
Local currency
18.50
18.43
Business conditions
31-Aug-16
29-Jul-16
Optimism
26%
15%
No change
38%
53%
Pessimism
35%
32%
Source: Bloomberg, Banco de México
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Monthly perspective
September 15, 2016
IMPORTANT LEGAL INFORMATION The material has been prepared by Franklin Templeton Servicios de Asesoría México, S. de R.L. de C.V. (“FTSAM” or the “Company”) which has the folio inscription number 30045-001-(14127)-15/04/2016 in the Public Register of Investment Advisors assigned by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) in terms of the Securities Market Law (Ley del Mercado de Valores). Registry does not imply compliance with the regulations applicable to the services that are provided, nor the precision or veracity of the information provided. The content of this document is for information purposes only. Past Performance is not a guarantee of future returns. The material has been prepared by FTSAM solely for use in this document, and is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any kind. Nothing in this document should be construed as investment advice. This document may contain information obtained from various sources, and while it may be considered reliable, the Company makes no warranty or any statement on its fidelity, accuracy, scope or coverage, as the Company has not verified, validated or audited independently such information. The information is partial and, therefore, cannot be called complete. You agree to keep the contents of this document strictly private and confidential and it shall not be disclosed, copied, reproduced or redistributed (in whole or in part) to any person without the prior written consent of the Company. This document may contain "forward looking statements" and results may vary from those expressed or implied are included in this document. Such forward-looking statements can be identified, among other words, by the use of terminology such as "expect", "anticipate", "believe", "continue", "could", "estimate", "predict", "try" "plan", "predict", "should" or other forward-looking terminology, or by the negative of these words or comparable terminology, including without limitation the plural form of these words. All forward-looking statements relate to the Company's current expectation regarding future events and are subject to a number of factors that could cause actual results to differ materially from those in respect of the forward-looking statements. One must be cautious of such statements and should not place undue reliance on any forward-looking statements. This document includes no representation or warranty (express or implied) so it should not support the accuracy, fairness or completeness of the information presented or contained in this document. Neither the Company nor any of its affiliates, meployees, advisers or representatives accepts any liability for any loss or damage caused by the information presented or contained in this document. The information presented or contained in this document is current as of the date indicated and is subject to change without notice and its accuracy is not guaranteed. The information contained herein and the views, if any, expressed therein are issued on the date hereof and, therefore, are conditioned and / or subject to probable changes due to changes in applicable law, as well as the conditions and circumstances that may or may not be provided in this document, in addition to over time and other similar situations. Neither the Company, nor its affiliates, agents, employees or advisers assume any responsibility or obligation to inform you or any other person regarding any changes to the information or opinions expressed herein resulting from matters, circumstances or events that may arise in the future or that may be brought to our attention after the date herein. This document should not be construed as legal, tax, investment or any other type of advice. This document does not constitute an offer or invitation to purchase or subscribe shares or other securities and no part of this document or any information, opinion or statement contained herein shall be the basis of, or be referred to in connection with any contract or commitment. Any decision to purchase securities in any offering of securities should be made solely on the basis of information contained in the prospectus of the securities offered. By reading this document, you agree to be subject to the above limitations. Copyright © 2016. Franklin Templeton Investments. All rights reserved. Valid only in the United States of Mexico.
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