30 January 2015
For professional investors only
Schroders
Economic and Strategy Viewpoint
Keith Wade
Chief Economist and
Strategist
Azad Zangana
Senior European
Economist and
Strategist
Craig Botham
Emerging Markets
Economist
Global 1: Careful what you wish for… (page 2)
 Investors have welcomed the decision by the ECB to launch sovereign QE
and there will be benefits to the economy, primarily through a lower euro.
However, QE will also create acute shortages of risk-free assets in the region,
increasing the likelihood of spill-overs to international bond markets.
Projects such as the Juncker plan now stand a greater chance of being
funded by asset starved investors, but the main effect from ECB QE is to
further increase the financial repression of savers in the Eurozone and
beyond.
Global 2: Lower inflation is only half the story (page 4)
 Markets remain gloomy about the outlook for the world economy and whilst
we recognise the structural headwinds which challenge growth, we believe
that the consensus is not fully accounting for the benefits to activity from
lower inflation via real incomes and consumer spending. Energy industry
cuts to capex and employment are not sufficient to derail this conclusion
given the size of the sector relative to the rest of the economy.
As ECB begins QE, Greece votes for austerity to end (page 6)
 The ECB has finally taken the plunge and announced the start of government
bond buying (QE). The scale is larger than expected and is likely to help the
economy. Meanwhile, Greece has elected the far-left party Syriza which has
promised to end austerity and push for easing of bail-out conditions.
However, both QE in the Eurozone and softer conditions for Greece will not
fix the underlying problems both face. Greece and the Eurozone need
structural reforms, otherwise, they risk taking the same path as Japan.
Is bad news in China good news for commodities? (page 11)
 China’s slowdown has prompted hopes of stimulus, and optimism for
commodities. But this is misplaced. China’s rebalancing and the nature of the
slowdown mean we are likely to see less of a lift than in the past.
Views at a glance (page 18)
 A short summary of our main macro views and where we see the risks to the
world economy.
Chart: Inflation forecasts downgraded, but growth forecasts are unchanged
2015 GDP consensus forecast (%, y/y)
3.5
2015 Inflation consensus forecast (%, y/y)
8.0 3.5
3.0
7.5 3.0
7.0
2.5
2.5
2.0
6.5
1.5
2.0
6.0
1.0
1.5
5.5
1.0
5.0 0.0
J F M A M J J A S O N D J F
2014
2015
0.5
J F M A M J J A S O N D J F
2014
2015
US
UK
Japan
US
UK
Japan
Eurozone
China, rhs
Eurozone
China
Source: Thomson Datastream, Consensus Economics, Schroders. 29 January 2015.
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30 January 2015
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Global 1: Careful what you wish for…
ECB QE will
exacerbate asset
shortage
One of the key developments this month was the well-trailed announcement by the
European Central Bank (ECB) of a sovereign quantitative easing (QE) programme.
We look at the details of this below, where we note that planned purchases of €60
billion per month until September next year would soon absorb the sovereign
issuance in the Eurozone which is put at just under €300 billion. From this
perspective, the strength of Eurozone bond markets - where, for example, the
German yield curve is below zero in bonds with a maturity of up to 5 years - is quite
understandable. The demand-supply balance in the Bund market will be particularly
acute as Germany intends to run a budget surplus this year making investors less
willing to sell their holdings as the Bundesbank/ ECB seeks to fulfil its QE quota.
The effect of QE on growth in the Eurozone remains an open debate and we see
the principal transmission mechanism to the economy as being through the
exchange rate. On this metric the ECB has already been successful, with the euro
depreciating to 1.13 having traded above 1.30 as recently as September. However,
if the experience of the Eurozone mirrors that of the US, UK or Japan then much of
the extra liquidity being created will find its way onto bank balance sheets rather
than increased lending. This in turn will boost asset prices, but unlike the US and
UK, the wealth effect in the Eurozone is likely to be relatively muted given the
smaller capitalisation of the equity markets.
As indicated above, QE also means that the supply of investible assets will be
reduced, thus creating a problem for institutions such as pension funds and
insurance companies who need risk-free or low risk, high quality assets to match
their liabilities. Consequently, it seems likely that many Eurozone funds will begin to
look outside the region in a search for yield. The same process is occurring in Japan
led by the Government Pension Investment Fund (GPIF).
Two consequences follow from this.
Spill-over effects
from the ECB will
be widely felt
First, we are likely to see spill-over effects with bond markets outside the Eurozone
experiencing inflows from yield seeking investors fleeing QE. The spread between
US Treasuries and Bunds remains attractive even after the recent rally in the former
indicating the incentive to shift funds remains high (chart 1 on next page). ECB QE
could be very widely felt and differs from QE in the US and UK where, for most of
these programmes the domestic government was running a substantial budget
deficit.
Chart 1: Treasury-Bund spread remains wide
%
6
5
4
3
2
1
0
-1
2005
2006 2007 2008 2009 2010
10 year Treasury - Bund spread
German 10 year Bund yield
2011 2012 2013 2014
US 10 year Treasury yield
Source: Thomson Datastream, Schroders. 29 January 2015.
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Increasing the
prospects for
projects such as
the Juncker plan
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Second, there is an opportunity for high quality issuers to raise funds. Of course we
have already seen this in credit markets as firms have restructured their balance
sheets. However, the latest move by the ECB also means that projects such as the
Juncker plan (which intends to leverage €21 billion of public money into €315 billion
of private investment) stand a much greater chance of being funded by assetstarved European funds.
Perhaps we might then see a stimulus to growth as spending on public-private
projects across Europe pick up with QE being the initial catalyst. This would be
great news, but until then the main effect from ECB QE is to further increase the
financial repression of savers in the Eurozone and beyond. Those cheering Mario
Draghi last week should be careful what they wish for.
3
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Global 2: Lower inflation is only half the story
IMF downgrades
global growth…
Sentiment towards the world economy remained poor in the first month of 2015 with
the IMF welcoming in the New Year by downgrading its forecast for global growth. It
now expects global growth of 3.5% in 2015, compared to 3.8% in October. Whilst
acknowledging that lower oil prices will help support activity, the benefits are
expected to be offset by a deterioration in the Eurozone and emerging markets. An
element of this reflects a correction to an overoptimistic view of China's growth
prospects and the IMF forecast for this year is now in line with our own at 6.8%.
There have also been cuts to growth forecasts for oil producers such as Russia,
which is now expected to be in recession in 2015. Nonetheless, the overall IMF view
is in line with that of the consensus, which shows that economists have downgraded
their inflation projections, but made little change to their growth forecasts (chart front
page). Financial markets seem to agree, with long-dated bond yields falling to new
lows and equities struggling to make progress.
…but we remain
positive on oil
price effect
Our own forecasts will be updated next month, but we are likely to take a more
optimistic view, with a strong possibility of an upgrade to our growth projections. We
continue to see the fall in oil prices as a boost to growth being driven by positive
supply side developments rather than a response to a collapse in global demand.
The main criticism of our view is that we are not fully taking account of the adverse
impact on the energy industry itself, which is seen by some as a principal driver of
the US recovery. It is certainly true that the shale boom has added to US growth, but
this vastly overstates the importance of the sector in the overall economy. For
example, the energy sector added 270k jobs since the economy turned in mid-2009,
compared with a 9.15 million total. Even if all these jobs in energy were now lost,
they would be offset by one month of payroll growth. The monthly totals for non-farm
payrolls with and without energy are shown below (chart 2).
Chart 2: Change in oil and gas jobs vs. total payrolls (ex. oil and gas)
Role of energy
sector in recovery
has been modest
Thousands of jobs per month
400
350
300
250
200
150
100
50
0
-50
2011
2012
2013
Non-farm employment excl. oil & gas
2014
Oil & gas related employment
Source: Thomson Datastream, Citi, Schroders. 28 January 2015.
It is likely that the hit from cuts in capex will be more significant from an economy
perspective than employment particularly in the short-term and may account for
some of the recent weakness in durable goods orders. However, as argued last
month, we would expect some offset as the non-energy sector benefits from lower
energy costs and raises capex. Clearly there will also be a regional impact and the
Dallas Fed reported that Texas is “…likely to grow but not nearly as strong as last
year”, with the amount of drilling rigs beginning to fall. However, even the Dallas Fed
is of the opinion that “…if energy prices remain low, (the) US economy should pickup further in 2015”, indicating lower oil prices are a positive overall.
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One reason investors are more concerned by the impact on the energy sector is that
it has a greater weight in markets than the economy. For example, according to
Bloomberg, energy accounts for 8.2% of the S&P500 and 14.1% of the FTSE-100
whilst the sector is only 3% and 2% of the US and UK economies. The relative
underperformance of the energy sector in the US has been significant, but not out of
line with the move in the oil price (chart 3). Similar concerns have dominated
sentiment in the credit markets where, for example, energy is the largest sector in
US high yield, constituting 13.4% of the index.
Chart 3: Oil price and energy sector relative performance
Greater weight on
energy in the
markets than the
economy
USD price/barrel
160
Index
220
140
200
120
180
100
160
80
140
60
120
40
20
2005
100
2006
2007 2008 2009 2010
Brent crude oil price, lhs
2011 2012 2013 2014
S&P Energy Sector, rhs
2015
Source: Thomson Datastream, Schroders. 29 January 2015.
On balance, our conclusions are unchanged: there are offsets to the boost to growth
brought by lower oil prices and these may be felt in the near term via lower capex
and employment in the energy sector. Increased volatility in oil-related currencies
and credit can have adverse effects on growth. Losses in the banking sector might
also result, although our US analyst reckons these should be contained with the
caveat that it is difficult to fully assess exposure via derivatives (taken on by banks
as part of a hedge trade). Despite some commentary to the contrary, bank exposure
to energy is not on the scale of sub-prime mortgage loans. Overall, we still believe
the benefits to consumer spending and business through lower energy costs are set
to outweigh these further out, with the result that global growth will be stronger and
inflation lower. Economists have been quick to assess the effect of lower oil prices
on inflation, but so far have failed to recognise the benefits to growth.
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As ECB begins QE, Greece votes for austerity to end
It has been a very eventful start to the year. 2014 ended with investors feeling there
was unfinished business in Europe. The European Central Bank (ECB) was clearly
looking to add further stimulus, while in Greece, with Parliament failing to elect a
successor to outgoing president Karolos Papoulias, snap elections were called
which raised the alarm with investors. We provide an update on events and analysis
of their implications.
ECB takes leap of faith
At last! The ECB
will begin buying
government bonds
(QE) to fight the
risk of deflation
ECB President Mario Draghi has announced that the central bank will purchase
sovereign debt along with agency debt in order to combat the rising risk of deflation.
Despite considerable doubts from Germany, the ECB will follow in the steps of the
Federal Reserve, Bank of Japan and Bank of England by introducing quantitative
easing (QE) - expanding its balance sheet in an attempt to weaken the euro and
raise domestic demand.
Draghi announced that the new additional purchases combined with the existing
asset backed securities (ABS) and covered bond purchases will total €60 billion per
month starting from March until September 2016 - totalling €1.1 trillion (11% of
Eurozone GDP), or roughly what is required to take the ECB’s balance sheet back
to the peaks seen in 2012. This is about twice the size expected by the market
consensus and as a result, the euro is trading lower against the US dollar and
sterling, while European government bonds are seeing falling yields (rising prices).
Eurozone annual inflation fell to -0.6% in January and is very likely to fall further in
coming months thanks to falling energy prices. While we see this as a positive
development for growth and medium-term inflation, in the near-term at least, there is
a risk that households’ inflation expectations become de-anchored and they start
behaving in a more deflationary manner. If households start to believe that prices
will continue to fall, they may be tempted to hold back spending to achieve lower
prices, which in turn will push prices down further thanks to the lower demand. This
would reinforce the lower price expectations, and cause a downward spiral in prices
– Japanese style deflation. This is not our central view, and this month's action from
the ECB further reduces the risk of deflation.
Will it make a
difference? The
ECB will certainly
be buying a huge
share of
outstanding
bonds, helping to
lower interest
rates
The obvious question is will QE make a difference, especially as government bond
yields in Europe are already so low? Table 1 (on next page) shows the theoretical
amounts the ECB will be buying. It shows the division of the €1.14 trillion based on
the ECB's capital key (ii), the outstanding stock of government bonds and forecast
net new issuance over the purchase period (until September 2016, and only 2-30
years in maturity). While this initially appears simple, as the ECB has said that it will
not purchase more than 25% of any individual bond issue, the pool of available
assets fall from €4.8 trillion to just €1.2 trillion (iv). When the cap is applied by each
country and combined with the capital key, we find that the ECB will probably only
be able to buy a maximum of €978.9 billion worth of government bonds (vii). For
example, the Bundesbank will only be able to buy about €191 billion of German
government bonds, compared to its €291 billion quota.
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Table 1: How much can the ECB buy?
ECB liquidity
restrictions mean
that national
central banks may
struggle to meet
their purchase
quotas
2-30yr gov.
Purchases
ECB
ECB
2-30yr gov.
Net
ECB 25%
ECB
bonds
Unfulfilled as % of
capital planned
bonds
issuance
issue cap purchase
outstanding
allocation market
key purchases outstanding (2015-16)
applied
limit
(2016)
(2016)
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
Austria
2.8%
31.8
159
-3
156
39
31.8
0.0
20.4%
Belgium
3.5%
40.1
253
0
253
63
40.1
0.0
15.9%
Cyprus
0.2%
2.5
1
0
1
0
0.0
2.5
0.0%
Estonia
0.3%
3.1
0.3
0
0.3
0
0.0
3.1
0.0%
Finland
1.8%
20.3
67
8
75
19
19.0
1.3
25.3%
France
20.1%
229.6
1030
63
1093
273
229.6
0.0
21.0%
Germany
25.6%
291.5
768
-5
763
191
191.0
100.5
25.0%
Greece
2.9%
32.9
36
14
50
13
13.0
19.9
26.0%
Ireland
1.6%
18.8
91
12
103
26
18.8
0.0
18.3%
17.5%
199.4
1225
68
1293
323
199.4
0.0
15.4%
Latvia
0.4%
4.6
0
0
0
0
0.0
4.6
0.0%
Lithuania
0.6%
6.7
1
-1
0
0
0.0
6.7
0.0%
Luxembourg
0.3%
3.3
6
-1
5
1
1.0
2.3
20.0%
Malta
0.1%
1.0
4
0
4
1
1.0
0.0
25.0%
Netherlands
5.7%
64.8
239
12
251
63
63.0
1.8
25.1%
Portugal
2.5%
28.2
79
-2
77
19
19.0
9.2
24.7%
Slovakia
1.1%
12.5
20
8
28
7
7.0
5.5
25.0%
Slovenia
0.5%
5.6
12
-2
10
2
2.0
3.6
20.0%
Spain
12.6%
143.2
524
118
642
161
143.2
0.0
22.3%
Total
100%
1140
4515.3
289
4804.3
1201
978.9
161.1
20.4%
Italy
(i) Distribution of QE; (ii) [€60bn x 19 months = €1.14 trillion] x (i); (iii) 2-30yr maturity government
bonds outstanding for each member state; (iv) Barclays forecast for new issuance net of
redemptions between February 2015 to September 2016; (v) equals (iii) + (iv); (vi) Barclays
calculated available purchases if no more than 25% of each bond issue is purchased; (vii) ECB
purchase limit given 25% cap; (viii) equals (ii) - (vii); (ix) purchases subject to (vii) as % of (v).
Source: ECB, Bloomberg, Barclays, Schroders. 29 January 2015.
The limitations placed on national central banks are not necessarily a problem as
this analysis does not include agency debt, covered bonds or asset backed
securities (which there are plenty of), but in addition, it also does not include
negative yielding bonds. As national central banks will be attempting to avoid losses
from their purchases, they will have to be careful not to buy too many bonds with a
negative yield to redemption. Also, if the ECB was to deem the scale of purchases
to be insufficient to boost growth, then it would seriously struggle to expand its bond
buying programme.
The final point from the above is that the ECB will potentially be buying more than
three times the issuance of new government bonds between March and September
2016. This can certainly push bond yields in Europe to fall further, which in turn
lower interest rates offered by banks to the real economy. This is useful for the real
economy, although we feel that the main impact will come through from the weaker
euro, which will make European exporters more competitive internationally.
Risk sharing
became a sticking
point, but the ECB
faces some risk
from losses
The issue of risk sharing in the event of losses was also answered by the ECB's
announcement. Germany appears to have been against the idea of any risk sharing
should an issuer look to default on the bonds purchased, but markets were
concerned that without risk sharing, the programme would lose any credibility. In the
end, the ECB has decided to share the risk on 20% of the purchases, with the
remaining covered by individual central banks.
Importantly, the ECB has stated that it will only purchase investment grade debt,
with an option to buy the debt issued by lower rated sovereigns for those in a bailout
programme. This covers the ECB should the new Greek government decide to
renege on the previous government's commitments. Finally, the ECB announced
that it would stand equal with private investors should losses be incurred (pari
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passu), which reduces the incentive for forced restructuring.
QE will help
reduce the risk of
deflation, but it
also reduces the
incentive for
structural reforms
Overall, we think the ECB’s QE programme will benefit the Eurozone economy by
reducing the risk of deflation; however, it is not a panacea for the monetary union’s
ills. Deep structural reforms are required in order to raise Europe’s potential trend
growth. Ironically, the introduction of QE will reduce the incentive for governments to
implement painful structural reforms, as it introduces a distortion to bond markets
and removes the discipline that comes from market pricing based on fundamentals.
Without structural reforms, the ECB may be forced to add additional stimulus in the
future as growth falters again, which in turn reduces incentives further. Could this be
the downward spiral that leads Europe down the path that Japan took?
Greek backlash against austerity
The Greek election this month has resulted in the far-left Syriza party winning the
most votes and parliamentary seats. Syriza has decided to enter into a coalition
government with the right-wing party Independent Greeks, who also ran an antiausterity campaign. The cross political spectrum coalition might seem unusual, but it
will send a strong message to outsiders that socialists and conservatives in Greece
are united against austerity.
Greece is set to
push for easing on
its bail-out
conditions
The new government is then expected to attempt to re-negotiate the terms of its
€240 billion bail-out, which is unlikely to go down well with the Troika (European
Commission, ECB and International Monetary Fund). Greece's current bail-out
programme is expiring, and negotiations for the next programme currently have a
deadline for completion for the end of February. Incidentally, the new programme
will require yet more new money for Greece. We expected this deadline to be
pushed back by a couple of months, but the consequences of failing to reach an
agreement could be very damaging for Greece.
The current terms of the loans are already very generous, especially when
compared to the terms other bail-out countries have received. There is room for
further extensions on the debt, and perhaps a very small reduction in the interest
rate, but these would represent marginal and insignificant changes, which would
certainly not satisfy voters. Instead, the new government is likely to focus on the
large primary surplus the government is forced to run, along with some of the painful
structural reforms. By reducing the surplus target, Syriza has suggested it could
spend more on welfare. Also, backtracking on structural reforms will be popular with
those with vested interests trying to hold on to the market power they have to the
detriment of the rest of the economy. European partners are unlikely to budge on
this front. If Greece does not complete the structural reforms being prescribed, then
it risks relapsing into a state where excessive government spending subsidise a
hideously inefficient economy. The ECB's new QE programme has provisions to
exclude Greece should it fail to continue with reforms.
Where now for Greece?
A range of
scenarios are
possible, ranging
from a benign
outcome to a
Greek exit from
the Eurozone
As we see it, the situation in Greece can play out in one of a few scenarios:
 Benign outcome. Syriza wins some concessions from the Troika in exchange
for continuing with the reform process. The Greek economy has a small
slowdown, but avoids a recession. The impact on wider Europe is insignificant.
 Syriza fails. Syriza fails to win any ground in negotiations with the Troika, and
the reality of Greece’s poor finances dawns on Syriza, which is then unable to
deliver the spending increases and tax cuts it promised. Syriza as a party
fragments and the coalition breaks down leading to another election. The Greek
economy sees a slowdown, but the wider implications are insignificant.
 Grexit. Syriza breaks off ties with the Troika having failed to reach a
compromise, and then refuses to pay interest on Troika debt. European leaders
decide to push Greece out by halting ECB liquidity funding to Greek banks,
which in turn start to see runs on deposits. Eventually, Greece is forced to
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leave EMU in order to print its own currency. Greece enters a deep and
prolonged recession, with some negative spill-overs in Europe.
 Troika out, but no Grexit. Negotiations end in stalemate with the Troika which
results in no further credit provision. Greece continues to service its loans, but
is forced to run a larger surplus to do so. As there is no default, the ECB
continues to support Greek banks, which keeps Greece in EMU. The Greek
economy goes into recession with the added austerity, but spill-over effects are
temporary and small.
Investors have feared this outcome for some time. Syriza won the most votes in the
previous election in 2014 but could not find another coalition partner, and so was
forced to remain in opposition. Since then, Syriza’s leader Alexis Tsipras has
moderated his campaign, by for example dropping the party’s agenda for exiting the
euro. Euro membership is still very important for Greeks (the vast majority continues
to support membership), which suggests that the new government will not wilfully
use Grexit as a bargaining position.
Greek markets
have taken
Syriza's victory
badly….
The wider implications of Syriza’s victory are complex. From a markets standpoint,
the reaction so far has been muted. The euro is trading higher against both the US
dollar and sterling (albeit after a large drop in the run-up to the election), while
European bourses are slightly lower (-0.3%). The news has hit Greek financial
assets hard with the Athens Stock Exchange falling just over 12.5% since the
election. Meanwhile, the yield on the 10-year Greek government bond is 1.7%
higher (price falling about 12%), although it is still lower than its recent peak at the
start of the year. Greek banking stocks were particularly badly hit, partly because
they own significant quantities of Greek government bonds, but also due to Syriza's
threat to nationalise the banks. Alarmingly, data on banking deposits shows that
households and corporates already started to aggressively withdraw funds at the
end of 2014. Households and corporates jointly withdrew €5.5 billion in December the largest monthly outflow since the middle of 2012, during the midst of the
European sovereign debt crisis.
Chart 4: Greek banking deposits* take flight once more
€6bn
90
€4bn
80
€2bn
70
€0bn
60
-€2bn
50%
-€4bn
40%
-€6bn
30%
8
20%
10
10%
12
2006
0%
2007
2008
2009
2010
10yr Gov. bond, rhs
Monthly corporate banking deposits
2011
2012
2013
2014
2015
Monthlyhousehold banking deposits
*Banking deposits held by households, non-profit organisations and corporates in term agreed
accounts. Source: Thomson Datastream, ECB, Schroders. 29 January 2015.
Deposit outflows are not only important for the solvency of the banks, but they also
reduce the ability of the Greek banks to buy the government's short-term debt (tbills), which in turn puts more pressure on the government.
…but outside of
Greece, markets
seem content.
Meanwhile outside of Greece, compared to when the European sovereign debt
crisis first started, the markets’ contagion risk has been dramatically reduced.
European financial institutions now have minimal exposure to Greece, which
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reduces the likelihood of a wider crisis returning. It also strengthens the hand of the
Troika in the upcoming negotiations.
While financial markets may be fairly content with the situation in Greece, there
could yet be political spill overs. Syriza is the first protest party to have actually
taken power in a European state. Depending on its success in coming months, it
could galvanise support for similar parties across Europe. For example, the Spanish
version of Syriza – Podemos - is currently polling in second place ahead of the
elections due by December this year. If an anti-austerity party was to take power in
the Eurozone’s fourth largest economy, then the risk of a full-blown political crisis
could seriously impact European markets.
In our view, the results of Greece’s elections are a setback, but not necessarily a
disaster. Yet another leader promising hope and to roll-back austerity has been
elected, but who will probably fail. President Hollande in France is just one example
of such false hope. Greek voters are understandably suffering from austerity fatigue,
which can be blamed on the previous coalition (PASOK and New Democracy) for
not taking reforms and austerity seriously earlier in the crisis, causing the downturn
to last longer than probably needed.
The Greek economy is reported to have returned to positive growth in 2014, largely
thanks to stronger exports, and a smaller drag from the other sub-components. In
real terms, GDP is 26% below its previous peak in Q2 2007, but importantly,
business investment is still falling in recent quarters, despite dropping some 67%
over the same period (chart 5). While the Greek experience is extreme, we would
have expected some recovery in business investment by now, especially given the
sharp fall in asset prices. This highlights the hesitancy and poor sentiment of both
domestic and foreign investors, which we think will only be exacerbated by the
election results.
Chart 5: GDP might be rising, but investors are nowhere to be seen
Index (100 - Q2 2007)
120
Exports
110
100
90
80
GDP
70
60
50
40
30
20
2007
Investment
2008
2009
2010
2011
2012
2013
2014
2015
Source: Thomson Datastream, Schroders. 29 January 2015.
Greece's future
depends on the
government's
willingness to
implement
structural reforms
Greece’s future now depends on whether Syriza can govern in a responsible way,
and recognise that major structural reforms are still needed to improve the country’s
competitiveness. Unfortunately, it is hard to find optimism on this front, with Syriza
promising to roll back labour market reforms, and to nationalise the banks.
Meanwhile, Greece’s membership of the monetary union also depends on structural
reforms, but in addition, Alexis Tsipras’s ability to reach an acceptable compromise
with the Troika. We are almost certainly going to see a stand-off in negotiations in
the near-term, if only for Syriza to demonstrate its willingness to take a hard-line.
The risk of Grexit is once again elevated, and for this reason, investors should think
very carefully before deciding to invest in Greece.
10
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Authorised and regulated by the Financial Conduct Authority
30 January 2015
For professional investors only
Is bad news in China good news for commodities?
Chinese growth
missed its target
and expectations
of stimulus are
building
China’s economy expanded 7.3% in the final quarter of last year, beating
expectations and recording a 7.4% expansion for the year as a whole. Growth in the
quarter was supported by government stimulus in the form of credit easing and
accelerated infrastructure spending, but it is notable that the year's 7.5% target was
missed despite this. The government seems more cautious in its use of economic
levers than in the past, as imbalances and instabilities mount.
Looking ahead, we expect growth to slow again in the first quarter of 2015 as fiscal
reforms and falling land sale revenues hit local governments’ budgets. This will
mean more stimulus, in the form of cuts to interest rates and the lowering of the
reserve requirement ratio cuts, but we also expect a lower growth target to be set
(and missed) this year. The expansion of shadow finance in December, as the
monetary easing worked its way through the system, points to one reason for
government hesitation in unleashing stimulus, and this will be the case for 2015 as
well.
Despite optimism,
the implications
for commodities
are not clear cut
Of course, this is by now a fairly consensus view. Everyone now expects stimulus
this year, with opinions mainly differing on timing and scale. However, less
unanimous is what the market impact of any stimulus might be. An asset class
which has typically benefited from Chinese growth and stimulus efforts in the past is
commodities, and with falls particularly in energy prices but also commodities more
broadly last year, some are hoping Chinese stimulus could reverse this trend. But
Chinese activity lacks explanatory power for falls in areas like agriculture - where
Chinese demand is driven not by economic growth but by population - and other
commodities where it is less obvious that Chinese demand should be the largest
component of demand, let alone the deciding factor for price movements.
To demonstrate this latter point, consider chart 6 below, which shows Chinese
consumption of certain goods as a share of the global total. Clearly, China is acting
a key driver for metals, pork, cement and coal - the building blocks of the last 20
years at least. Note though that China seems in less of a position to dominate
movements in the energy markets, with oil and gas consumption less than might be
expected given China's share of global GDP. We will return to the topic of oil later
on.
Chart 6: Chinese demand is not dominant for all commodities
China share of global consumption, 2011-12
70%
60%
50%
40%
30%
20%
10%
Source: Emerging Market Advisors, January 2015
11
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Natural gas
Crude oil
Wheat
PPP GDP
Corn
Electricity
Soybeans
Rice
Copper
Nickel
Zinc
Aluminum
Steel
Cotton
Pork
Coal
Cement
Iron ore
0%
30 January 2015
The Chinese
appetite for metals
has been more
voracious than
that for oil or rice
For professional investors only
Thinking simplistically, we might conclude from this that broad based stimulus in
China would, by boosting growth, support prices not just for metals, but also a range
of agricultural products. However, there is no obvious reason for agriculture to be
boosted by stimulus as high demand is more likely related to China's share (20%) of
the global population, and this is not going to be affected whether China engages in
stimulus or not. So, to refine our argument, we turn to chart 7, which shows
consumption intensity relative to GDP for a range of goods. Increasing consumption
intensity, as witnessed for metals and electricity, shows that those goods have had
an increasing role in the Chinese growth model, in this case, the property and
construction investment boom. Declining consumption intensity in food and oil
shows that these goods were not a key ingredient of the growth boom, and will
therefore suffer less than metals from a slowdown in GDP growth.
Chart 7: Consumption intensity
Physical intensity/GDP (index 2000=100)
350
Steel
Iron ore
300
Aluminum
Copper
Electricity
250
Coal
Crude oil
200
Rice
Chart 8: Money supply vs commodities
%, y/y
30
25
90
50
20
150
100
M2 (lhs)
Metal prices
Food prices
%, y/y
130
10
15
-30
50
10
-70
2000 2003 2006 2009 2012 2015
1980
1990
2000
2010
Source: Emerging Market Advisors, Thomson Datastream, Schroders. 29 January 2015.
0
Chart 8 (above) is another way of telling a similar story. With China's growth heavily
credit driven, it helps to look at the relationship between growth in the money supply
and commodity prices (particularly as any stimulus will involve monetary loosening).
A much stronger relationship is evident between the money supply and metal
commodity prices than with food commodity prices. To date, Chinese growth would
appear to have been far more supportive of industrial metals than of agricultural
commodities.
So, is it time for investors to start getting bullish on industrial metals? After all, most
economists (ourselves included) are expecting further monetary easing
accompanied by fiscal stimulus in the first half of this year. If it is effective, the charts
we have shown so far tell us it will be great news for metals.
China's
rebalancing
undermines the
argument for
commodities
Unfortunately for the bull case, the historic relationship is just that, historic. China is
now aiming at rebalancing its economy away from heavy industry and reducing
spare capacity, and is experiencing a property market slowdown to boot. New
stimulus is set to take the form of infrastructure investment and some monetary
easing, but this will not necessarily help metals. Rough and ready regression
analysis shows a strong relationship between real estate investment and metals
prices, but none between either manufacturing or infrastructure investment and the
price of those commodities. The same is also true when we model import demand,
the most obvious direct channel through which China would affect commodity
prices. There is, however, some evidence of a lagged effect from infrastructure on
both import demand and prices for industrial metals, as suggested by a casual
comparison of the data (chart 9). All the same, the regressions suggest that property
investment is the more commodity intensive of the two. For every 1% slowdown in
property investment, infrastructure investment would need to rise by 1-3% in order
to have an offsetting effect on commodity import demand and commodity prices.
12
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Chart 9: Metals prices and Chinese investment
y/y%
45
%, y/y y/y
120 80
%, y/y
120
40
100
70
100
35
80
60
80
60
50
60
40
40
40
20
30
20
0
20
0
-20
10
-20
-40
0
-40
-60 -10
-80 -20
-60
30
25
20
15
10
5
0
04
06
08
Real estate inv
10
-80
04
12
14
CRB metals, rhs
06
08
Infra. Inv
10
12
14
CRB metals, rhs
Source: Emerging Market Advisors, Thomson Datastream, Schroders. 29 January 2015.
The impact of infrastructure stimulus
Local
governments will
likely face budget
constraints
regarding stimulus
Reportedly, RMB7 trillion in infrastructure projects have been fast tracked to aid
growth this year. In 2014, total infrastructure spending was RMB11.2 trillion.
Assuming that 11.2 trillion were maintained in 2015, the additional RMB7 trillion
would represent a staggering 62.5% year on year increase (compared to around
15% growth in 2014), enough to offset a decline of between 20-60% in real estate
investment. However, this seems unlikely given that infrastructure investment was
accelerated from October 2014. Infrastructure investment prior to October stood at
RMB 7.7 trillion, so if we assume instead that this is the level of investment that
would have occurred absent new stimulus, that gives a 2015 projection of RMB14.7
trillion investment in infrastructure, or a 31.3% increase. While still impressive, this
offsets a smaller approximately 10-30% slowdown in property investment - and
property investment is already growing at a rate 20 percentage points lower than at
the start of 2014. In calculating the impact on commodity prices we should also note
that infrastructure investment growth is already running at around 15% year on year,
so the incremental impact would be 15%, rather than 30%. Table 2, below, shows
the effect of different assumed levels of infrastructure and property investment
growth on metal commodity prices, with the lower bound reflecting an assumption
that infrastructure investment is less commodity intensive, and the upper bound
assuming equal intensity with property investment.
Table 2: Metal price moves due to changes in property & infrastructure
investment
Change in infrastructure investment growth (ppts)
Impact on metals prices from
changes in investment (% )
0
10
20
30
-15
0 to -10
+5 to -5
0 to +15
0
0
+5 to +15
+10 to +20
+15 to +30
10
+15
+20 to +30
+25 to +45
+30 to +60
-10
Change in property
investment growth (ppts)
Metal prices based on the CRB Metal index. Source: Thomson Datastream, Schroders
calculations. 30 January 2015.
However, it is possible that even these conservative assumptions are overly
optimistic on investment spend. The stimulus package is centrally driven but local
governments are beginning to struggle, and it may be that the new stimulus simply
replaces local government efforts. Fiscal revenues grew at their slowest rate since
13
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For professional investors only
1991 in 2014, at 8.6%, and analysts at Deutsche Bank expect a 2% contraction in
local government revenues this year, thanks in part to the fall in land prices; land
sales account for around one third of local government receipts. It therefore seems
likely that infrastructure spending at a local level will be weaker in 2015 than 2014,
despite central government exhortations. In addition, the property market is likely to
weaken further this year, with concomitant further declines in real estate investment,
such that infrastructure investment has an even greater load to bear if it is to support
commodity demand.
Monetary stimulus' meaning for metals
Monetary easing
might not impact
the money supply
as expected
Of course, we have only looked at one part of the likely stimulus package. We
should also consider the impact of monetary easing. The main channel here (for
cutting the reserve requirement ratio and the discount rate) is the credit channel,
and we saw in chart 8 that an expansion of the money supply seems to be
associated with stronger metals prices. So the question then is how much of an
impact the cuts are likely to have on the money supply, and what this means for
commodities.
There appears to be limited responsiveness of M2 growth to reserve requirement
ratio (RRR) changes in China (chart 10), although the policy rate appears more
effective. However, it is difficult to separate out the impact of assorted government
stimulus efforts, market liberalisations and regulation. So while the policy rate and
RRR were cut in 2008, state controlled banks were also simply directed to lend with
the intention of supporting growth at all costs. Such an approach seems improbable
in 2015, and the degree of easing will in any case be smaller - we should not expect
an increase in M2 on a comparable scale. We note also that the recent cut in the
discount rate has yet to be reflected in faster M2 growth, although credit did see a
small acceleration in December. Similarly, RRR cuts in late 2011 of a similar scale
to those conducted during the Global Financial Crisis saw a much smaller increase
in M2 growth.
Chart 10: The impact of policy easing on money supply
%
35
% %
8.0 35
30
7.5 30
25
7.0
20
%
25
20
25
20
15
15
10
6.5
15
6.0
10
5.5
5
5.0
0
5
10
5
0
02
04
M2
Policy rate (rhs)
Source: Thomson Datastream, Schroders. 27 January 2015
M2
00
02
04
06
08
10
12
14
00
06
08
10
12
14
RRR (rhs)
An alternative way to consider the impact of a RRR cut is to note that a 50 bps cut
releases RMB500 billion of bank reserves. Current estimates put the Chinese
money multiplier at about 4x, so this would add RMB2 trillion to the money supply
(equivalent to 22% of GDP); an increase of roughly 1.6%, all else being equal. Chart
8 suggests a lagged relationship between M2 and metals prices, and regression
analysis suggests that an increase in M2 boosts metal prices with an approximate
six month lag. However, the effect drops out once we include our measures of
investment, suggesting that it functions by boosting the supply of credit for
investment rather than via excess market liquidity.
14
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30 January 2015
Money supply
growth does not
necessarily mean
investment growth
in the new China
For professional investors only
Overall, there appears to be a reasonable relationship between M2 growth and
investment in China, though a more detailed examination shows the relationship is
closest for infrastructure investment. Property investment also demonstrates a
correlation, but with an approximate six month lag. Although this disparity might
initially seem odd, it makes sense when you consider the key players in each type of
investment. Infrastructure investment is chiefly conducted by the public sector and
funded by state-owned banks, often via directed credit. This means that money is
injected directly into infrastructure projects, and so the increase in money supply is
immediately matched by an increase in infrastructure investment. Meanwhile,
property investment was, until recently, dominated by the private sector (social
housing construction is normally dwarfed by private construction), and so additional
money released into the system takes time to filter through into investment. Chart 11
illustrates this point.
One might then conclude that the increase in money supply growth expected this
year would boost both infrastructure and property investment, with positive
consequences for commodity prices and demand. However, it is apparent that the
relationship between money supply growth and property investment has broken
down over the course of the last year. A slowing property market and falling land
values has seen declines in both demand and supply of credit in the sector, and it is
hard to see developers wanting to add to already bloated inventories even if credit is
abundant. The hopes then rest on the impact on infrastructure spending. But in
reality this is less constrained by credit availability than by central government diktat.
Further, while in the past M2 growth conceivably boosted local government
spending (not necessarily on infrastructure!) thanks to borrowing by local
government financing vehicles (LGFVs), the advent of fiscal reform means that new
infrastructure must be funded by tax receipts, land sales revenues, bond issuance,
or public private partnerships. Stronger M2 growth may drive demand for local
government bonds, but issuance will be capped by a centrally imposed quota, and
the impact of higher M2 growth on the other sources of funding is more
questionable. We do not, therefore, expect RRR and rate cuts to have much impact
on infrastructure investment, or commodity demand.
Chart 11: Investment and M2 growth
China is not the
antagonist of the
oil story
%, y/y
35
%, y/y (3m, MA) %, y/y
80 35
70
30
%, y/y (3m, MA)
45
40
30
60
35
25
50 25
20
40
30
20
25
15
20 15
20
10
10 10
0
5
-10
15
30
5
0
-20
05
07
09
11
13
15
10
5
0
0
05
07
M2
Infrastructure investment, rhs
M2 (6m lag)
Source: Thomson Datastream, Schroders. 29 January 2015
09
11
13
15
Property investment (rhs)
What about oil?
We have thus far neglected to discuss oil, but China has little role in recent price
moves, which are supply driven. In fact, growth in Chinese demand for oil has
remained positive since the crisis, unlike the developed market and emerging
market aggregate figures, although demand growth did slow in 2014. Meanwhile,
casting an eye back to chart 7, we see that the role of oil in Chinese growth has
been declining, and has done so steadily, displaying no relationship with the
15
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investment cycle. We would argue therefore that it is extremely unlikely that Chinese
stimulus would provide a boost to oil.
To recap, metals are likely the only commodity to see benefits from Chinese
stimulus; demand for agricultural commodities is more structural than cyclical. While
fiscal expenditure on infrastructure should boost commodity demand and prices, it
will be offset by continued weakness in property investment, and at best seems
unlikely to do more than restore Chinese metals demand to its mid-2014 level.
Monetary stimulus, meanwhile, seems unlikely to have much effect on commodity
demand given the property market slowdown and resulting breakdown of the M2investment relationship, and fiscal reforms disrupting linkages between credit and
infrastructure spending.
A China-driven renaissance for commodities, based on current stimulus plans, is not
in the offing.
16
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Authorised and regulated by the Financial Conduct Authority
30 January 2015
For professional investors only
Schroder Economics Group: Views at a glance
Macro summary – January 2015
Key points
Baseline

Global recovery to continue at sub par pace as the US upswing is offset by sluggish growth in the
Eurozone and emerging markets. Lower energy prices are weighing on inflation, but will also boost
growth in 2015.
US recovery continues and unemployment is set to fall below the NAIRU in 2015 prompting Fed
tightening. First rate rise expected in June 2015 with rates rising to 1.25% by year end. Policy rates to
peak at 2.5% in 2016.
UK recovery likely to moderate next year with general election and resumption of austerity. Interest
rate normalisation to begin in 2015 with first rate rise in November.
Eurozone recovery becomes more established as fiscal austerity and credit conditions ease whilst
lower energy prices help consumption. ECB to monitor effects of recent easing, but we now expect
sovereign QE in 2015 in response to deflation fears.
In Japan, the consumption tax pushed the economy into recession prompting further easing by the
BoJ and a snap general election. Weaker JPY to support the recovery, but Abenomics faces
considerable challenge to balance recovery with fiscal consolidation.
US leading Japan and Europe. De-synchronised cycle implies divergence in monetary policy with the
Fed tightening ahead of ECB and BoJ, resulting in a firmer USD.
Tighter US monetary policy and weaker JPY weigh on emerging economies. EM exporters to benefit
from US cyclical upswing, but China growth downshifting as the housing market cools and the
authorities seek to reign in the shadow banking sector. Generally, deflationary for world economy,
especially commodity producers.






Risks

Risks are still skewed towards deflation, but are more balanced than in the past. Principal downside
risks are Eurozone deflation and China hard landing. Some danger of inflation if capacity proves
tighter than expected, whilst upside growth risk is a return of animal spirits and a G7 boom. Increased
prospect of stronger growth/ lower inflation if oil prices continue to fall.
Chart: World GDP forecast
Contributions to World GDP growth (%, y/y)
6
5
4.1
4.9
4.5
4.9
3.9
3
2.5
Forecast
4.6
3.7
4
2.8
5.0 5.1
4.5
3.3
2.9
2.8 2.8
2.5 2.5 2.6
2.2
2
1
0
-1
-1.2
-2
-3
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
US
BRICS
Europe
Rest of emerging
Japan
World
Rest of advanced
Source: Thomson Datastream, Schroders 25 November 2014 forecast. Previous forecast from August 2014. Please note
the forecast warning at the back of the document.
17
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Authorised and regulated by the Financial Conduct Authority
30 January 2015
For professional investors only
Schroders Baseline Forecast
Real GDP
y/y%
World
Advanced*
US
Eurozone
Germany
UK
Japan
Total Emerging**
BRICs
China
Wt (%)
100
63.0
24.8
18.8
5.4
3.7
7.2
37.0
22.8
13.6
2013
2.5
1.3
2.2
-0.4
0.2
1.7
1.5
4.7
5.7
7.7
2014
2.6
1.7
2.3
1.0
1.5
3.1
0.3
4.1
5.1
7.3
Wt (%)
100
63.0
24.8
18.8
5.4
3.7
7.2
37.0
22.8
13.6
2013
2.7
1.3
1.5
1.3
1.6
2.6
0.4
4.9
4.6
2.6
2014
3.0
1.4
1.6
0.5
1.0
1.5
2.8
5.7
4.1
2.2
Current
0.25
0.50
0.05
0.10
6.00
2013
0.25
0.50
0.25
0.10
6.00
2014
Prev.
0.25
(0.25)
0.50
(0.50)
0.05  (0.15)
0.10
(0.10)
5.60  (6.00)
Current
4498
365
276.2
20.00
2013
4033
375
224
20.00
2014
Prev.
4486  (4443)
375
(375)
295
(295)
20.00
20.00
Current
1.51
1.13
118.1
0.75
6.25
2013
1.61
1.34
100.0
0.83
6.10
2014
1.56
1.23
117.0
0.79
6.12
47.2
109







Prev.
(2.5)
(1.6)
(2.0)
(0.8)
(1.6)
(3.0)
(0.8)
(4.1)
(5.1)
(7.3)
Consensus 2015
2.6
2.8 
1.7
2.0
2.2
2.8 
0.8
0.9 
1.4
1.2 
3.0
2.5
1.0
1.1 
4.1
4.1 
5.1
4.8 
7.4
6.8
Prev.
(2.9)
(2.0)
(2.6)
(1.2)
(2.0)
(2.5)
(0.9)
(4.3)
(4.9)
(6.8)
Consensus 2016
2.8
2.8
2.2
2.1
3.2
2.4
1.1
1.4
1.4
1.8
2.6
1.8
1.2
2.2
3.8
4.1
4.4
4.7
7.0
6.5
Prev.
(3.1)
(1.5)
(1.7)
(0.7)
(1.1)
(1.6)
(2.7)
(5.8)
(4.4)
(2.3)
Consensus 2015
3.0
2.9 
1.4
1.3 
1.7
1.5 
0.5
0.8 
1.0
1.4 
1.6
1.3 
2.8
1.3 
5.7
5.6 
4.2
4.0 
2.1
2.2 
Prev.
(3.3)
(1.7)
(2.2)
(1.1)
(1.8)
(2.2)
(1.5)
(5.8)
(4.4)
(3.0)
Consensus 2016
2.6
3.2
0.7
1.8
0.7
2.4
0.1
1.1
0.7
1.7
0.9
2.0
1.2
1.4
5.8
5.6
4.3
4.0
1.8
2.7
Inflation CPI
y/y%
World
Advanced*
US
Eurozone
Germany
UK
Japan
Total Emerging**
BRICs
China










Interest rates
% (Month of Dec)
US
UK
Eurozone
Japan
China
Market
-
2015
1.25
0.75
0.05
0.10
5.20
Prev.
 (1.50)
 (1.50)
 (0.15)
(0.10)
 (6.00)
Market
0.69
0.73
0.03
0.10
-
2016
2.50
1.50
0.05
0.10
5.00
Market
1.43
1.11
0.09
0.10
-
Other monetary policy
(Over year or by Dec)
US QE ($Bn)
UK QE (£Bn)
JP QE (¥Tn)
China RRR (%)
Key variables
FX
USD/GBP
USD/EUR
JPY/USD
GBP/EUR
RMB/USD
Commodities
Brent Crude




100.4 
2015
Prev.
4594  (4443)
375
(375)
383
(383)
19.00  20.00
2016
4557
375
383
18.00
Prev.
(1.68)
(1.32)
(105.0)
(0.79)
(6.12)
Y/Y(%)
-3.1
-8.2
17.0
-5.3
0.3
2015
1.50
1.18
125.0
0.79
6.20





Prev.
(1.63)
(1.27)
(110.0)
(0.78)
(6.05)
Y/Y(%)
-3.8
-4.1
6.8
-0.2
1.3
2016
1.48
1.14
130.0
0.77
6.35
Y/Y(%)
-1.3
-3.4
4.0
-2.1
2.4
(101)
-7.9
82.1

(89)
-18.3
85.5
4.2
Source: Schroders, Thomson Datastream, Consensus Economics, November 2014
Consensus inflation numbers for Emerging Markets is for end of period, and is not directly comparable.
Market data as at 29/01/2015
Previous forecast refers to August 2014
* Advanced m arkets: Australia, Canada, Denmark, Euro area, Israel, Japan, New Zealand, Singapore, Sw eden, Sw itzerland,
Sw eden, Sw itzerland, United Kingdom, United States.
** Em erging m arkets : Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela, China, India, Indonesia, Malaysia, Philippines,
South Korea, Taiw an, Thailand, South Africa, Russia, Czech Rep., Hungary, Poland, Romania, Turkey, Ukraine, Bulgaria,
Croatia, Latvia, Lithuania.
18
Issued in January 2015 Schroder Investment Management Limited.
31 Gresham Street, London EC2V 7QA. Registered No. 1893220 England.
Authorised and regulated by the Financial Conduct Authority
30 January 2015
For professional investors only
Updated forecast charts - Consensus Economics
For the EM, EM Asia and Pacific ex Japan, growth and inflation forecasts are GDP weighted and
calculated using Consensus Economics forecasts of individual countries.
Chart A: GDP consensus forecasts
2015
8
2016
%
%
8
7
7
EM Asia
6
6
EM
5
EM
5
4
US
Pac ex JP
3
4
Pac ex JP
3
US
UK
UK
2
Japan
2
Eurozone
1
0
Jan 14
Apr 14
Jul 14
Oct 14
Japan
1
Eurozone
Jan 15
0
Jan
Month of forecast
Month of forecast
Chart B: Inflation consensus forecasts
2015
6
EM Asia
%
2016
6
EM
5
5
EM
4
4
EM Asia
3
3
Pac ex JP
US
UK
2
2
Japan
1
1
EM Asia
Pac ex JP
Eurozone
UK
Eurozone
Japan
US
0
0
Jan 14
Apr 14
Jul 14
Oct 14
Jan 15
Jan
Month of forecast
Source: Consensus Economics (January 2015), Schroders
Pacific ex. Japan: Australia, Hong Kong, New Zealand, Singapore
Emerging Asia: China, India, Indonesia, Malaysia, Philippines, South Korea, Taiwan, Thailand
Emerging markets: China, India, Indonesia, Malaysia, Philippines, South Korea, Taiwan, Thailand, Argentina, Brazil, Colombia, Chile,
Mexico, Peru, Venezuela, South Africa, Czech Republic, Hungary, Poland, Romania, Russia, Turkey, Ukraine, Bulgaria, Croatia,
Estonia, Latvia, Lithuania
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are
based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation
to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or
other factors. The views and opinions contained herein are those of Schroder Investments Management's Economics team, and may not
necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document does not
constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. The
information and opinions contained in this document have been obtained from sources we consider to be reliable. No responsibility can be
accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the
Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed
on the views and information in the document when taking individual investment and/or strategic decisions. For your security,
communications may be taped or monitored.
19
Issued in January 2015 Schroder Investment Management Limited.
31 Gresham Street, London EC2V 7QA. Registered No. 1893220 England.
Authorised and regulated by the Financial Conduct Authority