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What is happening to the world economy – and what this means for investment Hamish McRae Five great medium-term global shifts and … … their implications for the world of finance Three big questions about the future

Hamish mc rae smart beta presentation

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Page 1: Hamish mc rae smart beta presentation

What is happening to the world economy

– and what this means for investment

Hamish McRae

• Five great medium-term global shifts and …

• … their implications for the world of finance

• Three big questions about the future

Page 2: Hamish mc rae smart beta presentation

Two huge stories: globalisation …

It has been said that arguing against

globalization is like arguing against the

laws of gravity.

Kofi Annan

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… and recession-driven debt

I found this national debt, doubled,

wrapped in a big bow waiting for me as I

stepped into the Oval Office.

Barack Obama

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The presentation's structure …

• First, a look at the forces behind this power shift

• Then, how the downturn speeded this shift

• The medium-term economic outlook

• The longer-term perspective – to 2030

• Some implications for global investment

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Four great global trends

• Demography – an ageing developed world

• The environment – still pressure to be greener

• Technology – a more level playing field

• Government – under greater fiscal pressure

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Ageing societies are different

• Europe and Japan are ageing fast

• Much of the emerging world remains young

• So there will be a great shift of economic power

• Attitudes in the developed world will shift …

• … towards wanting greater security

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What this means for investment

• Some developed countries will grow faster than others

• China benefits now; India's "sweet spot" is later

• Savings will continue to come from Asia …

• … so Asian asset preferences are crucial

• Obvious consequences: Europe must fix its finances

• Less obvious: prizes go to those that adapt best

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It’s good to be green

• The end of the oil era is a long way off, but …

• … uncertain energy supplies, coupled with …

• … huge demand from the US and China

• The desire for mobility will continue …

• … concerns about climate change will rise …

• … and continue to affect public policy

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What this means for investment

• A rebalancing of wealth and power …

• … and a rebalancing of investment flows

• Does fracking change things?

• Obvious beneficiaries: the raw material producers …

• … who will become more important in investment choice

• Less obvious: companies that are best at adapting

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The revolution in technology

• It is (nearly) a global level playing field

• Communications technologies are universal …

• … and deeply democratic

• But technology gives global reach …

• … as well as global competition

• New investors will reshape asset choice

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What this means for investment

• It is not quite a level playing field but a flatter one …

• … for there are new peaks of excellence …

• … while old peaks can deliver excellence worldwide

• Obvious issue: what is the "old" world’s advantage?

• Less obvious: what can we learn from new investors?

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Government in the 21st century

• There are some things only governments can do …

• … such as fight wars or rescue banks

• But huge pressures as debts and demands rise …

• … and revenues in the developed world are cut away

• The result: “financial repression” for a decade

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What this means for investment

• The debt legacy for the G7 is massive …

• … and the closest precedents are long ago

• But this is not a grave as the inter-war period …

• … or in some ways the 1970s inflation

• So great pressure on the investment community …

• … but that brings opportunities too

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This cycle: what have we learnt?

• There is such a thing as the economic cycle!

• Fiscal, monetary and regulatory failure

• Finance will be different for a generation …

• Investment needs people with a long view …

• … and a mix of human experience

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So what happens next?

• We are well past the economic turning point …

• … and equities eventually will reflect that

• But there will be setbacks (Europe now) …

• … and the recovery will be a two-speed one

• Two questions: what next for the eurozone?

• … and when does the bond bear market begin?

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The bad news about Europe …

• European fiscal reforms will constrain growth …

• … and will probably fail

• The Eurozone may hold together this cycle …

• … but at huge economic cost …

• … and it is hard to be confident about its future

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A 30-year bear market in bonds?

• Parallels never perfect but two candidates:

• Fiscal repression in the 1930s …

• … and the great inflation of the 1970s

• Curbing inflation led to a 30-year bull market …

• … while war finance led to similar bear markets

• Timing: next two to three years

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But better news globally …

• The US recovery has broadened substantially …

• … and it will be forced to fix national finances

• The slow-down in China is a positive, not a negative

• Momentum in the emerging world remains solid

• And northern Europe is very competitive

• The mid-cycle pause is normal and natural

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… and for the investment world

• Growth areas will include energy and resources

• But also: luxury goods and services …

• … high technology, especially medical services …

• … and in finance, wealth management

• The great negative: the debt burden

• The great positive: reasonable global growth

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The road to 2030

• The rebalancing power to the BRICs

• When does China past the US?

• What will the new middle class want?

• How will the new rich deploy their wealth …

• … and how will their values change the West?

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Some key conclusions

• The shift of power to Asia is inevitable …

• … and global business will drive it

• The immediate economic outlook is troubling …

• … and it will be a two-speed global expansion

• The great anomaly is bond yields

• But that will demand more thoughtful investment

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But please keep it fun!

I don't want to make money. I just want to

be wonderful.

Marilyn Monroe

Page 37: Hamish mc rae smart beta presentation

What is happening to the world economy

– and what this means for investment

Hamish McRae

• Five great medium-term global shifts and …

• … their implications for the world of finance

• Three big questions about the future