正确、错误与回报：无罗盘巡航

15April2019 GlobalEQUITIESMSCIACWorld–GDPGrowth(marketprices)vsEPSgrowthrates–economiesneedtoacceleratemuchhigherthan3%GlobalEPSGrowthRate(YoY)80%60%

Rights,Wrongs&ReturnsKeypointsKeypointsHavewedoneenoughtostabilize?Yes.Reflate?No.Morehastobedone.Investorsaretransitingthroughtwilightfrommonetarytofiscallevers.Timingisuncertain.Westickwithsecularstrengthsinstocks&countries.20%-100%

R²=0.2378R²=0.32360% 1% 2% 3% 4% 5% WorldGDPGrowthYoY(Mktexchangerate)

Notenoughtostabilizeatlevelscompatiblewithassetprices…Asinvestorscontemplatetherestof’19and‘20,thekeyquestioniswhetherpressureshavetrulyabated&theextentofanylikelyreflation.OverthelastthreemonthsallmajorCBsexecutedasharpU-turnfromnormalizationtosupport.AtSource:MSCI;FactSet;Macrobond;MacquarieResearch,April2019MQ–GlobalQualitySustainableGrowthPortfolio–up250bpsYTD;14%sinceinception1191141091049904-Feb-1604-Apr-1604-Feb-1604-Apr-1604-Jun-1604-Aug-1604-Oct-1604-Dec-1604-Feb-1704-Apr-1704-Jun-1704-Aug-1704-Oct-1704-Dec-1704-Feb-1804-Apr-1804-Jun-1804-Aug-1804-Oct-1804-Dec-1804-Feb-1904-Apr-19"GlobalQualitySustainableGrowth"portfolio(reltoMSCIACWorld,$TRbasis)Source:MSCI;Bloomberg;MacquarieResearch,April2019InsideKeyrecommendationsandportfolios 2TheNewEraisdawning–fusingmonetary&fiscal Riskone:Liquidity–upordown? 5Risktwo:Doingtoolittle–‘dribs&drabs’ 11Riskthree:Doingtoomuch–‘freemoneyforall’ Riskfour:Stabilizingatawronglevel 21InvestmentStrategies–navigatingwithoutacompass Appendices 36AnalystsMacquarieCapitalLimitedViktorShvets+85239223883viktor.shvets@PerryYeung+85239224769perry.yeung@

thesametime,Chinahasabandoneditsill-conceivedde-leveragingtofocusonsupportinggrowth.Theonlyremainingquestioniswhetheralloftheseactionsaresufficienttojustifycurrentassetpricesorwhethermoreneedstobedone.Intheformercase,asmooth‘goldilocks’environmentwouldprevail.Inthelatter,needtobraceforvolatilities.Itisaforkintheroad,withnomiddleground.Investorsaretodayinanuncharteredterritory,withneitherUSconsumersnorChinayetwillingtounderwriteamuchmorerobustreflationwhileCBsaretryingtofindthe‘middleground’ofbeingsupportivebutshortofinjectingfreshliquidity.Giventhattheworldislabouringunderamountainofexcesscapital,aremerewordsandsignsofCBsconcernssufficienttounfreezecapitalandensureitsfastermultiplication?DittoforChina-islackoferosionofshadowbankingandacontainedriseinlocalgovernmentdebtenoughtostimulateglobalreflation?Indicationsthusfarsuggestno.Globalliquidityisstillerodingwhilereflationarymomentumremainsmutedandhesitant.Equities(perpetualbulls),focusonadecliningratesandahopeforgrowthwhilebonds(perpetualbears)expectdisinflation.Thetwoarenotnecessarilyincompatible.Equitiesrefusetolowerterminalvalues,evenastheycutWACC.Ontheotherhand,bondinvestorsstillharbourillusionsthatdebtsarerealandthatCBs/statesfacebindingconstraints.Theyarebothakintomedievalsailorstryingtofindashorewithoutacompass.…moremustbedone.KeyRisk:toolittlefirst&thentoomuchOurconcernisnotthatweareheadingintorecession,butratherthatgrowthratesmightstabilizeatlevelsincompatiblewithprevailingassetprices,leadingtorisingvolatilities.Ifglobalgrowthstaysat~3%(4Q’18-2.8%),itwouldbeunlikelytounderwrite’20-21EPSgreboundto~10%-15%clipimplicitincurrentvalues.However,weequallymaintainthatthecentreofgravityisalreadyshiftingtopro-cyclicalpolicies.Aselectionsrewardextremes,webelievepoliticsarelikelytodelivermorerobuststimuliinto‘20-21andthesemightprovetobemoredurableandmostlyfiscally-led.Indeed,thereisalreadyarisingchorusofvoicestosupportsuchashift(e.g.MMT,post-Keynesians).Itisjustamatteroftime.Thusinvestorsareinatransitionfrom‘CBbubbles’to‘fiscalbubbles’,thenextlikelystageinathree-decadejourneyofmanagingbubblesinordertosafeguardrealeconomies.Wedoubtthattherearemanyotherrealisticoptions,andinourview,investorswhoworrythatCBsandstatesarerunningoutoftoolsarewrong.Thereisnolimit,albeitatacostofdestroyingwhateverisleftofprivatesectorsignals.WhiletherearenogoodLToutcomes,thereisalsononeedtoexpectaninstantArmageddon.Thekeythemeforthenext12months:toolittlesupporttobeginwithbutprobablytoomuchlater,aswetransitthroughthetwilightfrommonetaryleverstoafusionofmonetary&fiscalpolicies.Thiswillalterinvestmentstrategies,butfornow,wearestayingwithsecularstrengthsinstocks&markets.Pleaserefertopage46forimportantdisclosuresandanalystcertification,oronourwebsite/research/disclosures.KeyrecommendationsandportfoliosFig1MQGlobal‘Quality/Stability’Portfolio(April2019) Fig2MQGlobal‘Thematics’Portfolio(April2019)Source:MacquarieResearch,April2019 Source:MacquarieResearch,April2019Fig3MQASXJPortfolio(April2019) Fig4MQASXJ‘Thematics’Portfolio(April2019)TickerReco.TickerReco.CountryBABAUSOPCHINA700HKTencentOPHONGKONG005930KSSamsungElectronics OPSOUTHKOREA2330TTTaiwanSemiconOPTAIWANHUVRINOPINDIABIDUUSBaiduADR OPCHINA002415CHA CHINA914HKConchCementH OPHONGKONG27HKEntertainment OPHONGKONGMSILINSuzukiOPINDIAHMSPIJPTHanjayaMandalaSampoernOPINDONESIAHCLTINHCLOPINDIACOALINCoalINDIA601888CHChinaTravelServiceA OPCHINA288HKWHOPHONGKONGNESTINNestleOPINDIA669HKTechtronicOPHONGKONG1093HKCSPCPharmaceuticalGroupOPHONGKONGBDMSTBDusitOPTHAILANDGCPLINGodrejConsumerProductsOPINDIASTESPSingaporeTechsEng OPSINGAPOREUNTRIJTractors OPINDONESIAHMPROTBHomeProductCenter THAILANDSATSSPSATS OPSINGAPORESource:MacquarieResearch,April2019 Source:MacquarieResearch,April2019Fig5 MQJapanPortfolio(April2019) Fig6MQAsiaexJP–countryallocationtilts(%)TickerNameReco.6758JPTickerNameReco.6758JPSonyNeutral9983JPFASTRETAILINGN/R4063JPShin-EtsuChemicalOP7974JPNintendoN/R6981JPMurataManufacturingOP8035JPTokyoElectronOP7741JPHOYAOP8113JPUnicharmOP2267JPYakultHonshaOP6506JPYaskawaElectricOP6857JPAdvantestOP6268JPNabtescoOP

-3 -2

0 1 2 3Source:MacquarieResearch,April2019 Source:MacquarieResearch,April2019Peopleandpoliticsmovingtothestageof……fusingmonetaryfiscalpolicies…fiscalleverstakingthelead

TheNewEraisdawning–fusingmonetary&fiscal‘Onlythingwehavetofearisfearitself’,FDRInauguralAddress,1932InthemiddleoftheworstDepressiononrecord,FDR’sinauguralPresidentialaddressurgedpeopletogobeyondhopelessnessandasheargued‘convertretreatintoadvance’.Hewentbeyondthatbyplacingtheblameontheshouldersofbankersandprivatesectorarguingthat‘…rulersoftheexchangeofmankind’sgoodshavefailed…practicesoftheunscrupulousmoneychangersstandindictedinthecourtofpublicopinion,rejectedbytheheartsandmindsofmen…themoneychangershavefledfromtheirhighseatsinthetempleofourcivilization…wemaynowrestorethattempletotheancienttruths…themeasureoftherestorationliesintheextenttowhichweapplysocialvaluesmorenoblethanmeremonetaryprofit’.AlthoughfarmoreeloquentthanMaxineWaters(ChairpersonoftheFinancialServicesCommittee),theimplicationsoftoday’sspeechesarenotmuchdifferenttoFDR’saddress.Whileclearlytheywouldneverblamepeopleandtheirrepresentativesforcreatinganenvironmentthatencouraged‘moneychangers’toactunscrupulously,asin1932,today’scapitalismisundergoingamajorchange.WefirmlybelievethatinvestorsarewitnessingatransitionfromCentralBank(CB)andfinancialization‘bubbles’to‘fiscalbubbles’,aspeoplerevoltagainstrisingincomeandwealthinequalitiesanddemandprotectionfromerodingvalueandmarginalpricingpoweroftheirservices.Asdiscussedinournotes,this‘Maslowiandisappointment’isfuelledbyadeadlyandself-reinforcingembraceoftechnologicaldisruptionandoverfinancialization,anditisunstoppable.Unlike1932,thisisnotdrivenbyunemploymentordecliningwages,butratherbyerodinglife-satisfactionanddisintermediationoflabour,whereinHarari’swords,ultimatelytherewouldbe‘nocureforirrelevance’.Whilemostcommentatorsarguethattransitiontothenewworldwouldtaketimeandremainsuncertain,itisthemarginalchangesratherthanaveragesthatdetermineeconomicandpoliticaloutcomes;andonamarginpeoplefeel(justifiably)thattheyaresufferingfromadecliningmarginalutilityandthatwealthandincomeinequalitiesarewidening.Theresponsetothetwinevilsofdecliningproductivityanddroppingmarginalpricingpowerwastoembarkfrom1980sonwardonaperiodofintensefinancialization,thusbringingfutureconsumptiontothepresentbyrelyingonassetpricestofillthevoid.Alas,financializationhasitsnegativeconsequencesoffurtheraggravatinginequalitieswhilerequiringaneverdecliningcostofcapital,whichinturnpreventsclearances(causingevenstrongerdisinflation)andcontributestowardsaccelerationinthepaceoftechnologicalsubstitution.Theremedywasinmanywaysworsethanthedisease.Nowpeoplearerebellingagainstfinancializationwithoutrecognizingthatitwasthefinancializationthatenabledwealthcreationoverthelastthreedecades.ThereisnodoubtthatifweevertrytoconvergemoneysupplyandnominalGDP,valueofassetswoulddrop,andthesamepeoplewilldiscoverthattheirpensionsarenotworthmuch,andthattheirhousesareunderwater.Thereisnowayoutofthis,otherthancontinuingtoensurethatassetpricesareholisticallysupported,anditcanbeonlyachievedbyliquiditygrowingfasterthannominalGDPandvolatilitiesmustbeconstrainedtoanevernarrowerranges.Althoughmonetaryleversarethekey,increasinglywebelievethatpublicsectorswouldcometorelyfarmoreextensivelyonfiscalpolicies,notonlybecausetheyarelessdistortingbutalsobecausetheyaremoredurable.Insteadofencouraginggrowththroughwealthcreation,portfoliore-allocationandtrickledowneconomics,fiscalpoliciescaninjectstimulidirectlyintothe‘bloodstream’,similarinawayitworksinChina.Itdoeshavetwonegativeconsequences.First,itiswastefulandlessefficient,andsecond,thereisalwaysaquestionofconstraintsonfiscalpolicies.Ignoringthequestionofwastefulness,asalternativessuchasmonetaryleversarejustaswasteful,fiscalpolicies(suchasinfrastructureinvestment,incomesupportsetc)arelikelytobelessdistortingfromanincomeandwealthdistributionperspective.Intermsofabilitytoaffordspending,wemaintainthatinvestors’perceptionsoflimitsofCBandstatepowerarewrong.ThisiswhathasbeenassumedinthecaseofJapanin1990s’sorChinaoverthelastdecade.Whiletherearemanydifferencesbetween(andwithin)MMTandpost-Keynesianstrands,thekeyargumentthattheyshareisthatifacountryissues(orborrows)initsowncurrencyandhasarelativelyhighdegreeofmonetarysovereignty,andalsomaintainssturdyinstitutionalsettings,thereisalmostnolimitshowfarthatcountrycango.Inflationistheonlylimitation,however,aswehavehighlightedinthepast,unlike1960s-70s,wetodayliveinstronglydisinflationarytimes.MMTorpost-Keynesianargumentsdonotapplytoeverycountry,andindeed,mostleastdevelopedEMsaswellasweakmembersofcurrencyblocks(suchasGreece)liveinadifferentworld,theaboveconditionsapplytoalmosteveryoneelse,includingUS,UK,Japan,ChinaandsomesmallerWhiletiminguncertain,nextwaveselectionsshouldconfirmtheInvestorsareresidinginaTwilightbetweenpolicyshiftsInviewofuncertainties,wecontinuetogowithsecularstrength

countries(e.g.AustraliaorCanada)orisolatedcountries(Russia).WebelievethatjustasFDR’sspeechinauguratedabrandnewversionofCapitalismofmuchlargerandmoredeterminedpublicsector,today,MMTandothernew(ormostlyold)theoriesforeshadowafarmoredecisiveshiftawayfromindependentCBsandaversiontomixingmonetaryandfiscalpoliciesandfromtheworkingassumptionthatprivatesectorshouldbeincharge,toanewworldwherepublicsectorisfirmlyinchargeandwhereCBsworkinunisonwithpublicandfiscalauthorities,andwhereprivatesectorcontinuestoatrophy(inanycase,ithasalreadybeenatrophyingforseveraldecadesnow).Thetimingofthischange?Itisalreadyhere.Ithasalwaysbeentherealityincountriesthathaveneverbecomeconventionalcapitalistsocieties,suchasChinaandJapan,anditisnowpenetratingdiscussionintheWest.Aselectoralcyclesevolveoverthenexttwo-to-threeyears,peoplearelikelytoshiftthepoliticalpendulumtowardstheextremeleftorright,andweareconvinced,thatthecentrewouldcontinuetogiveway.Whilethereareconsiderablepolicydifferencesbetweenthetwo,thereisalsoagreatdealincommon.Fascist,CommunistsandPopulistsglorifythestateandnationalsovereigntyandarepro-cyclical.Theyhaveastrongpreferenceforusingleversofstatepowertodriveinvestmentandspending.Allthreelovesmall(‘cottage’)industriesbutarealsoinfavourofbuildingnationalchampions,aslongastheseobeygovernmentdirectives.TheyaretheothersideofReagan,Thatcher,Friedman,vanHayekorCoase,andideasthatdominatedWesternnarrativefromthelate1970suntilfiveortenyearsago.StartingwiththeEuropeanelectionsinMay2019,andflowingthroughnationalandlocalelections,incountriesasdiverseasSpain,Australia,CanadaandUStotheUK,Germany,SouthKoreaandSwitzerland,thenexttwoyearsarelikelytoconfirmashifttomoreproactivestatepolicies.Atthesametime,intellectualandacademicargumentsarealsomakingheadway,andarelikelytogomainstream.Asweprogressthrough2019-21,itwouldbeincreasinglyallhandstothepump.Whathappensinthemeantime,andinparticularoverthenextsix-to-twelvemonths?Webelievethatinvestorsareresidingina‘twilightzone’betweentwobubbles.Hence,thereshouldbemorethanusualamountofvolatilities,aspoliticalandeconomicprioritiesshift.Weareconvincedthatgreatervolatilityisrequiredformonetaryandfiscalpoliciestofinallyfuse,andwearelikelytogetit,aspublicsectorstentativelyandgingerlymovetowardsacceptingtheinevitable.Thekeymessagefromthisreportisthatpolicymakersareprobablylikelyto‘undercook’beforeultimatelyoverprovidingsupportandofferingfarmorestimulatorypolicies.Thehardquestioniswhenwouldinvestorsstartdiscountingthisfundamentalshift?Ourguessisthatweshouldseeitin2019-20,aselectionscontinuetodeliverresultsconsistentwithchange.Fromatacticalperspectivefourkeyconclusions:Thegloballiquidityisstilldraining,eventhoughCBsmanagedtoarrestarapidriseinvolatilitiesthatwasexperiencedtowardstheendof2018.Thekeyquestioniswhetherwordsandguidancecangobeyondloweringtensionsandleadtoafastermultiplicationofmoney?Theevidencethusfarsuggestsno,andhence,moreisneeded.ThesignificantuptickinChina’ssupportsisstartingtostabilizeglobalreflationarymomentum.WhetherwelookatOECDleadingindicators,ortrade,therearesignsofstabilityandsomeimprovement.Isthatenough?No,theworldcannotlivewithstableChina;weneedreflationaryChina,andthereisnochoicebutforthestatetoembarkonmorerobuststimuli,althoughprobablyonlymuchlaterin2019orearly2020.Asin2010,Europemightbeasourceofconsiderableinstability.AtthisstageourviewisthatonceindecadeswholesalechangeinallofthekeypersonalitieswouldfreezeandparalyseEU,ratherthancausingamajordislocation.Webelievethatin2019,EUwouldneithercontributenorwoulditdetract.However,in2020-21,thereisahighprobabilityofEUbecomingfarmorereflationary,joiningUSandChina.Intheshort-term,wedonotbelievethatenoughhasbeendonetoensureglobalreflationtoalevelthatiscompatiblewithtoday’sassetprices.Hence,wedoexpectvolatilitiesasweprogressthrough2019.However,ifourviewsarecorrect,alltheplayersshouldbecomemorereflationaryinto2020,andequitieswouldthenreflectit.The‘twilight’zonesarehard.Itisneverclearhowpolicieswouldevolve.ToolittleattheearlierstageimplieshighervolatilityandEMunderperformance,toomuchlater,impliesasubsequentsurgeinEMequitiestowardstheendof2019/early2020.Itishighlyuncertain,andhence,ourpreferredstrategyistocontinueinvestingintostrengthofQuality,SustainabilityandThematics.Country-wise,wearestayingwithContinentalstateswithlargedomesticbaseandsecularratherthanjustcyclicaldrivers.ThiscontinuestotiltustowardsChinaandIndia.Allmeasuresofliquidityflowsremainnegative.Thisappliesto……publicsectorasitdoesto…

Riskone:Liquidity–upordown?‘Liquidityisoxygenforafinancialsystem’,RuthPorat,CFOAlphabetAlthoughitiswell-recognizedthatliquidityebbsandflowsarethemostimportantfactorsdeterminingperformanceofassetpricesandtheirvolatility,itisanexceptionallyelusiveconcept.First,itisfarclearwhatliquidityis,asclearlyitconsistsofseveraldistinctpartsthatcanariseoutofbothpublicandprivatesectors.Second,liquidityhasastrongandintimaterelationshiptoconfidenceandmomentum,creatingaproblemofcausation.Anothercomplicatingfactoriswhereasinthepastmostofliquiditycamefromprivatesectorsmultiplyingmoneyinproportionsthatwereconsistentwiththedegreeofprivatesectorcyclevisibility,overthelasttwodecades,publicsectors(firstinJapan,andlateracrosstheworld)haveassumedthedominantrole,astheguardianseconomicandcapitalmarketcycles.Hence,theabilityandwillingnessofprivatesectortomultiplymoneydeteriorated.Itwasaninevitableoutcomeofeconomiesacceptingassetpricesandfinancializationastheonlyacceptablemechanismforsatisfyingsocietaldemandforanongoingwealthcreation,despitesaggingproductivity.Asdiscussedinourpriornotes,wecloselymonitorthreetypesofliquidity:Publicsectorliquidity,whichmeasureshowaggressivelyCentralBanksadjusttheirrespectivebalancesheets.WefocusonG4plusSwitzerland;wedonotviewChinaasaliquiditygenerator(duetoitsclosedcapitalaccount)butratherasprimarilyareflationaryagent.Broadmeasuresofliquidity,orinotherwords,combiningpublicandprivatemultiplication.WelookatM2aswellasourestimatesofM3(astheUSstoppedreportingofficialM3numbersin2006).US$liquidity,whichmeasuresbothchangesintheUSmonetarybaseaswellasmovementinFXreservesandtheUSTreasuriesownedbyforeigners.Whatdothelatestnumbers(mostlyrelatedtoFebruary/March2019)showus?First,publicsectorliquiditycontinuestocontract.Unlike‘16-17,CBsarestillinthemodeoftryingtolimitthedegreeofpublicsupport.WhiletheFedislikelytosoonbecomeanetbuyeroftheUSTreasuries,thenetamountsarenotgoingtosignificantlyaltercurrenttrends.ThesameappliestotheproposedreplacementofTLTRO’sbyECB.Hence,weexpectthatpublicsectorliquiditywouldcontinuetohuglevelsatclosetozerothroughtherestoftheyearvsglobalnominalGDPexpectationsof~6%andforadvancedcountriesof~4%.Inotherwords,absentachangeinpoliciesinfavourofanaggressiveexpansionofCB’sbalancesheets,itseemsunlikelythatpublicsectorwouldprovidesufficientliquiditytocovernominalGDPandoffersomesparecashforassetprices.Fig7G4+SwissCentralBankBalanceSheet(US$bn) Fig8 G4+SwissCBBalanceSheet(%YoY)8,0004,000Jan-99Dec-99Nov-00Oct-01Sep-02Aug-03Jul-04Jan-99Dec-99Nov-00Oct-01Sep-02Aug-03Jul-04Jun-05May-06Apr-07Mar-08Feb-09Jan-10Dec-10Nov-11Oct-12Sep-13Aug-14Jul-15Jun-16May-17Apr-18

30.0%25.0%20.0%15.0%10.0%5.0%0.0%-5.0%Oct-09Mar-10Oct-09Mar-10Aug-10Jan-11Jun-11Nov-11Apr-12Sep-12Feb-13Jul-13Dec-13May-14Oct-14Mar-15Aug-15Jan-16Jun-16Nov-16Apr-17Sep-17Feb-18Jul-18Dec-18FedECBBoJBoESwiss G4+Swiss(YoY)Source:Bloomberg,MacquarieResearch,April2019 Source:Bloomberg,MacquarieResearch,April2019Second,thebroadermeasuresofliquidity(whetheritisM2orM3),alsoarenotyetshowinganymeaningfulacceleration.Indeed,theoppositeistrue,withourmeasureofglobalbroadliquidity(M2)fallinginFebruary2019totherecentlowoflessthan1%(comparabletoaslumpinthesecondhalfof2015).AsfarasourestimatesofM3,thegrowthratesarealsoseemtobede-acceleratingtowards~3%.Bothnumbersare…broadmeasuresofliquidityand…

completelyoutofkilterwithprojectednominalGDPgrowthrates,andclearlyoffernosurplusliquiditytosupportassetpricesandconstrainvolatilities.Inessence,thereisnoevidencethatprivatesectorsarerestartingamorerobustmultiplicationofmoney.Althoughthisisinlinewithourlong-standingviewthatprivatesectorisfacingsomanyheadwindsthatisunlikelytoeveragainbecometheprimarydriver,mostcommentatorsinthemarketplacearestillhopingthatreturntonormalityisaroundthecorner,andthatallwhatisneededisforpublicsectortostepoutoftheway.Wemaintainthatthisillusionisunlikelytoevercometopass.Fig9GlobalM2(%)–G4+Switzerland+China–below1%clip

Fig10G4–MoneySupplyestimate(M3)vsNominalGDP(%)20%15%10%Jan-10Jul-10Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19

6.05.04.03.02.01.00.0-1.0Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16Sep-16Dec-16Mar-17Jun-17Sep-17Dec-17Mar-18Jun-18Sep-18Dec-18-2.0Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16Sep-16Dec-16Mar-17Jun-17Sep-17Dec-17Mar-18Jun-18Sep-18Dec-18G4+Swiss+China

SurplusLiquidity NominalGDP M3Source:Bloomberg,MacquarieResearch,April2019 Source:Bloomberg,MacquarieResearch,April2019Fig11GlobalVelocityofMoney(GDP/M2)(x) Fig12US–VelocityofMoney(GDP/M2)(x)–slightpickupVelocityofMoneyGDP/M2VelocityofMoneyGDP/M2Dec-95Dec-96Dec-97Dec-98Dec-99Dec-00Dec-01Dec-02Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10Dec-11Dec-12Dec-13Dec-14Dec-15Dec-16Dec-17Dec-18Dec-95Dec-96Dec-97Dec-98Dec-99Dec-00Dec-01Dec-02Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10Dec-11Dec-12Dec-13Dec-14Dec-15Dec-16Dec-17Dec-18

2.21.45x1.43x=HistoricLow1.45x1.43x=HistoricLow2.0Dec-59Mar-62Jun-64Sep-66Dec-68Mar-71Jun-73Sep-75Dec-77Mar-80Jun-82Sep-84Dec-86Mar-89Jun-91Sep-93Dec-95Mar-98Jun-00Sep-02Dec-04Mar-07Jun-09Sep-11Dec-13Mar-16Jun-181.3Dec-59Mar-62Jun-64Sep-66Dec-68Mar-71Jun-73Sep-75Dec-77Mar-80Jun-82Sep-84Dec-86Mar-89Jun-91Sep-93Dec-95Mar-98Jun-00Sep-02Dec-04Mar-07Jun-09Sep-11Dec-13Mar-16Jun-18G4+Swiss+China

Velocity Average(1990-2015) Average(1960-1990)Source:Bloomberg,MacquarieResearch,April2019 Source:Bloomberg,MacquarieResearch,April20191.701.601.701.601.501.401.3000.900.801.0x

Fig14 Eurozone–VelocityofMoney(GDP/M2)(x)–historiclows0.54x=Historiclow0.54x=HistoriclowMar-57Dec-59Sep-62Jun-65Mar-68Dec-70Sep-73Jun-76Mar-79Dec-81Sep-84Jun-87Mar-90Dec-92Sep-95Jun-98Mar-01Dec-03Sep-06Jun-09Mar-12Dec-14Sep-17Mar-57Dec-59Sep-62Jun-65Mar-68Dec-70Sep-73Jun-76Mar-79Dec-81Sep-84Jun-87Mar-90Dec-92Sep-95Jun-98Mar-01Dec-03Sep-06Jun-09Mar-12Dec-14Sep-17

1.80Mar-95Jun-96Sep-97Dec-98Mar-00Jun-01Sep-02Dec-03Mar-05Jun-06Sep-07Dec-08Mar-10Jun-11Sep-12Dec-13Mar-15Jun-16Sep-17Dec-18Velocity Average(1957-1987)Mar-95Jun-96Sep-97Dec-98Mar-00Jun-01Sep-02Dec-03Mar-05Jun-06Sep-07Dec-08Mar-10Jun-11Sep-12Dec-13Mar-15Jun-16Sep-17Dec-18Source:Bloomberg,MacquarieResearch,April2019 Source:Bloomberg,MacquarieResearch,April2019Third,theUS$liquidityisquiteoftenthesinglemostimportantsub-setofgloballiquidity.ThisisduetotheuniquepositionoccupiedbyUS$asthekeyglobalstoreofvalueandtransactioncurrency.Whilethereisagreatdealofdiscussionofloomingde-dollarization,wemaintainthatitisjustawishfulthinking.IsolatedeconomieslikeRussia,IranorVenezuelacannotmakemuchdifference,whileforRMBtobecomeawidelyfunctioningreservecurrency,Chinawouldneedtoembarkonamuchdeeperandprofoundreformagenda,whichwecontinuetoviewasincompatiblewithChina’spoliticalandeconomicset-up.Hence,wemaintainthatUS$isheretostayformanyyears(possiblydecades)tocome.Itisstillresponsiblefor~62%ofglobalreserves,~40%ofSWIFTtransactions,~75%ofcrossborderfinanceand75%-80%ofglobaltrade.Only€comesanywhereneartoUS$,butalas,itisaflawedcurrencyproject.RMBremainsaverysmallglobalcurrency,andjustlikeittookalmostacenturyfortheUS(asthedominanttraderatthetime)toreplace£,itwouldtakeawhileforRMBtogettothesameposition.Indeed,wewouldgoasfarastosaythatbeforeRMBisabletochallengeUS$,theglobalmonetarysystemmightchangesoprofoundlythatUS$mightbeultimatelyreplacednotbyRMBbutratherbyvarietyofcryptocurrenciesandbartertransactions.RmbOtherC$RmbOtherC$2%4%£2%Yen4%5%€21%US$62%

Fig16 GlobalSWIFTTransaction(%Share)–US$and€dominateJan-13Jan-14Jan-15Jan-16Jan-17Jan-18Feb-19USD33.5%38.8%43.4%43.0%40.7%38.5%39.1%Eur40.2%33.5%28.8%29.4%32.9%32.8%35.0