Global Business Environment August 2015

G L O B A L B U S I N E S S E N V I R O N M E N T U P D A T E P a g e | 1

Research: Prodeep Mookerjee AUGUST 2015

Contents The Global Picture .................................................................................................................................. 2

The US Economy ..................................................................................................................................... 2

Rate Rise Expectations: ...................................................................................................................... 3

Stock Valuations ................................................................................................................................. 3

Shiller Analysis .................................................................................................................................... 4

Trade Balance ..................................................................................................................................... 4

The EU Economy ..................................................................................................................................... 5

European Economic Forecast; Winter2015 ........................................................................................ 6

The China Factor ..................................................................................................................................... 6

Global Market Valuations ................................................................................................................. 10

Growth in Volume of World Merchandise Trade and real GDP 2007 – 16P .................................... 11

Cheap Oil .............................................................................................................................................. 12

"Lower For Longer" Consensus ........................................................................................................ 12

Oil Consumption Estimate Increased ............................................................................................... 13

Global Supply Falls on Lower Non-OPEC Production ....................................................................... 13

Oil Glut to Persist Into 2016 ............................................................................................................. 13

OPEC Keeps Pedal to the Metal ........................................................................................................ 13

Is a Price Slump to $30 ahead?......................................................................................................... 13

The information contained in this paper is for general guidance only. You should neither act, nor refrain from action, on the basis of any

such information. The research and analysis has reference to secondary sources and entails reasonable endeavours to ensure that the

information presented is correct. This information cannot however be assured as accurate or complete. The use of secondary sources has

minimal potential for negatively impacting the demand or purpose of the original works.



The Global Picture1

The US Economy The 1st Quarter Started well. The financial news was surprisingly rosy: record trade surpluses in

China, positive surprises in Europe, the best run of new jobs added to the U.S. economy since the

1990s, and the gift that keeps on giving to consumers everywhere, low oil prices. The 2nd Quarter

increase in real GDP mainly reflected an increase in consumer spending. Spending on both durable

goods, notably motor vehicles and parts, and nondurable goods increased. Spending on services,

mainly household services, also increased. Exports, state and local government spending, and

residential fixed investment also contributed to the rise in real GDP.

These contributions to the increase in real GDP were partly offset by decreases in federal

government spending, inventory investment, and business investment. In addition, imports—a

subtraction in the calculation of GDP—increased.

Household debt in the US was unchanged at $11.85 trillion for the second quarter of 2015. Increases

in auto loan debt and credit card balances offset a decline in mortgage debt to leave total

borrowings of U.S. households roughly unchanged in the second quarter. As of June 30, 5.6% of

outstanding debt was in some stage of delinquency, compared with 5.7% in 2015Q1. Of the $668

billion of debt that is delinquent, $471 billion is seriously delinquent.

1 www.bloomberg.com/businessweek



Rate Rise Expectations:

Interest rates “act on financial valuations the way gravity acts on matter: The higher the rate, the

greater the downward pull. That's because the rates of return that investors need from any kind of

investment are directly tied to the risk-free rate that they can earn from government securities. So if

the government rate rises, the prices of all other investments must adjust downward, to a level that

brings their expected rates of return into line. Conversely, if government interest rates fall, the move

pushes the prices of all other investments upward.”—Warren Buffett

Recent “conventional wisdom” is that the Fed may delay its first anticipated rate hike from Sept. to

either Dec. or 1st quarter 2016 and that it may only be 10-15 basis points.

Stock Valuations

In a CNBC interview earlier this year (April 23rd), Warren Buffett expressed his view that stocks

aren't "too frothy". However, both the "Buffett Index" and the Wilshire 5000 variant suggest that

today's market is indeed at lofty valuations, now well above the housing-bubble peak in 2007.

The recent divergence between the S&P and

margin debt levels is also notable. But rather

than interpret it as a sign that market

sentiment is getting frothy, Erin Gibbs, S&P

Capital IQ's equity chief investment officer,

says it's actually a good sign. "We definitely

see that sentiment starts to turn first, and

then we see the market go down," Gibbs said.

"I'd be more worried about margin debt being

lowered and seeing a downtrend than seeing

new highs. New highs don't concern me."

"It's one of those things, like the put/call ratio, that's

only the tip of the iceberg," said Dennis Davitt of

Harvest Volatility Advisors. "Plus, I only know what I

have in my pocket. If I start trading based on what I

think other people have in their pocket, and then

what am I really doing? I'm no longer investing, I'm

speculating."

“I cannot tell you when it will rumble but eventually it will rumble again.” Hans-Jörg Vetter, CEO of Landesbank Baden-Württemberg 31 Mar 2015



Shiller Analysis

Source: Guru Focus

The highest peak for the regular P/E was 123 in the first quarter of 2009. The P/E was high because

earnings were depressed. With the P/E at 123 in the first quarter of 2009 it would lead one to

interpret the level as a bad time to buy stock. On the other hand, the Shiller P/E was at 13.3, its

lowest level in decades, correctly indicating a good time to buy stocks. It is over 26 today.

Trade Balance

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of

Commerce, announced that the goods and services deficit was $43.8 billion in June, up $2.9 billion

from $40.9 billion in May, revised. June exports were $188.6 billion, $0.1 billion less than May

exports. June imports were $232.4 billion, $2.8 billion more than May imports.

The June increase in the goods and services deficit reflected an increase in the goods deficit of $2.9

billion to $63.5 billion and a decrease in the services surplus of less than $0.1 billion to $19.7 billion.

Year-to-date, the goods and services deficit increased $1.6 billion, or 0.6 percent, from the same

period in 2014. Exports decreased $33.4 billion or 2.9 percent. Imports decreased $31.8 billion or 2.2

percent.

Country Data: The June figures show surpluses, in billions

of dollars, with South and Central America ($3.5), OPEC

($0.7), and Brazil ($0.6). Deficits were recorded, in

billions of dollars, with China ($29.0), European Union

($13.9), Germany ($6.8), Mexico ($5.4), Japan ($5.2),

Canada ($3.1), South Korea ($2.3), Italy ($2.2), France

($1.7), India ($1.6), Saudi Arabia ($0.5), and United

Kingdom ($0.2).

The balance with Canada shifted from a surplus of $0.2

billion in May to a deficit of $3.1 billion in June. Exports

decreased $1.1 billion to $23.0 billion and imports

increased $2.2 billion to $26.2 billion.

The deficit with Mexico increased $1.3 billion to $5.4

billion in June. Exports increased $0.1 billion to $20.0

billion and imports increased $1.4 billion to $25.5 billion.



The EU Economy The first quarter was encouraging across the Eurozone. The head of the European Central Bank,

Mario Draghi, announced a massive, €1 trillion bond-buying program on

22nd Jan 2015. The ECB will buy €60 billion in bonds every month until

September 2016 and maybe longer.

And stocks surged: the Stoxx Europe 600 was up 16%; Italy’s FTSE MIB

index up 22%; and Germany’s DAX also up 22%, the sharpest quarterly

gain since Q2 2003. Since January 2012, in a little over three years, the

DAX has nearly doubled.

Somewhat disappointing Eurozone numbers for the 2nd quarter

demonstrate the fragility of the region’s recovery despite cheap oil, a

weaker euro and mass bond-buying by the European Central Bank.

Gross domestic product in the Eurozone increased 0.3 per cent,

undershooting analysts’ estimates of a modest 0.4 per cent, as France’s

economy stagnated and Germany, Italy and the Netherlands grew less

than expected. Data from Germany indicate that companies in the

Eurozone’s economic powerhouse remain reluctant to invest, regardless

of record low interest rates.

The Yuan devaluation has created uncertainly in the markets but both

the Euro STOXX 50 and FTSEurofirst remain up around 10 percent since

the start of 2015, as economic stimulus measures from the European Central Bank have helped to

prop up the region's stock markets.

Morgan Stanley equity strategists say investor sentiment could be further boosted if investors

interpreted China's yuan devaluation as a precursor to more action from Beijing to bolster China's

economic growth.

ECB support to the European economy, struggling with high unemployment and slow growth, is

doing for Europe what the US QE programme did for the US. And it's not just the charts that look

good. European stocks pay big dividend yields. The Dow Jones Euro STOXX 50 Index, the "Dow Jones

Industrial Average of Europe", yields 3.2% today. The index is made up of 50 blue-chip stocks across

12 European countries. They include multinationals like British consumer-goods firm Unilever,

French health and beauty product company L'Oréal, and Belgian beer-maker Anheuser-Busch InBev.

The 30 stocks in the U.S. Dow Jones Industrial Average – for comparison – have an average dividend

yield of 2.3%. Plus, lots of bonds and bank accounts in Europe pay near-zero interest rates. Others

have negative rates. The comparatively high yields in Euro stocks will attract fund managers and

individual investors searching for income.



European Economic Forecast; Winter2015

http://ec.europa.eu

“GDP growth in the EU remains sluggish. Sputtering investment has so far prevented a broader and

more robust acceleration of domestic demand. Amid challenging global conditions, the fall in crude

oil prices should provide a welcome boost to growth.

Several important shifts are under way in the global economy. Falling oil and commodity prices are

redistributing income from commodity-exporting countries to commodity-importing ones on a

massive scale. Strong GDP growth in the US has fuelled expectations of monetary-policy divergence

among major advanced economies, which has already provoked large adjustments in bilateral

exchange rates. The economic prospects of emerging markets are also diverging; and the factors

that led to the extraordinary growth of global trade in the early 2000s appear to have weakened.

The friction that occurs as these shifts take place creates a number of vulnerabilities in the global

economy. Financial asset prices continued to rise substantially in 2014 but appear vulnerable to a

change in risk appetite. The expected tightening of the US Fed’s monetary stance may trigger

adjustments in global capital flows. The resilience of commodity-exporting countries will be tested if

commodity prices remain low. Geopolitical risks have not abated. All in all, the global outlook is

clouded by the risk that economic prospects around the world will diverge further and by the

potential for volatile incidents in capital markets.

The easing of the EU’s fiscal policy stance from consolidation to neutral is appropriate for the EU as a

whole, but the lack of differentiation among countries reduces its benefits. Public finances would

also be much more supportive of long-term growth if expenditure were more focused on

investment. The EU Investment Plan and the Commission’s guidance on the application of the

Stability and Growth Pact provide a framework that must now be put into practice. Whether and

how we reform our labour and product markets today will determine our chances for resource-

efficient growth in the long run. These policy areas are intertwined and must be addressed

simultaneously. “

The China Factor

Aug 20 2015, 03:23 ET: Seeking Alpha

Chinese shares sunk

back into the red

today as traders

weighed the level

of state support for

equities amid

concern a slowing

economy and

weaker yuan will

spur capital

outflows.



The pressures in the mainland are also spilling across the region, with Hang Seng officially entering a

bear market during the session. The index has now dropped more than 20% from a high reached in

April.

In yuan news: The IMF signalled the renminbi won't be added to its basket of reserve currencies for

at least another year, despite many analysts seeing confidence in China's new pricing regime.

Shanghai -3.4%; Hang Seng -2.4%

16 August 2015: http://www.wsj.com/

As part of Beijing’s strategy to support its stock market since early July, regulators have taken steps

to discourage selling pressure and limit the ability of investors to bet against the market with short

sales, including by selling stock-index futures.

Chinese financial-market regulators have never been comfortable

about allowing investors to profit from bad news. That philosophy

has been in evidence this week following devaluation of the yuan by

China’s central bank, which said the move was part of a strategy to

make the exchange rate more market-oriented even though the

monetary authority also appears to have worked behind the scenes

to keep its currency from falling too fast.

The Chinese regulatory drive against short selling comes months

after CSI 300 Index Futures emerged as the world’s most actively

traded stock-index futures product, topping activity in futures on the

U.S.’s S&P 500 index. A boom in Chinese stock trading that took hold

late last year fuelled activity in futures as more professional investors

joined the rally and also executed relatively complex strategies that

included futures.



However, so far this year, CSI 300 futures have retained their crown as the most widely traded

stock-index futures globally. But average daily volumes in July have slumped more than 40% from a

peak of 3.2 million contracts on June 29.

It should be noted that the declining trend in trading volume of E-mini S&P 500 futures has

significance for discretionary traders who use market-breadth indicators specifically as trading tools

that signal when to buy and sell.

China Expansionism Source: http://www.nytimes.com/2015/07/26

China is aggressively asserting its economic clout to win diplomatic allies, invest its vast wealth,

promote its currency and secure much-needed natural resources. It represents a new phase in

China’s evolution. As the country’s wealth has swelled and its needs have evolved, President Xi

Jinping and the rest of the leadership have pushed to extend China’s reach on a global scale.

China’s currency, the renminbi, is expected to be anointed soon as a global reserve currency, putting

it in an elite category with the dollar, the euro, the pound and the yen. China’s state-owned

development bank has surpassed the World Bank in international lending. And its effort to create an

internationally funded institution to finance transportation and other infrastructure has drawn the

support of 57 countries, including several of the United States’ closest allies, despite opposition from

the Obama administration.

Even the current stock market slump is unlikely to shake the country’s resolve. China has nearly $4

trillion in foreign currency reserves, which it is determined to invest overseas to earn a profit and

exert its influence. China’s enormous overseas spending has helped it displace the United States and

Europe as the leading financial power in large parts of the developing world. Here’s where China has

the most influence, based on its share of foreign investment since 2005.

Oil has been on the leading edge of this investment push. Energy projects and stakes have

accounted for two-fifths of China’s $630 billion of overseas investments in the last decade.



While China has substantial funds to withstand serious financial shocks, its overall health matters.

When China swoons, the effects are felt worldwide, by the companies, industries and economies

that depend on the country’s growth.

The managing director of the International Monetary Fund, Christine Lagarde, has commended

China’s efforts to engage globally through investment and trade, as well as to enact economic

reforms. It “is good for China and good for the world — their fates are intertwined,” she said in her

keynote address at an economic development conference this spring in Beijing.



Global Market Valuations2

2 Guru Focus

Past Max

Current



Growth in Volume of World Merchandise Trade and real GDP 2007 – 16P3

3 www.wto.org



Cheap Oil4 OPEC reported on 12th August that its production is at a three-year high. The US Energy Information Administration simultaneously revised its oil price and US oil production outlook downward for this year and next. The third major report in the week was published by the International Energy Agency (IEA), which forecasts global oil demand rising at its fastest rate in five years in 2015. Despite this rise in demand, lower oil prices and spending cuts will continue to "take a toll" on non-OPEC producers, the agency said.

"Lower For Longer" Consensus

“Oil’s plunge below $50 barrels a day from triple digits a year ago has seen demand react more swiftly than supply...Against this backdrop, many participants in the oil industry have adopted a new mantra – ‘lower for longer’,” the IEA said.

Global oil demand this year will rise at more than twice the pace last year as low oil prices catalyse consumption in the US and economies recover, the agency noted.

"Global oil demand in 2015 is expected to grow by 1.6 M/bpd, up 0.2 M/bpd from our previous report and the fastest pace in five years, as economic growth solidifies and consumers respond to lower oil prices," the agency said. Additionally, "Persistent macro-economic strength" supports above-trend growth of 1.4 M/bpd next year.

But although world demand is projected to rise, the IEA said that world oil supply also continues to grow at "breakneck speed" - currently standing at 2.7 M/bpd above a year earlier – despite the fall in oil prices.

4 http://oilprice.com/



Oil Consumption Estimate Increased

Global oil consumption will expand by 1.6 M/bpd in 2015 to average 94.2 M/bpd, the IEA said. The agency also raised its estimate for oil consumption in 2016, forecasting growth of 1.4 M/bpd to total 95.6 M/bpd - representing an increase of 400,000 bpd from the previous report.

Global Supply Falls on Lower Non-OPEC Production The IEA noted that global oil supply dropped almost 600,000 bpd last month, "mainly on lower non-OPEC output." The agency sees the growth rate of non-OPEC oil supply as continuing to decline into next year.

"As lower prices and spending cuts take a toll, non-OPEC supply growth is expected to slow sharply from a 2014 record of 2.4 M/bpd to 1.1 M/bpd this year, and then contract by 200 kb/d in 2016."

"While a drop in costs and efficiency improvements will help to offset some of the spending cuts, output is likely to take a hit soon. As such, non-OPEC supply growth is expected to decelerate through the end of the year and decline in 2016 – with the US hardest hit."

Oil Glut to Persist Into 2016

Global oversupply will average 1.4 M/bpd in 2H15, exerting pressure on available storage capacity, before easing to approximately 850,000 bpd next year, the IEA projected. The production surplus in 2Q15 was the highest in 17 years- at 3 M/bpd, it said.

The IEA forecasts that record inventories will continue to "pile up," even as consumption growth doubles this year and non-OPEC supply contracts in 2016 for the first time since 2008. Stockpiles will not be diminished until 4Q16, or possibly even later, if sanctions on Iranian oil are rescinded, the report said.

"Our latest forecast shows stronger-than-anticipated demand and non-OPEC supply growth swinging into contraction next year. While a rebalancing has clearly begun, the process is likely to be prolonged as a supply overhang is expected to persist through 2016 - suggesting global inventories will pile up further."

OPEC Keeps Pedal to the Metal

The IEA says that OPEC supply, and particularly "muscular pumping" from Saudi Arabia and Iraq would continue to increase, to 30.8 M/bpd in 2016, up 1.4 M/bpd on this year "due to a stronger demand outlook and stalling non-OPEC supply growth."

OPEC maintained production near a three-year high at 31.79 M/bpd last month, as record Iraqi output helped offset a pullback by Saudi Arabia, the report said.

The agency increased estimates for the amount of oil needed from OPEC next year by 600,000 bpd to 30.8 M/bpd. This is still approximately 1 M/bpd lower than current production.

Significantly, Iran could raise output to 3.6 M/bpd from roughly 2.9 million currently “within months” of sanctions being rescinded, the IEA said.

Is a Price Slump to $30 ahead?

WTI crude slumped over 4% on 19th August with U.S. supply build of 2.6M barrels, sending prices to levels not seen since early 2009. Some analysts see oil futures set to fall into the $30s per barrel range; crude futures fell -1.5% to $40.21/bbl.

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Global Business Environment August 2015