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India - Economics

04 August 2015

Disintermediation of credit

Bank loans have historically been the principal source of credit in India. However, over the past few quarters, the credit market has seen significant disintermediation with corporate bonds and commercial paper market seeing significant growth. This is being driven by lower short-term money market rates, a narrowing of credit spreads to multi-year lows, and sticky base rate of banks. There are four broad implications of this trend.

Firstly, limited monetary transmission is taking place despite base rates not seeing a decline. Secondly,
Firstly, limited monetary transmission is taking place despite
base rates not seeing a decline. Secondly, the underlying credit
growth in the economy is not as low as the bank loan data
suggests.
Thirdly,
with
pricing
of
‘dis-intermediated’
credit
becoming fine, this is negative for bank’s profitability. Lastly,
from a long-term perspective, deepening of debt market is a
structural positive.

Growing disintermediation in credit: The credit market in India remains dominated by bank loans. Ballpark calculations suggest that the bank loans contribute three-fourths of the outstanding private sector credit in India. However, the last few quarters have seen a significant increase in disintermediation with borrowers directly raising money from

the financial markets. Our calculations suggest that in FY15, just 60% of Our calculations suggest
the financial markets.
Our calculations suggest that in FY15, just 60% of
Our calculations suggest that in FY15, just 60% of
incremental credit to private sector was met through bank loans as
against an average of ~75% in the preceding four years. In the first
quarter of this financial year, the share of bank loans in incremental
credit flow has fallen even further to just 50%.

This trend towards disintermediation

This trend toward s disintermediatio n of credit demand is being driven of credit demand is

of credit demand is being driven

of credit demand is being driven

largely by higher supply of funds from alternate domestic sources of from alternate domestic sources
largely by higher supply of funds
from alternate domestic sources of
from alternate domestic sources of
credit rather than higher overseas
credit rather than higher overseas
borrowings.
borrowings.
Both corporate bonds as
oth corporate bonds as
well as commercial paper market have seen a big upswing in the last
well as commercial paper market have seen a big upswing in the last
few quarters. Their share of total in
few quarters. Their share of total incremental credit flow has increased
cremental credit flow has increased
to 30% and 9% respectively in FY15.
to 30% and 9% respectively in FY15.
I In the preceding few years, the
In the preceding few years, the
share of corporate bonds was less
share of corporate bonds was less
than 20% and commercial papers
than 20% and commercial papers
were a negligible source of domestic credit flow.
papers were a negligible source of domestic credit flow. Institutional Equities Figure 1: Share of bank
papers were a negligible source of domestic credit flow. Institutional Equities Figure 1: Share of bank

Institutional Equities

Figure 1: Share of bank loans in credits was only 50% in 1QFY16 compared to more than

80% in FY11

DD MMM YYYY

Share in Credit Bank loans Corporate bonds CPs ECBs 100% 90% 80% 70% 60% 50%
Share in Credit
Bank loans
Corporate bonds
CPs
ECBs
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY11
FY12
FY13
FY14
FY15
1QFY16

Source: RBI, CEIC, IIFL Research. Note: Calculated as share in sum of change in outstanding bank loans, change in outstanding corporate bonds, incremental CP issuance and net ECB flows

Lower money market interest rates and credit spreads and sticky base rate drive disintermediation: There are three reasons for the growing trend of disintermediation. Firstly, at the short end, money market rates declined in the last few quarters after RBI started easing the monetary policy this year. The fall in short-term rates is especially sharp as in late 2013 RBI had increased short-term rates to prevent the sharp depreciation in INR during the ‘taper’ driven turmoil in global financial markets. The yield on the three-month commercial paper has declined by almost 200bps in the past five quarters.

Note: In this report we have defined adjusted credit as total of incremental bank loans, net issuance of corporate bonds, including securitized debt (at face value), incremental issuance of commercial papers and net inflows of ECBs (in rupee terms).

Ashutosh Datar | ashutosh.datar@iiflcap.com 91 22 4646 4642

Amit Tiwari | amit.tiwari@iiflcap.com 91 22 4646 4649

|

Institutional Equities Figure 2: CP yields have declined ~100 bps over last one year (%)
Institutional Equities Figure 2: CP yields have declined ~100 bps over last one year (%)

Institutional Equities

Figure 2: CP yields have declined ~100 bps over last one year

(%) 3m CP Rate 13 12 11 10 9 8 7 6 5 4 3
(%)
3m CP Rate
13
12
11
10
9
8
7
6
5
4
3
Jan 10
Sep 10
May 11
Feb 12
Oct 12
Jun 13
Mar 14
Nov 14
Jul 15

Source: Bloomberg, IIFL Research

Figure 3: Credit spreads are at lowest levels in a decade

Bond Spreads (ppt) AAA AA BBB 6 5 4 3 2 1 0 FY07 FY08
Bond Spreads (ppt)
AAA
AA
BBB
6
5
4
3
2
1
0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15 FY16 YTD

Source: Bloomberg, IIFL Research. Based on yields of 5 year maturity relative to G Sec yields.

Secondly, credit spreads have seen a sharp decline in the last few years, especially for the higher rated corporates. The spread on most investment grade corporate bonds declined to decadal lows (although spread on BBB bonds has ticked up a bit in 1QFY16). This coupled with

India - Economics

the decline in long bond yields has meant that yields on investment grade bonds have seen a sharp decline in the last few quarters. The yield on five-year AAA rated bonds, for example, has declined ~100bps

over the past year to 8.5% currently. The yield on the BBB rated bonds

of similar maturity has declined ~80bps during the same period.

Thirdly, even as the interest rates on ‘disintermediated’ credit products has declined sharply, that on
Thirdly, even as the interest rates on ‘disintermediated’ credit products
has declined sharply, that on ‘intermediated’ credit product, viz. bank
loans, has barely fallen. The median
. The median
base
base
rate of
rate
of
PSU banks, for
PSU banks, for
instance, remains at around 10%, down just 25bps over last year.
instance, remains at around 10%, down just 25bps over last year.

Figure 4: Yields on higher rated issues are lower than base rate of banks

Yields relative to base rate (ppt) 3mth CP AAA AA BBB 3 2 1 0
Yields relative to base rate (ppt)
3mth CP
AAA
AA
BBB
3
2
1
0
(1)
(2)
FY11
FY12
FY13
FY14
FY15
1QFY16

Source: Bloomberg, CEIC, IIFL Research. Note: Base rate is median base rate of PSU banks as provided by CMIE. Data of base rate for June quarter is IIFL estimate.

A combination of these three factors has created an arbitrage where

‘dis-intermediated’ credit is much cheaper than ‘intermediated’ credit for

the better rated issuers (A rated issuers and above). While it was always cheaper to borrow from markets than banks for highly rated corporates (AAA) it is even cheaper now. Moreover, for slightly lower rated corporates (like AA or A rated), the interest arbitrage has opened up. This is allowing companies to bypass the banking system to fulfill their credit demand whenever they can.

ashutosh.datar@iiflcap.com

2

Institutional Equities Disintermediation trend likely to continue: We believe that this We believe that this
Institutional Equities
Disintermediation trend likely to continue:
We believe that this
We believe that this
trend of disintermediation is like to continue driven by a couple of
structural factors. Unless banks respond by quickly adjusting down their
base rates, FY16 is likely to be the first year where incremental credit
through corporate bonds and CPs will exceed credit flow through bank
loans.
loans.

Firstly, given the currency stability, FII interest in India’s debt market is likely to continue. In FY15 itself, FIIs were net buyers of corporate bonds of over US$15bn – this was ~20% of incremental bank loans. While the government has not increased FII limits significantly this year, we believe that a gradual annual increase is likely to continue as in the last few years.

Secondly, if the government continues with its path of fiscal consolidation, government borrowings are likely
Secondly, if the government continues with its path of fiscal
consolidation, government borrowings are likely to fall in absolute
terms. This will require insurance companies, pension funds etc to
increase their allocations to corporate bonds for their investment
purposes, keeping credit spreads modest (and thus encouraging more
issuance).
Further, if the trend away from physical savings towards
Further, if the trend away from physical savings towards
financial savings continues, there will be greater disintermediation of
financial savings continues, there will be greater disintermediation of
financial
financial
sector’s
sector’s
liabilities
liabilities
as
as
well,
well,
creating
creating
further
further
supply
supply
of
of
‘disintermediated’ credit.
There
are
four
broad
implications
of
this
trend
towards

disintermediation, in our view:

Reported credit growth is understated: While credit growth is Reported credit growth is understated: While
Reported credit growth is understated: While credit growth is
Reported credit growth is understated: While credit growth is
low, it is materially higher than what bank loan growth suggests.
low, it is materially higher than what bank loan growth suggests.
While bank loan growth has decelerated to ~9% growth in FY15, our
While bank loan growth has decelerated to ~9% growth in FY15, our
calculations suggest that overall credit growth in the economy has been almost 250bps higher than
calculations suggest that overall credit growth in the economy has
been almost 250bps higher than that.
been almost 250bps higher than that. Credit growth was thus faster

than nominal GDP growth in FY15, unlike what bank loan data suggests.

India - Economics

Figure 5: Bank loan growth is under stating overall credit growth in the economy

(YoY%) Bank loans growth Adjusted credit growth 20% 15% 10% 5% 0% FY12 FY13 FY14
(YoY%)
Bank loans growth
Adjusted credit growth
20%
15%
10%
5%
0%
FY12
FY13
FY14
FY15

Source: RBI, CMIE, CEIC, IIFL

Note: Adjusted credit growth includes bank loans, corporate

bonds, commercial papers and external commercial borrowings. Limited (and narrow) monetary transmission underway:
bonds, commercial papers and external commercial borrowings.
Limited (and narrow) monetary transmission underway:
A A
major macro issue this
year has
been
the lack
of monetary
transmission of the YTD 75bps repo
rate cut by RBI. Base rate of
banks,
banks,
a
a mechanism
mechanism
set
set
in
in
place
plac
e
in
in
2010 to ensure efficient
2010 to ensure efficient
monetary transmission, have barely budged, falling not more than
25bps YTD. However, as the data above shows, with growing
disintermediation, monetary transmission has taken place due to fall
in market interest rates. Indeed the fall in market interest rates has
been
more
than
the 75bps
cut
in the
repo rate by
the RBI.
So

monetary transmission has indeed happened.

ashutosh.datar@iiflcap.com

3

Institutional Equities Figure 6: Monetary transmission has happened for only the better rated
Institutional Equities Figure 6: Monetary transmission has happened for only the better rated

Institutional Equities

Figure 6: Monetary transmission has happened for only the better rated corporates

(%) AAA yield (5 year) 3mth CP rate 11.0 10.5 10.0 9.5 9.0 8.5 8.0
(%)
AAA yield (5 year)
3mth CP rate
11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
Jan 14
Mar 14
Jun 14
Sep 14
Nov 14
Feb 15
May 15
Jul 15

Source: Bloomberg, IIFL Research

However, given that not all borrowers can directly access the money markets, monetary transmission so far has been restricted to corporates that can access financial markets which basically means the large and better rated corporates. As per data from CRISIL, India’s largest credit rating firm, 75% of outstanding ratings (by number of issuers) have a credit rating of BB or lower and less than 10% of issuers have a rating of A or above. Thus, while monetary transmission has happened in the last few quarters, it has happened for a very narrow set of borrowers.

Negative impact on bank profitability: With higher quality issuers directly accessing credit from the market, banks are competing with other market participants (mutual funds, insurance companies, FIIs etc) reducing the spreads on this segment. Further, the residual addressable market for banks now comprises relatively lower rated borrowers, which further disincentivises them to cut their base rate.

India - Economics

Deepening of financial markets: India’s bond market is relatively under-developed and this trend of disintermediation suggests a gradual deepening of the debt market is underway. This is thus a positive sign from a long-term perspective as liquid bond markets will allow for more efficient pricing as well as transfer of risk and at the same time easier access to credit for a variety of borrowers.

ashutosh.datar@iiflcap.com

4

WHEN FUELS COMPETE THE EVOLVING DYNAMIC OF GLOBAL ENERGY MARKETS By Christophe Brognaux and Nicholas

WHEN FUELS COMPETE

THE EVOLVING DYNAMIC OF GLOBAL ENERGY MARKETS

By Christophe Brognaux and Nicholas Ward

T

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For more on this topic, go to bcgperspectives.com

Signs of Growing Competition

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Centralized

Transportation Buildings Industry power Electric Process Electric Base Cars Trucks Ships Aircra Heat power
Transportation
Buildings
Industry
power
Electric
Process
Electric
Base
Cars
Trucks
Ships
Aircra
Heat
power
heat
power
Feedstock
load
1920
1940
1960
1980
2
2000
2020-2040
2
2
(potential)
1
1
Oil
Coal
Hydro
Natural
Centralized
Distributed
Nuclear
Wind
gas
power
solar

Source: BCG analysis. Note: Each cell includes the main competing energy sources in widespread use across developed economies and excludes sources with limited use or narrow geographical focus. 1 Electrified heating moves into traditional gas and oil spaces. 2 This represents small-scale cogeneration.

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Interconnected Energy Markets

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A More Complex World

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Regions. - - - - - - - - - - - - - A More

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Optimal power source in a home

Grid price ($/kWh) 0.25 0.20 Rooop PV system 0.15 0.10 Centralized power 0.05 0.00 1,500
Grid price ($/kWh)
0.25
0.20
Rooop PV system
0.15
0.10
Centralized power
0.05
0.00
1,500
2,000
2,500

Solar irradiation (kWh/m 2 /year)

Evaluated by the total cost of ownership over 20 years

10 kWp PV system costing $2,500 per kWp

Optimally inclined panel; no storage

PV system performance ratio of 85 percent

No penalty for feeding into the grid; no tax incentives

Optimal energy type for a car

Oil price ($/bbl) 150 CNG 125 Electricity 1 100 Gasoline or 75 diesel 50 400
Oil price ($/bbl)
150
CNG
125
Electricity 1
100
Gasoline or
75
diesel
50
400
300
200
100

Battery cost ($/kWh)

Evaluated by the total cost of ownership over five years

Midsize car

12,000 miles per year

U.S. gas prices

No tax incentives

Solar Electricity Handbook, by Michael Boxwell; IEA Electricity Information 2011; Lawrence Berkeley National Laboratory; National Renewable Energy Laboratory database; BCG analysis. Note: PV = solar photovoltaic; kWh = kilowatt hour; kWp = kilowatt peak; bbl = barrel; CNG = compressed natural gas. 1 Based on the economics of a typical battery-electric vehicle.

peak; bbl = barrel; CNG = compressed natural gas. 1 Based on the economics of a

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Tough Questions for Companies, Investors, and Regulators

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Consulting Group. You may contact him by e-mail at brognaux.christophe@bcg.com.

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Data vs Intuition: Can the twain meet?

by Pravin Palande, Samar Srivastava

Is decision-making moving away from hunch to hard facts? Richard Dobbs, author of No Ordinary Disruption, and Kotak Mahindra Bank chief Uday Kotak discuss

On July 14, two people, who know a thing or two about disruption, came together to discuss, well, disruption.

One of them was Richard Dobbs, a director at the McKinsey Global Institute and co- author of the book No Ordinary Disruption, which was launched that evening at the Trident hotel in Mumbai’s Nariman Point. The book talks about four global forces that have the power to cause disruption: The shift of economic activity to emerging markets like India and, with that, to cities; the economic impact of technology; world demographics; and lastly, the fact that the world is more connected through trade and through movements in capital, people and information, which Dobbs calls ‘flows’.

The possibility of disruption means a change is required in the way decision-making is

The possibility of disruption means a change is required in the way decision-making is

means a change is required in the way decision-making is viewed, Dobbs points out. It has

viewed, Dobbs points out. It has become important to think analytically and employ

solid data, which could mean less intuition, he adds. This is in line with the works of Daniel Kahneman, the winner of the Nobel Memorial Prize in Economic Sciences in 2002, who believes that human beings have two states of thinking. A typical manager relies heavily on System I thinking, which is fast, intuitive and easy to handle. But System II thinking is more analytical, slow and deliberate. It requires effort. People are reluctant to use System II thinking as it takes you away from intuition. Dobbs argues that, in the future, it will become important to reset our intuitions to make decisions, and this is not going to be easy.

He would have been gratified to hear Uday Kotak—executive vice-chairman and managing director of Kotak Mahindra Bank, who has spearheaded several transformative moves at his bank as well as in the industry—say he already sees a shift away from intuition. Kotak agreed to join in a short, but lively, discussion on disruption with Dobbs for Forbes India, and the result was some food for thought. Edited excerpts.

Uday Kotak:

The key issue to me is technology disruption. It is both fascinating and

frightening. What does disruption do to jobs? The traditional answer is that we had a

similar situation during the Industrial Revolution and we found a solution. But just

 

because we solved it then, I’m not sure we can solve it now.

 

Richard Dobbs: I agree. But let’s first look at the traditional answer. The printing press helped the monks who used to hand-write the Bible move on to something else. When we took our first job, there were switchboard operators and typewriter operators. These jobs don’t exist anymore. Historically, jobs have vanished and, historically, we have dealt with the situation. I think the challenge, this time, is that technology might disrupt the scene in a much bigger way. We may now have to get around it by retraining people more number of times to keep their skills relevant. Secondly, technology creates

new jobs. Take for example, Uber. Some say the company is causing a lot of trouble for drivers. But Uber means more people travelling by taxi than before. Look at San Fransisco: The number of people working as Uber drivers is increasing. But sometime in the future, the cars are going to self-drive and then the drivers might lose their jobs again. But, we also need to understand that the world’s working population is shrinking, with the exception of India and Africa. In such a scenario, technology might just help us.

Forbes India: But what will happen to jobs if technology starts building

 

technology? And can we assume that we have to look at the future based on

our past?

 

Dobbs: There are additional jobs coming up. As the population ages, we will need

 

people to look after the elderly. As people get older, they might suffer from problems

 

like dementia, or other disorders. I think these are areas where there will be many jobs

coming up.

 

Forbes India: A classical manager takes decisions based on his personal experiences, which leads to intuitions. It is not easy for most people to move away from intuitions to analytics. Since we do not understand how the future is going to work out, you are saying that it is not a good idea to completely rely on intuitions. Can you explain why?

 

Dobbs: When it comes to things like allocating resources and dealing with competitors,

 

then you need to have facts behind it than just intuitions. I’m not saying that you have to

completely rely on data, I’m talking more about resetting intuitions.

McKinsey research

 

and client experience suggest that 50 percent of all efforts to transform companies fail

 

because senior role models fail to drive change due to their inherent tendency to defend

 

the status quo. I think it is important to be self-aware.

For instance, the great things you

did when you set up your bank (Kotak Mahindra Bank): There was intuition about the type of partners to work with. But when it comes to allocating resources or thinking about the actions of your competitors, then you need to have more facts, rather than just intuitions.

Kotak: Are we not moving away from intuitions already? I’m talking about Indian policy making. Every time you hear the Reserve Bank of India (RBI) governor addressing the media, he says, “I will go with data.” We are already moving towards analytics. The RBI governor (Raghuram Rajan) comes from the Chicago school, which is very focussed on data. We are underestimating how big data and analytics are changing our world and our lives. Therefore, when you have solid data, the judgement can be taken after having a thorough review of the data. And some of the challenges we are facing in terms of how the RBI governor is approaching policy versus how some of us are approaching it, is the classic debate between data and intuition.

Dobbs: I’m not arguing against intuition. I’m saying that we must supplement it.

Kotak: But there is that last judgment call that is based on solid data, which is much better.

Dobbs: We all have blind spots. But it is important to be aware of these blind spots. That’s another way of looking at it.

Forbes India: Do you think the cost of capital will increase in future? Kotak: I think you are seeing the world at two very different points in time. While the rest of the world has a very loose monetary policy where interest rates are zero or negative, India is at a point in time when interest rates are positive, and cost of capital is high. As someone told me, ‘India is too much of a good boy in a bad world today’.

Dobbs:

The reality is, when I look at emerging markets, one of the big issues is that

 

companies are getting capital cheaply, but what about returns? Other emerging markets

can learn from India, particularly the capital discipline of Indian promoters. The Indian

promoter is capital constrained and so he wants to deliver high returns. I think that is a

good lesson for other emerging markets.

 

Kotak: I would add that some Indian promoters are so smart that they put in very little equity and take bank loans and consider even that as equity

Source: http://forbesindia.com/article/special/data-vs-intuition-can-the-twain-

meet/40761/1

BofAML’s Transforming World Atlas

IInvestment themes illustrated by maps

Atlases educate, illustrate and illuminate our dynamic world

In our inaugural Transforming World Atlas we have produced a series of maps to highlight BofA Merrill Lynchs favorite cyclical and secular investment themes based on our Transforming World framework:

Themes

1. People the allocation of scarce human resources

2. Earth the allocation of scarce natural resources

3. Innovation the disruptive role of technology

4. Government the role of public policy

5. Markets the allocation of scarce financial capital

Our maps cover topics ranging from aging populations to clean tech to the sharing economy and many others. As you navigate complex investment decisions, we hope these maps provide unique and compelling perspectives.

BBofA Merrill Lynch does and seeks to do business with companies covered in its research
BBofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a rresult, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
sshould consider this report as only a single factor in making their investment decision.
Unauthorized redistribution of this report is prohibited. This report is intended for amehra@baml.com.
is prohibited. This report is intended for amehra@baml.com. 0 0 4 August 2015 Corrected Investment Strategy
is prohibited. This report is intended for amehra@baml.com. 0 0 4 August 2015 Corrected Investment Strategy

004 August 2015 Corrected

is intended for amehra@baml.com. 0 0 4 August 2015 Corrected Investment Strategy Global Michael Hartnett Chief
Investment Strategy Global Michael Hartnett Chief Investment Strategist MLPF&S +1 646 855 1508
Investment Strategy
Global
Michael Hartnett
Chief Investment Strategist
MLPF&S
+1 646 855 1508
michael.hartnett@baml.com
2 BofAML’s Transforming World Atlas | 04 August 2015

2 BofAML’s Transforming World Atlas | 04 August 2015

2 BofAML’s Transforming World Atlas | 04 August 2015

The Aging of the World Population

The proportion of people aged 65+ by country in 2015 and 2050

ortion of people ag ed 65+ b y countr y in 2015 and 2050 2015 2050
2015 2050 % of population 65+ > 30% 25-30% 20-25% 15-20% 10-15% 5-10% 0-5% Source:
2015
2050
% of population 65+
> 30%
25-30%
20-25%
15-20%
10-15%
5-10%
0-5%
Source: Mapping Worlds, UN DESA

The aging of the world population is a key People theme.

By 2050, the Silver Generation By 2050 , the Silver Generation (people aged 65 years
By 2050, the Silver Generation
By 2050
,
the Silver Generation
(people aged 65 years and older) )
(people aged 65 years and older
will outnumber children under 14 for the first time in human history.
The countries with the largest proportion of old people in 2050 will be Japan (37%), Spain (35%), ,
The
count
r
ies with the largest proportion of old people in 2050 will be Japan (37%), Spain (35%)
and Germany
and Germany
and
and
Italy (33%).
Italy (33%).
and Germany and Germany and and Italy (33%). Italy (33%). BofAML’s Transforming World Atlas | 04
and Germany and Germany and and Italy (33%). Italy (33%). BofAML’s Transforming World Atlas | 04

BofAML’s Transforming World Atlas | 04 August 2015

3

The Growth of the Silver Generation

The increase of people aged 65+ by country between 2015 and 2050

of peop le a g ed 65+ b y countr y between 2015 and 2050 65+
65+ population in 2015 Source: Mapping Worlds, UN DESA Increase by 2050 (mn)
65+ population in 2015
Source: Mapping Worlds, UN DESA
Increase by
2050 (mn)
By 2050, the world’s Silver Generation will increase by 885 million. China’s Silver Generation will
By 2050, the world’s Silver Generation will increase by 885 million.
China’s Silver Generation will increase by 199 million, India’s by 136 million and America’s by 38 million by 2050.
The spending
The spending
and
and
savings of the global
“ ““
longevity sector
longevity sector
” ”
is a
is a
huge
huge
investment theme;
investment theme; the US longevity sector covering health, finance, and consumer services currently totals s
th
e US longevity sector covering health, finance, and consumer services currently total
$7.1 trillion
$7.1 trillion
4 BofAML’s Transforming World Atlas | 04 August 2015

Where the Millennials live

Concentration of Millennials in the US by Nielsen DMA

live Concentration of Millennials in the US b y Nielsen DMA Concentration of Millennials by DMA
Concentration of Millennials by DMA Above Average Average Below Average Source: BofA Merrill Lynch Global
Concentration of Millennials by DMA
Above Average
Average
Below Average
Source: BofA Merrill Lynch Global Investment Strategy, Nielsen
DMA: Designated Market Area

Investment Strategy, Nielsen DMA: Designated Market Area A second key demographic group is Millennials, people aged
A second key demographic group is Millennials, people aged between 18 and 34 years old.
A second key demographic group is Millennials, people aged between 18 and 34 years old.
Their annual income is forecast to reach
$8.3tn
$8.3tn
by 2025 in the US alone.
This map shows that
Millennials are more concentrated in
the
the
western
western
region of the
region of the
US than in the rest of the country.
US than in the rest of the countr
than in the rest of the country. US than in the rest of the countr BofAML’s
than in the rest of the country. US than in the rest of the countr BofAML’s

BofAML’s Transforming World Atlas | 04 August 2015

5

Asia’s Dominance in the Global Population

More than half the people in the world live in the red region

than half the people in th e world live in the red region Total World Population
than half the people in th e world live in the red region Total World Population

Total World Population = 7.25bn

Source: BofA Merrill Lynch Global Investment Strategy, UN DESA

A third key demographic is the the number number of people in Asia; 3.7 of
A third key demographic is
the
the
number
number
of people in Asia; 3.7
of people in Asia; 3.7
billion
b
illion people live in the red region depicted above.
people live in the red region depicted above.
This population
This population
generates
generates
many long
many long-term investment themes, such as Chinese and Indian
-
term investment themes, such as Chinese and Indian
Healthcare,
Healthcare, Infrastructure and
Infrastructure
and
Tourism

Healthcare, Infrastructure and Infrastructure and Tourism 6 BofAML’s Transforming World Atlas | 04 August 2015

6 BofAML’s Transforming World Atlas | 04 August 2015

Healthcare, Infrastructure and Infrastructure and Tourism 6 BofAML’s Transforming World Atlas | 04 August 2015

US Immigration

The countries that supply the most immigrants to each state

The countries that su pply the most immigrants to each state States with the Highest Immigrant
States with the Highest Immigrant Populations 1. California (10.3mn) 2. New York (4.4mn) 3. Texas
States with the Highest
Immigrant Populations
1. California (10.3mn)
2. New York (4.4mn)
3. Texas (4.4mn)
4. Florida (3.8mn)
Excludes Mexico

Source: Department of Homeland Security, Giorgio Cavaggion

Immigration to the US (around 500,000 immigrants arrive each year) is a source of population growth, economic stimulus, and social and political change. The states with the highest immigrant populations are California, New York, Texas and Florida. By state, excluding immigration from Mexico, Filipinos are the largest immigrant population in California, the Chinese in New York, the Indians in Texas and the Cubans in Florida.

8

BofAML’s Transforming World Atlas | 04 August 2015

8 BofAML’s Transforming World Atlas | 04 August 2015
Tourism The world’s ma j or tourist destinations, 2014 Top 5 Destinations Source: BofA Merrill

Tourism

The world’s major tourist destinations, 2014

Top 5 Destinations Source: BofA Merrill Lynch Global Investment Strategy, UN World Tourism Organization
Top 5 Destinations
Source: BofA Merrill Lynch Global Investment Strategy, UN World Tourism Organization
1.1 billion 1.1 billion people traveled overseas as tourists people traveled overseas as tourists in
1.1 billion
1.1 billion people traveled overseas as tourists
people traveled overseas as tourists
in
in 2014
France was the most popular (84 million) tourist destination, followed by the US, Spain, China and Italy.
The share of tourists
traveling to
traveling to emerging economies is forecast to rise from 45% in 2014 to 57% by 2030 (over 1 billion international tourist arrivals). ).
emerging economies is forecast to rise
f
rom 45% in 2014 to 57% by 2030 (
over 1 billion international tourist arrivals
to 57% by 2030 ( over 1 billion international tourist arrivals 10 BofAML’s Transforming World Atlas

10 BofAML’s Transforming World Atlas | 04 August 2015

Urbanization

Urban population by country in 2010 and 2050

Urbanization Urban population by countr y in 2010 and 2050 2010 2050 Urban Population > 75%

2010

Urban population by countr y in 2010 and 2050 2010 2050 Urban Population > 75% 50%-75%
2050 Urban Population > 75% 50%-75% 25%-50% < 25% Source: BofA Merrill Lynch Global Investment
2050
Urban Population
> 75%
50%-75%
25%-50%
< 25%
Source: BofA Merrill Lynch Global Investment Strategy, UNICEF

In the next 10 years, the world’s largest 600 cities will comprise nearly 65% of
In the next 10 years, the world’s largest 600 cities will comprise nearly 65% of global growth.
The countries with the greatest urban populations in 2050 will be China (1bn), India (875mn), US (365mn)
and
and
Nigeria (218mn).
Nigeria (218mn).
Urbanization has huge investment implications for infrastructure in the next
Urbanization has huge investment implications for infrastr
ucture in the next
3-4 decades.
3-4 decades.
for infrastr ucture in the next 3-4 decades. 3-4 decades. BofAML’s Transforming World Atlas | 04
for infrastr ucture in the next 3-4 decades. 3-4 decades. BofAML’s Transforming World Atlas | 04

BofAML’s Transforming World Atlas | 04 August 2015

11

Globesity

The most frequent cause of death by US state

Source: Slate, CDC
Source: Slate, CDC

Heart Disease Cancer

death b y US state Source: Slate, CDC Heart Disease Cancer This map shows that in
This map shows that in the vast majority of US states, heart disease is the
This map shows that in the vast majority of US states, heart disease is the most
common
common
cause of death.
cause of death.
610,000 Americans die from heart disease each year;
that
that
’s
s 1 in every 4 deaths,
1 in every 4 deaths,
or a fatality from a heart disease-related event every minute.
or a fatality from a heart disease-
related event every minute.
Obesity is a leading contributor to heart disease;
globally 2.1 billion people are obese or
globally 2.1 b
illio
n people are obese or
overweight
overweight
(2014: WHO); Globesity is a core
BofAML Transforming World theme.
WHO); Globesity is a core BofAML Transforming World theme. 14 BofAML’s Transforming World Atlas | 04

14 BofAML’s Transforming World Atlas | 04 August 2015

WHO); Globesity is a core BofAML Transforming World theme. 14 BofAML’s Transforming World Atlas | 04

The Fitness Culture

A running and biking heat map, US, January 2014 to May 2015

A running and biking heat map, US, January 2014 to May 2015 January 2014 – May
January 2014 – May 2015
January 2014 – May 2015
Source: Strava 19mn 19mn runs runs 77mn 77mn bike bike rides rides Fitness is now
Source: Strava
19mn
19mn runs
runs
77mn 77mn bike bike rides rides
Fitness is now a huge growth industry with health-conscious Americans running and cycling more than ever before.
This heat map shows Americans took 77 million bike rides and 19 million runs in the past year and a half.
US consumer purchases of sporting goods rose to $65bn in 2015, boosting the athletic apparel and footwear sector.
BofAML’s Transforming World Atlas | 04 August 2015
15

Vanity Capital

Top 5 countries for cosmetic surgery

“ Vanity Capital ” Top 5 countries for cosmetic sur gery Source: BofA Merrill Lynch Global
Source: BofA Merrill Lynch Global Investment Strategy, International Society of Aesthetic Plastic Surgeons (ISAPS)
Source: BofA Merrill Lynch Global Investment Strategy,
International Society of Aesthetic Plastic Surgeons (ISAPS)
An aging population and improved technology are the driving forces of of growth growth in
An aging population and improved technology are the driving forces
of
of
growth
growth
in
in
plastic surgery.
plastic surgery.
Worldwide there were 23 million cosmetic procedures performed in 2013
with
with
the US, Brazil, Mexico, Germany and Spain leading the way.
and Spain leading the way.
BofA Merrill Lynch believes spending on Vanity Capital is approximately $4.5tn, equal to the fourth largest economy in the world.
$4.5tn, equal to the fourth largest economy in the world. BofAML’s Transforming World Atlas | 04
$4.5tn, equal to the fourth largest economy in the world. BofAML’s Transforming World Atlas | 04

BofAML’s Transforming World Atlas | 04 August 2015

17

18 BofAML’s Transforming World Atlas | 04 August 2015

18 BofAML’s Transforming World Atlas | 04 August 2015

18 BofAML’s Transforming World Atlas | 04 August 2015

The Worlds Carbon Footprint

Total carbon dioxide emissions by nation

Carbon Footprint Total carbon dioxide emissions b y nation Source: BofA Merrill Lynch Global Investment Strategy,
Source: BofA Merrill Lynch Global Investment Strategy, Miller-McCune
Source: BofA Merrill Lynch Global Investment Strategy, Miller-McCune

In recent decades, carbon dioxide emissions and climate change have become major political, social and environmental issues.

Half of all carbon dioxide emissions from fossil fuels have occurred since the mid-1980s.

In 2014, China was the largest producer of carbon dioxide emissions at 27.5% of the global total, followed by the US at 16.9%.

ons at 27.5% of the global total, followed by the US at 16.9% . BofAML’s Transforming
ons at 27.5% of the global total, followed by the US at 16.9% . BofAML’s Transforming

BofAML’s Transforming World Atlas | 04 August 2015

19

Energy Efficiency in Emerging Markets Energy Efficiency in Emerging Markets Top 3 promising clean technologies
Energy Efficiency in Emerging Markets
Energy Efficiency in Emerging Markets
Top 3 promising clean technologies for SME’s in emerging markets
Top 3 promising clean technologies for SME’s in emerging markets
Source: infoDev/The World Bank
Clean technology helps reduce carbon emissions (and reliance on the Middle East for energy supply).
Clean technologies are growing quickly in
Emerging Markets; China boasts the highest clean technology investments at
$415bn on Electric Bikes, Wind
and Solar.
and Solar.
Globally Wind and Solar
clean technology will account for
clean
technology will account for
80%
80% of global
of global
electricity capacity additions by 2030.
0.
20
BofAML’s Transforming World Atlas | |
Transforming World Atlas
04 August 2015
04 August 2015

Waste

Municipal solid waste production, 2012 and 2015

Waste Munici p al solid waste p roduction, 2012 and 2015 Source: BofA Merrill Lynch Global
Source: BofA Merrill Lynch Global Research
Source: BofA Merrill Lynch Global Research
Waste is another Earth theme; municipal solid waste has risen everywhere in recent years; and
Waste is another Earth theme; municipal solid waste has risen everywhere in recent years;
and yet only 25% of the
11billion tons
11billio
n tons
in waste collected annually is recycled or
recovered.
recovered.
Americans generate 21.5
million tons of food waste each year; composting that food would reduce
m
illio
n tons of food waste each year; composting that food would reduce
the same amount of greenhouse gas as taking 2 million cars off the road.
m
illion cars off the road.
BofAML’s Transforming World Atlas | 04 August 2015
25
26 BofAML’s Transforming World Atlas | 04 August 2015

26 BofAML’s Transforming World Atlas | 04 August 2015

26 BofAML’s Transforming World Atlas | 04 August 2015

Social Media

The global reach of social media

Facebook

1.4 billion monthly active users

Global social networking website

monthly active users Global social networking website China Population = 1.4 billion Social Media Tencent Qzone

China

Population = 1.4 billion

social networking website China Population = 1.4 billion Social Media Tencent Qzone : 540 million monthly
Social Media
Social
Media
website China Population = 1.4 billion Social Media Tencent Qzone : 540 million monthly active smart

Tencent

Qzone : 540 million monthly active smart device users

Chinese social networking website

active smart device users Chinese social networking website USA & Brazil Population = 529 million Source:

USA & Brazil

Population = 529 million

networking website USA & Brazil Population = 529 million Source: BofA Merrill Lynch Global Investment Strategy,
networking website USA & Brazil Population = 529 million Source: BofA Merrill Lynch Global Investment Strategy,

Source: BofA Merrill Lynch Global Investment Strategy, Facebook, Tencent, Worldometers

Social media drives Social media drives the sharing economy sharing economy.” .” BofA BofA Merrill
Social media drives
Social media drives
the sharing economy
sharing economy.”
.”
BofA
BofA Merrill
Merrill
Lynch
L
ynch
believes the sharing economy is a potential market opportunity of over
$450bn
$450bn
Facebook
Facebook
’s
s global reach is massive with 1.4
global reach is massive with 1.4
billion monthly active users, equal to the current population of
billio
n monthly active users, equal to the current population of
China.
China.
Tencent
Tencent
’ ’
s Qzone has 540
s Qzone has 540
million monthly smart phone active users, greater than the combined populations of the US and Brazil.
m
illio
n monthly smart phone active users, greater than the combined populations of the US and Brazil.
greater than the combined populations of the US and Brazil. 28 BofAML’s Transforming World Atlas |

28 BofAML’s Transforming World Atlas | 04 August 2015

greater than the combined populations of the US and Brazil. 28 BofAML’s Transforming World Atlas |

The Internet

Top 10 countries’ share of world internet usage

UK 1.95%
UK
1.95%
France United States 1.90% 9.58% Nigeria 2.30% Brazil 3.69%
France
United States
1.90%
9.58%
Nigeria
2.30%
Brazil
3.69%
Russia 2.89%
Russia
2.89%
China 21.97% Japan 3.74% India
China
21.97%
Japan
3.74%
India

8.33%

Germany

2.46%

Source: BofA Merrill Lynch Global Investment Strategy, Internet Live Stats

Lynch Global Investment Strategy, Internet Live Stats Around 40% of the world Around 40% of the
Around 40% of the world Around 40% of the world ’s ’s population has an
Around 40% of the world
Around 40% of the world
’s
’s
population has an
population has an
I Internet
nternet
connection today; back in 1995
connection today; back in 1995, less than 1% did.
,
less than 1% did.
The number of
The number of
I
nternet users has increased tenfold from 1999 to 2013; the first billion was reached in 2005, the second billion in 2010
and the
and the
third billion in 2014.
third billion in 2014.
BofA Merrill Lynch believes that the rise of the Internet makes the
BofA Merrill Lynch believes that t
he rise of the Internet makes the
Internet of Things
Internet of Things
a
potential $7tn industry by 2020.
of Things Internet of Things a potential $7tn industry by 2020. BofAML’s Transforming World Atlas |
of Things Internet of Things a potential $7tn industry by 2020. BofAML’s Transforming World Atlas |

BofAML’s Transforming World Atlas | 04 August 2015

29

Innovation Countries ranked b y Innovation #3 United States (90.69) #9 Finland (85.86) #2 Sweden

Innovation

Countries ranked by Innovation

#3 United States

(90.69)

Countries ranked b y Innovation #3 United States (90.69) #9 Finland (85.86) #2 Sweden (90.80) #6

#9 Finland

(85.86)

#2 Sweden

(90.80)

#6 Denmark

(86.97)

#5 Germany

(88.23)

#8 Switzerland

(86.02)

#1 South Korea

(92.10)

#4 Japan

(90.41)

#10 Taiwan

(83.52)

#7 Singapore

(86.07)

Source: BofA Merrill Lynch Global Investment Strategy, Bloomberg

Bloomberg calculates that South Korea is the world Bloomberg calculates that South Korea is the
Bloomberg calculates that South Korea is the world
Bloomberg calculates that South Korea is the world
’s
s most innovative country.
most innovative country.
This ranking is based on
seven
seven
weighted factors:
weighted factors:
R&D, manufacturing, high
R&D, manufacturing, high-tech density, researcher concentration, tertiary efficiency, productivity and patent activity.
-
tech density, researcher concentration, tertiary efficiency, productivity and patent activity.

tertiary efficiency, productivity and patent activity. BofAML’s Transforming World Atlas | 04 August 2015 31
tertiary efficiency, productivity and patent activity. BofAML’s Transforming World Atlas | 04 August 2015 31

BofAML’s Transforming World Atlas | 04 August 2015

31

BofAML’s Transforming World Atlas | 04 August 2015 33
BofAML’s Transforming World Atlas | 04 August 2015 33
BofAML’s Transforming World Atlas | 04 August 2015 33

BofAML’s Transforming World Atlas | 04 August 2015

33

America as Superpower The world’s lar g est defense bud g ets ($bn) Source: Mapping

America as Superpower

The world’s largest defense budgets ($bn)

Source: Mapping Worlds, SIPRI
Source: Mapping Worlds, SIPRI
The US spends more on its defense budget than the next 15 countries combined. The
The US spends more on its defense budget than the next 15 countries combined.
The US Pentagon spends more than is spent on health, education, welfare, and safety by all 50
US
US
states combined.
states combined.
In fact, the US has 5% of the world's population, but almost
50% of the world's total military expenditure.
Military spending
Military spending
and
and technological superiority make
technological superiority make
the US the sole global superpower, providing geopolitical clout
and
and
expectations as to role as global policeman.
clout and and expectations as to role as global policeman. 36 BofAML’s Transforming World Atlas |

36 BofAML’s Transforming World Atlas | 04 August 2015

38 BofAML’s Transforming World Atlas | 04 August 2015

38 BofAML’s Transforming World Atlas | 04 August 2015

38 BofAML’s Transforming World Atlas | 04 August 2015

Credit Default Risk

Sovereign credit default swap spreads (bps), July 31, 2015

Sovereign credit default swap spreads (bps), July 31, 2015 As of July 31, 2015 Source: Mapping
As of July 31, 2015 Source: Mapping Worlds, Bloomberg
As of July 31, 2015
Source: Mapping Worlds, Bloomberg
Sovereign Credit Default Swaps (CDS) are financial contracts which measure the risk of default on
Sovereign Credit Default Swaps (CDS) are financial contracts which measure the risk of default on sovereign debt; the higher the spread, the greater the risk of default.
Currently, Venezuela in the Americas, Ukraine
and
and
Greece in
Greece in
Europe, and Pakistan in Asia have the greatest sovereign credit risk in their respective regions.
Europe
,
and Pakistan in Asia have the greatest sovereign credit risk in their respective regions.
BofAML’s Transforming World Atlas | 04 August 2015
39

Red, White & Boom

US states renamed with countries with similar GDP levels

Washington Montana Oregon North Dakota Minnesota Idaho Michigan Wisconsin Wyoming South Dakota Michigan Nevada
Washington
Montana
Oregon
North Dakota
Minnesota
Idaho
Michigan
Wisconsin
Wyoming
South Dakota
Michigan
Nevada
Iowa
Nebraska
Utah
California
Ohio
Indiana
Colorado
Kansas
Illinois
Missouri
Kentucky
Arizona
Tennessee
Oklahoma
New Mexico
Arkansas
Mississippi
Georgia
Alabama
Texas
Louisiana
Florida
T
Alaska
Hawaii
Maine Vermont New York Pennsylvania Connecticut New Jersey Maryland Delaware West Virginia Washington DC
Maine
Vermont
New
York
Pennsylvania
Connecticut
New Jersey
Maryland
Delaware
West
Virginia
Washington DC
Virginia
North Carolina
South
Carolina

New Hampshire

Massachusetts

Rhode Island

Top 5 states with highest GDPs and their country equivalents

California = Brazil Texas = Canada New York = Spain Florida = Netherlands Illinois = Saudi Arabia

York = Spain Florida = Netherlands Illinois = Saudi Arabia Source: BofA Merrill Lynch Global Investment

Source: BofA Merrill Lynch Global Investment Strategy, AEI

Source: BofA Merrill Lynch Global Investment Strategy, AEI The US represents The US represents 23% of
The US represents The US represents 23% of global GDP; it is the 23 %
The US represents
The US represents
23% of global GDP; it is the
23
% of global GDP; i
t is the
world
world’s
’s
dominant economy.
dominant economy.
California’ ’
California
s economy ($2.3tn in 2014) is the same size as Brazil
s economy ($2.3tn in 2014) is the same size as Brazil
’ ’
s; the GDP of Texas is equivalent to that
s; the GDP of Texas is equivalent to that
of Canada; New York is as big as the Spanish economy.
40 BofAML’s Transforming World Atlas | 04 August 2015

Pax Americana

The world according to free-float equity market capitalization ($bn)

g to free-float e q uit y market capitalization ($bn) Source: Mapping Worlds, Bloomberg US stock
Source: Mapping Worlds, Bloomberg
Source: Mapping Worlds, Bloomberg
US stock market capitalization is $19.8tn (as measured by MSCI). The US currently represents 52%
US stock market capitalization is $19.8tn (as measured by MSCI).
The US currently represents
52% of world market capitalization, the highest since the 1980s.
Next largest markets
are Japan, UK, France, Switzerland, Germany and China.
markets are Japan, UK, France, Switzerland, Germany and China. BofAML’s Transforming World Atlas | 04 August
markets are Japan, UK, France, Switzerland, Germany and China. BofAML’s Transforming World Atlas | 04 August

BofAML’s Transforming World Atlas | 04 August 2015

41

The Stock Market Heat Map

2015 YTD performance

The Stock Market Heat Map 2015 YTD performance Source: BofA Source: Merrill BofA Lynch Merrill Global
The Stock Market Heat Map 2015 YTD performance Source: BofA Source: Merrill BofA Lynch Merrill Global

Source: BofA Source: Merrill BofA Lynch Merrill Global Lynch Investment Global Investment Strategy, FinViz Strategy, FinViz

Global Investment Strategy, FinViz Strategy, FinViz As of July 28, 2015. Note: Size of the boxes

As of July 28, 2015. Note: Size of the boxes represents the size of the company market capitalizations.

The Stock Market Heat Map shows 2015 YTD returns for the sectors and sectors and
The Stock Market Heat Map shows
2015 YTD returns for the
sectors and
sectors and
companies in the S&P 500 index, as of July 28, 2015.
500
index
, as of July 28, 2015.
The top
The top
seven
seven
companies with the largest impact on the S&P 500
index
index
during this time period are Amazon, Apple, Exxon, Chevron, Intel, Disney and Google.
42 BofAML’s Transforming World Atlas | 04 August 2015
T T   T Th h       h h e e m e

T

T

 

T

Th h

     

h h

e e

m

e em

e e P P

a k

ark

r

 
  Theme   Rationale   Investment Reports/Primer Picks
 

Theme

 

Rationale

 

Investment

Reports/Primer Picks

 

Older persons (60+) are expected to more than double from 841mn in 2013 to 2bn+ by

Pharma/Healthcare (age-related illness accounts for 66% of deaths). Financials/Insurance/Asset mgmt. ($30tn in assets to be transferred over next 30-40 years). Consumer/Senior-living/Managed care (revenues in US senior living expected to reach US$69.8bn by 2018E).

The Silver Dollar – the longevity revolution Primer Managed Care Primer 2015

2050E.

 

Aging

 

The spending power of 60+ consumers is expected to reach US$15tn by 2020E. US longevity sector alone is currently estimated at US$7.1tn, making it the world’s #3 economy.

 

Managed Care Trend Tracker

 

A potential healthcare revolution is developing within the field of genomics, which is a genetics discipline that applies recombinant DNA, sequencing methods to sequence and assemble genome structures.

Particular biotech and pharma companies are concentrating on certain diseases such as; acute lymphoblastic leukemia, breast cancer, cystic fibrosis, heart disease and diabetes, all of which have genetic components which could be addressed with a genomic approach. Investment entry-points include biotechnology, pharmaceuticals, and research & testing facilities.

What’s in store for biotech in 2015?

DNA sequencing update

Competitive trends in key therapy areas –

Genomics

 

2015

Genetic factors play a role in nine of the ten leading causes of death in the United States. There is vast potential for profitable novel gene therapies for heritable diseases.

 

Millennials are emerging as a new dominant economic force. They are the largest generation by workforce headcount in the US. Millennials account for $1.3tn in direct annual consumer spending. Annual income expected to grow to $8.3tn by 2025E in the US alone.

BofAML identifies attractive sectors that are poised for growth in the next three to five years, including accommodation, autos, eating-out, finance, media, technology, and travel.

Generation Next – Millennials Primer

Millennials

 
 

300 million Chinese now living rurally will move to cities by 2025. China's urban population growth is higher than that of the rest of Asia. The world’s urban population is expected to surpass 6bn by 2045.

Investment entry-points include home-building, infrastructure construction, civil engineering, air/road transport, and utilities.

Construction: The cycle with upside

Pan Asia Real Estate Monthly

Urbanization

 

Asia Pac RE: 2015 Year Ahead

 

India Infrastructure

 

People

 

China is the key global growth driver – since 2012, it has been the world’s largest “outbound tourism” market by number of travelers (109mn in 2014) and by spending

High potential are sectors that will be positively impacted by the high growth in Chinese traveler numbers. Sectors include: Gaming, lodging, also transport and retail. Gaming: Asia market revenue CAGR of 7% in coming years. Lodging: China generated US$37bn in room revenue with 1.7mn rooms.

China Tourism Primer

Asia Economics: Demographics & Deflation

 

China

 

(US$164bn).

 

     

BofAML expects AsiaPac casino gaming market to hit US$84bn by 2019 (CAGR of 7%) with Chinese gamers contributing US$61bn.

 

 

100m children have never having attended school. There are 800m illiterate adults. The cost of attending a private US university is rising at 4.5% pa. Private US college tuition (4yr) is set to rise to $356,000 by 2029. The global education market is expected to be US$6-8bn by 2017E. Every dollar invested in education returns US$10-15.

Education for all offers an opportunity to build healthy, prosperous and equitable societies. Investment entry-points include post-secondary for-profit colleges, publishing & content, educational technology, digital & on-line course providers (Massive Open Online Courses - MOOCs).

Global Education Primer

2015 Education Year Ahead

Education

 
 

Obesity rates have doubled over the past 30 years, and globally 1.4bn people are overweight and 500mn obese (2013: WHO). By 2030, 50-60% of the population in many countries, including the US and UK, are on target to be classified as obese. Large proportion of health care spending results from obesity, with HC costs over 40% higher for those obese than not.

Investment entry-points:

Globesity Primer Globesity Primer Picks Global food security European Food: Globesity: trimming the fat & working out the winners

1) Pharma, Healthcare & Medical technology; 2) Food, Food Retail, Quick Casual & Beverages; 3) Commercial Weight Loss, Diet Management & Nutrition; 4) Sports Apparel & Equipment.

Globesity

     

Global athletic report

 

”Vanity Capital” is the pursuit of, and the accumulation of, attributes and accessories to augment self-confidence by enhancing one’s appearance and prestige. BofAML believes spending on Vanity Capital is approximately US$4.5tn, larger than the US$3.7tn German economy, and 4th largest in the world.

Luxury beauty and personal care products. Luxury cars, private jets, yachts, cruises. Haute couture, bespoke clothing-wear, luxury hotels and residential units. High-end accessories; Art, High-end jewelry, Luxury watches Fine wines/spirits.

Vanity Capital: The global bull market in narcissism 2015 Consumer Discretionary Year Ahead

Vanity Capital

    Luxury in a post ECB world…
   

Luxury in a post ECB world…

Vanity Capital     Luxury in a post ECB world… 44 BofAML’s Transforming World Atlas |

44 BofAML’s Transforming World Atlas | 04 August 2015

Vanity Capital     Luxury in a post ECB world… 44 BofAML’s Transforming World Atlas |
  Theme Rationale Investment Reports/Primer Picks     Traditional global oil exploration has
 

Theme

Rationale

Investment

Reports/Primer Picks

 
    Traditional global oil exploration has plateaued and associated reserves are likely to diminish in
 

Traditional global oil exploration has plateaued and associated reserves are likely to diminish in the decades ahead. Current primary energy demand accounts for 7-9% of GDP and demand is expected to grow by at least 1/3 by 2035. The US shale exploration revolution has reduced import dependence, but other economies will require alternative energy sources. Energy efficiency standards are continuously rising.

End-use energy efficiency offers the greatest potential to lower energy demand – incremental demand is forecast to save 3.5mn b/d by 2018 via energy efficiency innovations. Longer-term, EU importing energy from the US, Germany restarting nuclear supply, Poland and even the Ukraine developing shale gas. Global solar energy demand to grow 15% YoY in 2015. Wind and solar expected to comprise 80% of new power generation capacity to 2030.

 

Global Energy Efficiency Primer

Renewable Energy: Primer Demand & Pricing driving Solar Renewable Energy: Wind turbines Japan environment ministry & coal power

Energy

Efficiency

 

China Wind Industry

New battery technologies are enabling a transition to greater electrically powered transport systems.

 
 

2014 was 29th straight year of global temperature > 20th century avg. 2014 was the hottest year on record since 1880; beating 2010. 10 warmest years on record have all occurred since 1997. Extreme weather is the new normal and impacts 10% of globe. Estimates of hurricane costs, e.g., Sandy (2012), run to $60bn+.

By 2030E, global food demand is set to increase by over 50%, water demand by up to 40% and energy demand by up to 50%. All the above will be challenged by extreme weather. Main entry-points: water; crop science; farming and agri-equipment; new generation biofuels; and Cleantech.

 

Weather Primer 2015 Property/Casualty Insurance Primer

FY2016 US Government budget clean energy focused

Extreme Weather

   

750m people have no access to clean drinking water. 2.4bn people have no access to proper sanitation. Water demand is set to exceed supply by 40% by 2030E. $28bn in US water spending expected over 20Y; 7-10% EPS CAGR. By 2050E, 3.9bn people will live under “severe” water stress. circa 45% of GDP in China is produced in water stressed provinces.

Water is a $600bn market today, but could be worth $1tn by 2020. Asia and South America have the greatest growth potential. Entry-points include desalination and waste treatment facilities, infrastructure providers, and water-friendly energy sectors.

 

Global Water Primer

Earth

 

Water Scarcity

   

 

 
 

Only 25% of the 11bn tons of waste collected annually is recycled and recovered. 3.5bn people lack access to basic waste management services. Global waste is a 4-11bn ton challenge & a US$1tn+ opportunity.

By 2020, the waste industry could be worth US$2tn, with Europe facing the toughest strategic challenges, & Asia/South America seeing the fastest growth. Entry-points are waste management, recycling, waste-to-energy, and sustainable packaging.

 

Waste Primer

Waste

Waste Treatment Industry Overview

 
 

Increasing water scarcity and an expanding global population, future food security will be an increasingly important challenge. 805mn people in the world are going hungry. There will be 9.6bn people to feed by 2050E. 70% more food production needed in coming years. There is a $2.3tn food and agriculture market.

BofAML identifies the following entry-points: Agri equipment, agribusiness and protein, farming, safety inspection firms, water treatment, health and wellness, waste reduction.

Feed the World: global food security primer South African Food Producers

Food Security

   

Latin America Agribusiness& FoodPrimer

 
     

By 2023, M2M could exceed 10% of global mobile service revenue (currently less than

Seek new companies with innovative, low-cost, secure and disruptive products. Entry-points include shale drillers, cybersecurity firms, online consumer services, electric vehicles, and sharing economy facilitators, nextgen auto safety & cashless society.

Creative Disruption Technology: The Wearable Wave Digital Banking Revolution

Disruptive

1%).

The BofAML Tech team believes that innovative hardware, social/mobile consumer, and cloud collaboration will be top pick stocks to outperform in the years ahead.

Technology

 

Cloud Wars VII

 

The internet-of-Things (IoT) is expected to have a market opportunity of $7tn by 2020.

Wi-Fi key technology in low-end consumer M2M apps, cellular technology should dominate for high-value applications. Other entry-points include, smart homes, integrated workplaces and targeted personalized mobile advertising & marketing.

M2M: Third wave of mobile growth

Internet-of-

The number of connected devices is set to double in the next three years to over 20bn.

Disruptive IoT space

Innovation

Things

 

 
 

In the past 10 years, the number of global industrial robots has grown 72%, while the number of US manufacturing jobs is fallen 16%. Industrial automation market is estimated to be worth around $140bn pa.

There are a number of long term industry drivers related to productivity which will drive growth, including global cost competition, energy efficiency, outsourcing, quality and EM wage inflation.

Automation for the people

Robotics

Autonomous cars

 
     

Cybercrime costs are at record levels, approx. US$500bn in annual costs. Cybercrimes are estimated to cost >$2 trillion globally by 2019E.

Cybersecurity is one of the fastest growing IT sub-sectors with an estimated CAGR of 11.3% from 2012 to 2017. Entry-points include cybersecurity consulting, software services and secure cloud storage facilities.

Global Security Primer

Cybersecurity

Safer World primer picks

 

 
 

eCommerce is a top growth story with estimated global growth of 23%. China’s eCommerce market is set to double the US in size by 2016.

Mobile user experience continues as a top focus area for marketplaces; cross border trade is the biggest 5 year opportunity. BABA and AMZN are prime examples of leading eCommerce.

2015 – Internet Year Ahead eCommerce: year ahead eCommerce is going global Indian eComm: Clash of Titans

eCommerce

India e-commerce is expected to increase from current US$7bn to US$200bn (CAGR of 36%).

 
 

increase from current US$7bn to US$200bn (CAGR of 36%).   BofAML’s Transforming World Atlas | 04
increase from current US$7bn to US$200bn (CAGR of 36%).   BofAML’s Transforming World Atlas | 04

BofAML’s Transforming World Atlas | 04 August 2015

45

Government

Markets

Government Markets Theme   Rationale Investment Reports/Primer Picks   Impactful future challenges
Government Markets Theme   Rationale Investment Reports/Primer Picks   Impactful future challenges

Theme

 

Rationale

Investment

Reports/Primer Picks

 

Impactful future challenges include, Middle Eastern energy (oil and nuclear), US/China trade policy (TPP), ISIS/Turkey, Russia/Ukraine, China/Taiwan, EU member exit risks, FX wars/strategic devaluations, and the future role of the US military.

The Chinese defense sector is a good area for the government to spend stimulus money on and is one positive consequence of geopolitical tensions.

Defensive in an age of turbulence Deciphering Defense – An Industry Primer 2015 Disruptive forces in defense

Geopolitics

 

 

Quantitative Easing has inflated wealth of equity of owners. Top wealthiest 1% own 40% of global wealth; bottom 80% own 7%. Top 1% pay 24% of US taxes, while 68% of taxes are paid by top 10%. Technological innovation has been a cause of greater automation and thus unskilled labor unemployment.

Capital flight in emerging economies that are in need of reform likely exacerbate excessive valuations of real estate assets in chic western cities. Investment entry-points include niche high-value brands of luxury products and other high-end discretionary stocks.

Piketty & Plutonomy Luxury Goods: The haves & have nots Luxury 2015 Year Ahead Financials: 2015 Year Ahead

Income

Inequality

   
 

Global capital gravitates to wherever there is financial liberalization and tough and credible regulatory reform. China and India governments have vowed to implement reform programs. New Japanese corporate governance guidelines encourage companies to be more efficient and return cash to shareholders.

Countries that have seen significant improvements in CA a/c balances and/or have enacted reform should outperform. Key beneficiaries include SOEs in competitive sectors, and private companies potentially gaining entry into previously protected areas of the economy.

China: Tax Reform Update Reform Scoreboard China – Local Govt. Reform LatAm Strategy: SOE reform? Japanese governance of insurance China Power Industry Reform Japan’s New Governance Code

Reform

 

 

 

The number of government regulations in the US has increased from 834,949 in 1997 to 1,040,940 in 2012. In 2014, an estimated $182bn in new US regulatory costs were introduced. Following the Global Financial Crisis, western governments have begun to readdress regulatory frameworks, impacting financial and non-financial sectors alike.

Healthcare reform in the US has been a boon for the HC insurance industry; S&P healthcare is up 155% (20% pa) since the new HC regulations came into effect March 2010. Financial regulations have impacted the permissible investments of banks and insurance companies, which in turn have greatly impacted higher-risk bond market sectors. Large cap companies have a greater capacity than smaller companies to bare the added costs of new regulations.

Navigating regulatory constraints 2015 Regulatory Outlook Global Bank Regulation Handbook New Australian audit reporting

Regulation

 
 

Since the global financial crisis, the global economy has had only a sluggish recovery marked by deflation risk. There is an outright war on deflation, making inflation our preferred contrarian strategy. Indebtedness has the potential to induce inflation in years ahead.

Investment entry-points to consider are TIPS, gold, small-caps, REITs, and banks, all of which tend to outperform in an inflationary environment.

The War on Deflation

Inflation

 

The decade-long trend of inflows into bond funds/outflows from equity funds has started to unwind. Great Rotation is now public policy in Japan. The announcement that the $2tn managed by GPIF and others need be more weighted towards risky assets is start of new period of capital outflow & yen carry-trade.

This multi-year theme will be bearish for the Japanese yen and bullish for Japanese stocks. As the Fed contemplates rate hiking, this is bullish for ZIRP losers like banks, large-cap equities and the US$. Equities > Bonds; IG > HY; Real Estate > Commodities; US$ > Gold; DM > EM, LC > SC.

The Great Rotation, the Great Rebalancing & the Great Risks Japan's alpha potential My world is my bond: a look at asset allocation trends

The Great

Rotation

 

Strong balance sheets are likely to be favored over low quality balance sheets, at least until the financial system heals and credit creation resumes. As US interest rates begin to rise, financially leverage will raise costs and will likely be a financial drag to many overly leveraged companies.

Creditors over debtors. Companies over countries.

Global Best of Breed keeps delivering High Quality Strategy Screen Quality is so expensive

Best of Breed

 

Screen Quality is so expensive Best of Breed   46 BofAML’s Transforming World Atlas | 04

46 BofAML’s Transforming World Atlas | 04 August 2015

Screen Quality is so expensive Best of Breed   46 BofAML’s Transforming World Atlas | 04

Clash of the currencies-The yuan’s rise will challenge America, but not before China changes

WHEN will the yuan rival the dollar? Many in China think it only a matter of time. Chen Yulu, a leading economist, says it will take 15 years. Wei Jianguo, deputy head of a major think-tank, puts it at 20. Officials are more circumspect: currency internationalization will be a long process, its pace determined by the market, says Zhou Xiaochuan, the central-bank governor. Outside China, opinions are more divided. Some think the yuan is already on the verge of displacing the dollar in Asia; others predict it will never get there.

What difference would it make if China’s currency did vie with the dollar for global pre-eminence? Scholars have looked for clues in the transition from the pound to the dollar, but that took place around the middle of last century in a very different context. The dollar and the pound were both convertible into gold at fixed rates, making the leap of faith for those switching from one to the other much less of a risk. Today, reserve currencies are not backed by gold. Their value is more slippery—a function of supply and demand.

What is more, the shift from the pound to the dollar reflected a passage of economic power, one that had started many decades earlier, between two allies with shared democratic values and economic ideas. China’s leaders talk of the yuan’s internationalization in peaceful terms. A more diverse monetary system will breed financial stability for the world, they say. But China’s rise poses a bigger threat to America than America’s did to Britain. For all the paeans to mutually beneficial development, China is a possible adversary, governed by an autocratic regime with a statist approach to the economy.

Some in China thus take a darker view of how competition between the yuan and

Some in China thus take a darker view of how competition between the yuan and the dollar will play out. Song Hongbing, author of “Currency Wars”, a conspiracy-laced series of books, foresees America fighting the yuan every step of the way. That has been shown to be wrong, so far. Over the past five years China has built a network for yuan-trading around the world, and America has not tried to thwart it. But a glimpse of the potential for conflict came last year when America tried, unsuccessfully, to persuade its allies to stay out of the Asian Infrastructure Investment Bank, launched by China. America is pushing for a Pacific trade deal that excludes China. And it is striking that among the many yuan-trading hubs established by China, from London to Singapore, the one glaring hole in the network

is New York.

many yuan-trading hubs established by China, from London to Singapore, the one glaring hole in the

America has good reason to worry about the yuan. Its emergence as a credible alternative to the dollar would undermine a cornerstone of American power. Sanctions against Iran and North Korea have had bite because of the dollar’s centrality to global finance. Some 45% of all cross-border transactions are denominated in dollars. So any bank with international business needs access to the American banking system, to clear payments or manage cash. And for that it needs an American license, which means it had better heed the sanctions. China knows

how potent this is. In 2013, after America hit North Korea’s main foreign-exchange bank with

how potent this is. In 2013, after America hit North Korea’s main foreign-exchange bank with sanctions, Bank of China stopped serving its North Korean client. In 2012, at the height of American pressure on Iran, China grudgingly cut imports of

Iranian oil.

North Korean client. In 2012, at the height of American pressure on Iran, China grudgingly cut

The dollar’s political leverage will dissipate as the yuan goes global. China is already close to launching a system for processing cross-border yuan payments. Although described blandly as a platform for facilitating transactions, its consequences could over time be far-reaching. It will allow banks and companies to move money around the world on a financial superhighway delinked from the dollar.

America will find it far harder to track who is using the China International Payment

America will find it far harder to track who is using the China International Payment System (CIPS) and for what. The threat of exclusion from the American financial system will start to lose its force. And China would have a new tool to propagate its way of thinking. When heads of state meet the Dalai Lama, the Tibetan spiritual leader regarded by China as a separatist, they may find their banks placed on the CIPS blacklist. This tactic would damage the yuan’s standing if used too liberally,

but the mere threat of punishment might be enough for China to get its way.

the yuan’s standing if used too liberally, but the mere threat of punishment might be enough

A global yuan would also win China more respect. China has shown that it wants to be seen as a good citizen of the world at times of trouble. In 1997-98, during the Asian financial crisis, and in 2008-09, during the global one, it locked the yuan in place against the dollar. This reassured other countries that it would not use depreciation as a crutch for its economy. As international use of the yuan increases, China will be in a position to do more, by serving as backstop to the global financial system.

Yuan-upmanship

When Lehman Brothers collapsed in 2008, the Federal Reserve provided emergency swap lines to banks

When Lehman Brothers collapsed in 2008, the Federal Reserve provided emergency swap lines to banks around the world. If a crisis hits in two decades’ time, China could play a similar role. It is assembling the framework to lend such support by

establishing currency swaps with many nations, from Argentina to Russia.

assemblin g the framework to lend such support by establishing currency swaps with many nations, from
The economic consequences of the yu an’s rise would be momentous. The “exorbitant privilege” that

The economic consequences of the yuan’s rise would be momentous. The “exorbitant privilege” that goes with being the issuer of the dominant currency would ebb for America. Because there is so much demand for dollar assets—more than 60% of all global central-bank reserves are held in dollars—America and companies based there can sell bonds for higher prices than they could otherwise. Since bond yields move inversely to prices, this means it costs less for Americans to borrow—so it is easier for the government to fund its deficits and for firms to raise

money.

less for Americans to borrow—so it is easier for the government to fund its deficits and

A global monetary system with multiple poles could in theory engender greater economic stability

early 2000s thanks to the dollar’s status. America is also able to issue all its

early 2000s thanks to the dollar’s status. America is also able to issue all its debt in dollars. The currency mismatch that often triggers debt crises in smaller economies is thus off the cards; the Federal Reserve can simply print more dollars to pay off the government’s liabilities. The benefits add up to $100 billion a year for America,

estimates the McKinsey Global Institute.

liabilities. The benefits add up to $100 billion a year for America, estimates the McKinsey Global
But there are also downsides. Demand for the dollar as a reserve asset means the

But there are also downsides. Demand for the dollar as a reserve asset means the currency is stronger than it would otherwise be, making it harder for American exporters to compete. McKinsey found this lops as much as $60 billion off GDP.

Net, America still gains 0.3-0.5% of GDP a year thanks to the dollar’s status.

is lops as much as $60 billion off GDP. Net, America still gains 0.3-0.5% of GDP
When the yuan rivals the dollar, China will eat into this pie. Investors from other

When the yuan rivals the dollar, China will eat into this pie. Investors from other countries might sell off dollar assets since they would have alternatives in the yuan; this would drive up American interest rates and weaken the economy. Researchers have shown that the Fed can mitigate but not fully counteract this effect by buying the bonds sold by foreigners. The upshot is that America would have to work harder to retain the confidence of global investors, perhaps leading it to rein in government

debt.

would have to work harder to retain the confidence of global invest ors, perhaps leading it

But the changes required of China would be even more dramatic. In his account of how the dollar remained the world’s pre-eminent currency despite being at the centre of the global financial crisis, Eswar Prasad, an economist at Cornell

University,

explains that its strength resides in America’s institutions. Deep financial

markets, a robust legal system and a generally transparent political process underpin