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Trump policies: Will America First make America Second?
Despite President Trump being in office since January, major policy changes and risks still lie ahead. Markets have signaled unease over the upcoming debt ceiling. Uncertainty over tax reform could be delaying the investment decisions of companies. A protectionist trade agenda could erupt at any time. In our opinion, policies coming from DC not only alter the economic and Fed outlook, but could induce changes and shocks across global markets.
We expect the debt ceiling to be passed, but short-term Treasury markets are likely to react nervously as deadlines approach in late September; not as pronounced as in 2011, but worse than in 2015. Congress would then turn to taxes, where the already bleak fiscal outlook will limit fiscal largess, potentially disappointing investors. Looking across the globe, we forecast that the Trump administration will continue to pursue a reasoned approach to trade after exiting TPP, tacitly acknowledging that an America First policy will make America second.
- NEWNAFTA Renegotiations Begin
- NEWPresident Trump and Controversies: What Are the Risks and Implications?
- NEWDebt Ceiling: Calm Seas but Storms Possible
- NEWUS: Tax Cuts Likely, Tax Reform Not
- NEWDebt Ceiling in Focus (again…)
- NEWBuckle Up, It’s Debt Ceiling Season Again
- NEWUS Reported to Soon Begin Investigation into Intellectual Property Violations by China
- NEWChina: US probe of intellectual property practices may ratchet up tensions
The Eurozone’s renaissance and the path to ECB normalisation
We expect the eurozone’s economic revival to gather pace in the period ahead and to surprise the consensus on the upside. We have recently lifted our regional GDP forecast for 2017 to 2.1%, which would be its strongest pace for over 10 years, and well above the region’s potential. This should, in time, lift core inflation to heathier levels and drive the ECB to normalise its monetary policy.
We expect the normalisation of ECB policy to be positive for the euro. Furthermore, Germany has the largest current account surplus in the world. With a protectionist US president, markets may soon start to focus on any required weakness in the dollar (strength in euro) to correct trade imbalances. We favour long EUR/USD positions and expect the cross to test 1.15 by year-end. On the rates side we continue to position for an ECB normalisation and hold a short duration bias on Bunds, outright and against USTs. We favour front-end curve steepeners, tighter front end swap spreads and wider EGB spreads.
- The eurozone’s renaissance
- Could wage inflation spring a surprise?
- Labouring the point
- Long EUR/USD (Six FX trades for summer 2017)
- Reduced slack and inflationary pressures
- Reaching the point of taper inevitability
- European repo markets - operating within a new normal
- Liquidity- vs collateral-driven repo activity
- A re-convergence in policy: bund-driven spread tightening
What does a Brexit mean for the markets?
The Brexit vote has, and will continue to have a major impact on the UK economic and political landscape. Our research analysts cover the critical paths to exit, the negotiations, the global implications for growth and medium and long term trade ideas.
What’s next for Japanese policy?
A strengthening Yen, modest growth and persistently low inflation has left investors asking what next for Japanese policy. The recent upper house election has given the ruling coalition a “super-majority” and therefore more room for policy manoeuvre. How will they use it? More importantly, how should investors position themselves?
- Richard Koo: Cost-benefit analysis of helicopter money
- Helicopter money Q&A
- Assessing BOJ's likely comprehensive assessment
- Cabinet approves ¥28trn economic stimulus package - ¥5.8trn of extra government spending in FY16
- BOJ “Reassessment” and JPY
- How will the BOJ ease concerns over a sharp JGB market selloff?
Our View on 2017
Rising economic nationalism could usher in the largest economic shakeup in a generation. The known unknowns are clear: euro area and UK political uncertainty, US fiscal reflation vs protectionist policies, structural headwinds in much of Asia, and higher inflation. While in Japan, although the gradual recovery is likely to continue, we question its sustainability. What does this mean for the global economy and asset markets? Read our global outlooks for a taste of what 2017 may have in store.
- Global Markets Navigator - Back to boom/bust?
- Latin America - High hopes, low growth
- A brighter outlook: upgrading our forecasts and extending our ECB view
- Our Global Economic outlook: Paradigm shifts
- Our 2017 Rates outlook: Dawn of a new era?
- Our Asia 2017 outlook: Sailing into the storm
- Market risks next year: 10 Grey Swan Events For 2017
- Bob’s World: "Trumpocalypse" later?
- Richard Koo: President-elect Trump and the economy he will inherit
Steady Growth for the US and the Balance Sheet Unwind
It would take a very significant surprise to knock the Fed off its plan to start unwinding the balance sheet this fall. Although the market’s response to the Fed’s plans has thus far been sanguine, we expect term premia to begin to steadily increase and financial conditions to tighten modestly once the unwind begins.
Despite steady growth and falling unemployment, we expect that inflation through 2019 will continue to fall beneath the Fed’s target of 2%. We hold that the low inflation and tightening financial conditions will cause the FOMC to cease the hiking cycle at 2%, less than the current 3% consensus of FOMC members.
The economy appears to be on autopilot, growing close to 2% with unemployment steadily falling. We expect the unemployment rate to fall below 4%, less than the FOMC is anticipating, but for wage growth to be lower than in previous cycles. Modest fiscal stimulus later this year is likely to provide only a minor boost, before growth descends to a new, lower elevation closer to 1.5% as a result of lower population growth and tighter immigration policies.
- NEWFed QT Studies: Supply/Demand Review
- NEWYellen at Jackson Hole: A Preview
- NEWThe Fed Sets the Stage for Balance Sheet Roll Off
- NEWThe Nomura Labor Turnover (NLT) Index: A Timely Indicator of US Business Dynamics
- NEWA Structural Reason For Low Productivity and Wage Growth: Reduced Business Dynamism
- NEWYellen’s Semiannual Testimony to Congress
GDP growth in LatAm: will high hopes of growth be delivered?
Potential growth in LatAm fell since the Global Financial Crisis due to lack of structural reforms, deteriorating demographics, low investment levels and the end of the super cycle in commodity prices. Slightly higher potential growth is a possibility in the next five years, mainly as we expect improved conditions in Brazil and a slight upward trend in Mexico, the region’s two biggest economies. However, we expect potential growth to be lower in Chile, Colombia and Peru. We highlight that a pick-up in potential growth would still likely leave LatAm growth below other comparable EM groups.
India’s demonetisation: A blip or a bigger dip?
The Modi government’s decision to withdraw the old 500 and 1000 rupee notes, which accounted for 86% of the total value of notes in circulation, has thrown the fast growing Indian economy into disarray. Will the growth damage be transitory or long-lasting? Which sectors are more vulnerable? Will demonetisation permanently lower inflation and create room for easing? Read our reports on India for more answers.
- Angels and demon-etisation
- The reform push continues
- Proprietary indicators suggest sharper near-term slowdown after demonetisation
- India consumer - We see a quick recovery after demonetisation
- India corporate day – Demonetisation to demonetisation
- India autos: Demonetisation related slowdown will be transient
- India transportation trends and outlook - Demonetisation to hurt volume revival
China’s balancing act
We still expect a slowdown in 2017, as the property market is likely to cool on regulatory tightening after the price surge. We believe PPI inflation likely peaked in February. Monetary policy remains prudent and neutral, but with a bias toward tightening to curb asset bubbles and financial risks.
- China’s recovery cycle shortened by rebalancing challenges
- China: Growth picks up on stronger infrastructure and property investment
- China: Rapid rise in PPI may complicate policy choices
- China: An extended period of stability
- China: Solving the debt problem
- China: Pace of rebalancing weighs on growth
- China: Slower is better
Asia’s late-stage financial cycle
A pure business-cycle view of the world has severe shortcomings in assessing the risk of financial crises. Financial crises are better viewed through the perspective of financial cycles, which can be loosely defined as the co-movement of medium-term cycles in credit and asset prices, particularly property prices. The level, but even more so, the speed, of the rise in the ratio of private credit to GDP across much of Asia since 2008, is disconcerting. Loan growth has recently slowed in several countries, but so too has nominal GDP growth, and hence in most of Asia the credit-to GDP ratios continue to rise. The debt build-up has fuelled property market booms, and while property prices have started to correct in some countries, they remain elevated; in China, they have risen to all-time highs.
Asia’s Striving Cubs And Ageing Tigers
Our top 5 Asia economists define Asian countries into two sets - striving cubs and ageing tigers. To better understand why we believe this Asia cubs-tiger divide is a growing theme in the years ahead, we present comparative data on their vulnerabilities, opportunities and investment outlooks.
The global case for fiscal easing stimulus
Slow trend growth is now largely priced in – but investors remain focused on the risk of a “hard landing” in China and the impact around the globe. Is the recent softening in the US merely a slow patch or the beginning of a cyclical downturn? And what are the prospects for fiscal policy to ride to the rescue? Nomura has one of the slowest growth forecasts on the street. Read more to understand why.
ECB: Reverting to "orthodoxy"
The euro area economy is strengthening, and inflation is picking up. Also, and equally importantly, the risks of a severe downturn and/or deflation are fading. The ECB is taking stock of these changes, and is waiting for trends in the data to become more established. It no longer needs to provide a cushion against “tail risks” and so its strategy is gradually shifting from “unorthodox” to “orthodox” – in particular its emphasis on the link between the economy and financing conditions, which reflect the persistence of monetary accommodation. Unconditional accommodation is no longer warranted, we argue, and investors should pay more attention to different scenarios for economic and financial conditions in the Euro Area economy.
RMB underperformance to continue
We expect trend RMB depreciation to continue in 2017 and do not believe that the sharp RMB appreciation at the start of this year reflected positive fundamental changes in China. Rather, we expect RMB to continue its medium-term depreciation trend due to 1) few signs that outflows are stabilising (December FX reserves fell USD41.1bn m-o-m to USD3.011tn), and January reset of the annual USD50K purchase will add to depreciation pressures; 2) local macro/policy challenges remain intact and consensus is already of the view that growth will remain stable into Q4; 3) global factors should continue to add to local capital outflows, with risks from US Fed hikes and President-elect Trump policies; and 4) despite the recent rhetoric over a one-off RMB devaluation, we still view it as a low probability event in coming months, but increased discussion of this raises our concern given strong capital outflows and the consistent fall in FX reserves.
SGD: Global, regional, and domestic drivers for depreciation
SGD remains vulnerable due to Singapore’s highly open economy as well as local, regional and global risks. Domestically, despite stronger-than-expected Q4 GDP data, our economists expect full-year growth of 0.7% in 2017, below the official 1.0-3.0% forecast range; we currently assign a 30% probability to a re-centring lower of the S$NEER policy band in April 2017. Regional risks stem from potential bond outflows from Malaysia and Indonesia and macro/FX concerns in China. Global risks to SGD include policy risks from the Trump administration and the likely demise of the TPP, the impact of Brexit and political risk events in Europe, as well as from higher US rates and its impact on highly leveraged households and corporates in Singapore.
Northeast/Southeast Asia relative value (short KRW, TWD, CNH versus long INR, THB)
Asia’s “ageing tigers” (China, HK, Taiwan, Korea and Singapore) face structural headwinds from demographics, stagnant exports, an oversized financial cycle and weak productivity growth. KRW is vulnerable from further rate cuts, while Korea and Taiwan’s central banks remain active in USD-buying intervention; also, these countries are exposed to increased political risks from Trump policies, cross-strait relations (Taiwan) and political scandals (Korea). In India, while the recent demonetisation policy poses near-term risks to growth, we believe INR can outperform due to its BOP strength and vast FX reserves, while Thailand has a significant current account surplus and limited foreign capital outflows amid increasing foreign investor allocations.
Asia FX valuations
As market participants and policymakers have become more focussed on currency competitiveness, FX valuations should remain relevant for investors over the coming year. We have examined Asia FX valuations across a number of frameworks to assess whether currencies are misaligned from economic fundamentals. In addition, we examine how important FX valuations are for central bank FX intervention and what FX stances we expect from regional central banks over the medium term. We also project FX valuations in the region through to end-2018 and analyse how valuations would shift under a scenario of significant global headwinds and local idiosyncratic risks.
EM FX: Winners and losers
President-elect Trump’s economic policies along with numerous other global concerns will remain a significant driver of EM FX over the next few months. We believe some of the biggest losers will be CNH and MXN. Capital outflows, macroeconomic and policy challenges, external risks and FX valuations remain negative drivers of CNH. Mexico is the most exposed to President-elect Trump’s policy risks, while domestic imbalances are growing. Relative outperformers in EM FX include INR and BRL. INR is supported by local macroeconomic fundamentals and reduced FX vulnerability. We think BRL is less of a target from the US versus its regional peers, it has a relatively low degree of trade openness, low external debt vulnerability and has high carry.
GBP to continue to decline, gilts to underperform
The market is adjusting to the ‘Hard Brexit’ realisation, and we expect this to weigh on sterling in the coming months. We believe GBP/USD will trade below 1.20, and for EUR/GBP to head above 0.92. We highlight the inverse relationship we are seeing between UK yields and the currency, implying that the normal correlation between a reserve currency appreciating when yields rise has broken down. Instead, we are seeing more of an EM relationship, where rates selling off leads to a weaker currency, meaning the FX markets are no longer chasing higher UK yields. The UK’s current account adjustment could be a slow and drawn out process, and further GBP weakness could be needed to restore an equilibrium.
Dollar strength to continue
We think monetary policy divergence can help push the euro towards its 2015 lows of 1.05 and USD/JPY rise to 110. Our estimates suggest that if the market prices in a pace of normalisation consistent with our economists’ view (100bp by end-2018) the USD index would appreciate by about 5%. The flow backdrops also support our USD view, with euro-area investor repatriation flows, especially in equities, seem to be coming to end, while bond outflows continue. Meanwhile, on the yen, we expect Japanese institutions to reduce their hedge ratios as hedging costs are higher than before. There are also more signs that Japanese investors are buying foreign equities. The feedthrough of USD strength to equities and the US economy likely provides a limit to dollar strength, but both the macro backdrop and flow dynamics are more dollar-positive than before, so greater dollar strength could be tolerated than a year ago.
The 15 countries in South and East Asia that have well-established stock markets make up 52% of the world’s population, 31% of GDP and 26% of consumption, outpacing global growth in all three. Not only is Asia’s consumer base growing as urbanisation and income growth bring more families into the consuming class (defined as those with more than USD9,000 in PPP-adjusted household income), but scope for increase in household leverage offers additional upside. Households are also increasingly shifting to formal channels, allowing listed companies to access a growing share of overall household demand. Asian consumption, thus, stands to offer a large and diverse range of growth opportunities for investors. In addition, the constant process of upgrading with rising incomes, rising adoption of technology (mobile usage and social media penetration), and ageing in parts of the region offer unique opportunities.
- Japan restaurant sector - Focus on small cap growth stocks
- Korea medical beauty - Korean aesthetics the new K-wave
- Asean logistics - Delivering the last mile
- HK/China retail - Bargain hunt, but selectively
- Asean consumption - 14 stocks that could double in five years
- China consumption - Winners from upgrade trends
The healthcare sector encompasses products (drugs and devices) and services (diagnostics and hospitals). The sector presents secular growth prospects in emerging economies given lower penetration of healthcare spend. For instance, the spend on Healthcare is at 2-5% of GDP for most AEJ countries, which is much lower than 8%+ spend in most developed nations such as the US and Japan. Ageing populations, increasing awareness, rising disposable income, insurance and government support are the key growth drivers. Besides catering to the local needs, India and China have also emerged as pharmaceutical development and manufacturing hubs that support the developed markets. For instance, in the US, Indian companies account for 25-30% of all drug prescriptions. Chemistry and relevant technical skills along with low-cost development and manufacturing are the key success factors.
- Indonesia healthcare - Cautious in near term
- Asia healthcare - Drivers intact for long-term growth
- Korea healthcare & pharmaceuticals - Finding cures for diabetes
- Thailand hospital - Diversified operators promise strong growth
- China hospitals - Private hospitals on cutting edge of reform
- Biotech 101 - Japanese stocks likely to transform global medicine
While smartphones (which have driven the tech sector for the past 8 years) are entering into the maturity stage, the emergence of new technologies -- including enterprise data centers, cloud services, artificial intelligence (AI) and autonomous driving -- is spurring a new growth cycle for the tech sector. Amidst this new growth trend, we expect the super cycle in the memory market to extend over a longer term, led by rising demand for server DRAM and SSD (3D NAND), and we expect the supply chains in the semiconductor industry to be the key beneficiaries. Additionally, new technology innovation in smartphones should continue: 1) the replacement of smartphone displays from LCD to OLED and 2) the application of 3D sensing, iris scanning and AI to smartphones should provide new user experience and new opportunities to related supply chains.
- Global Semi wafers - Revival of once-overlooked sector
- Greater China Semiconductor - 2017 Chinese New Year a critical point
- Asia fingerprint sensor - Not all boats lift on a rising tide
- Global display - Two display super-cycles in 2017
- Asia Pacific technology - Outlook 2017: Memory and display super-cycle
- Japan Sector Outlook: Spring 2017
- Japan IT & business software: outlook & investment ideas 2017
- Semiconductor production equipment basics: 2016
Japan angle reports
Nomura places Japan at the heart of our APAC research product. We believe we are best positioned to connect our deep understanding of Japan with the rest of the region. Japan is one of APAC’s biggest trading partners. It is also strongly bound to the region in terms of FDI, outbound M&A, security issues and other areas such as tourism. We hope these products help investors navigate the region in a better informed manner. Japan matters and Nomura is your partner to keep you ahead of the curve.
- Asia Pacific internet - Top picks: Yahoo Japan, Alibaba, Naver
- China property: Lessons from Japan vol. 2
- Greater China Equity Strategy: Lessons from Japan - Stock-specific impact of a Sino-US trade war
- Lessons from Japan Vol. 1 - Walking the line...
- Lessons from Japan Vol. 2 - A balancing act...
- China property: Lessons from Japan - Is China repeating Japan's history?
- Lessons from Japan - Fed rate hike & FX/capital outflow concerns
- China insurance: Lessons from Japan’s negative spread crisis
Electric Vehicles / batteries
Systematic development of charging infrastructure, operators and smart grids will be just as important in accelerating electric vehicle (EV) penetration as battery cost/performance improvement. We estimate EV battery market size at USD87bn, assuming global EV market share of 26% in 2030F. ESS market size could be USD15bn in 2020F, and this could grow significantly depending on subsidy policy and the need for power efficiency. Assuming China retains a policy favouring local EV battery producers over foreign ones, we see Chinese EV and battery plays as key beneficiaries of the country’s growing EV market. In addition to reviewing global lithium ion batteries for EV usage, we also discuss energy storage system (ESS) basics and how battery companies are gaining value. We provide answers to: 1) how much electricity is required to power EVs; 2) what happens to gasoline/diesel consumption as EVs become popular; 3) does the world have enough chargers installed, and who operates them.
The US, Europe, China and India to drive global auto demand in 2016F, with consumer preference for SUVs leading to product mix improvement. We expect the US auto market to remain healthy, well above the 17mn mark, while China sees minimal growth in 2017F after the tax breaks end. We expect widespread adoption of automated driving technologies on highways by 2020F in developed markets. Given the presence of favourable conditions for the adoption of such technologies, we think Japan will lead the way in mass adoption of automated driving.
- Global Autos Outlook - Domo Arigato Mr. Roboto?
- Asia Pacific auto parts - Smarter, safer and lighter
- Self-driving cars and the construction sector - Increased expressway use a boon to construction
- Self-driving cars and the transportation sector - Tourist drain from rail; logistics productivity boost
- Self-driving cars and the insurance sector - Guesstimating impact of new technology
We see virtual reality (VR) and augmented reality (AR) as a field in which global technology companies can aim for growth. We estimate that the market for home-use VR systems will be worth $10.4bn in 2020. We expect the market to be dominated initially by entertainment fields, centered on games, but to encompass telecommunications, marketing, healthcare, and other fields over the longer term. The takeoff of the VR market is likely to have knock-on benefits across a wide range of companies, including hardware companies, content providers, and suppliers. Major related stocks include Sony, Facebook, Nintendo, and GoerTek.
New FinTech innovation within Asia
The financial industry is at the beginning of a new cycle of business innovation driven by the adoption of new technologies. We believe China has developed one of the largest FinTech user bases globally, driven by the business model innovation from internet giants (such as Alibaba and Tencent) and leading financial institutions (e.g. Ping An group). Read more about why we think some innovations such as robo-advisors may completely replace traditional fund managers and financial analysts, while others such as block chain may improve the efficiency of the existing global transaction system.
Steeper curves in Asia
We expect reflation expectations to lead to steeper curves in some countries while the Fed hiking cycle also supports this view. A few local factors such as fiscal situations, capital flows and valuations may also act as catalysts in select markets.
Asia’s monetary policy divergence with US
Despite rising inflation and the Fed’s hiking cycle, Asian central banks will be willing to support growth by providing liquidity in the banking system or cutting rates. This, along with ample liquidity, should lead to outperformance of front-end rates against US rates in select markets.
- 2017 Rates Outlook - Dawn of a new era?
- First Insights - SGD rates: Reduce 3yr receivers; adding US 3yr pay against remaining receivers
- Asia Insights - India rates: Stay long bonds, stay with swap steepeners, add long bonds vs pay 5yr swap
- First Insights - Korea rates - portfolio update
- Asia Insights - China rates: Attractive valuation versus near-term uncertainties
- Asia Insights - China rates: Increase receive CNH CCS
Negative rates – the cure or the catalyst?
One of the great recent surprises in markets has been the persistent rally in government bond yields. Few policy makers (or investors) in 2009 would have thought yields would be this low in 2016. What are the consequences of negative interest rate policies in the Euro area, Japan and elsewhere? Is the Fed likely to move its policy rate higher this year after all?
QQE with Yield Curve Control
Although the BOJ had been telegraphing dissatisfaction with the flatness of the yield curve for weeks heading into its comprehensive assessment, the decision to add yield curve control to its QQE came as a surprise. These reports show our assessment of the new framework and how it will change yen rates trading.
Efficacy of Central Bank Policies in the Cross-Hairs
After years of extraordinary accommodation, a number of developed economies are still suffering from stagnant growth and low inflation, leading many in the marketplace to question the efficacy of QE and ZIRP/NIRP policies. Meanwhile, as these QE programs are in place, they are having real-life impacts on the availability of long-end duration instruments. We look into how the ECB could change its QE design to address the scarcity issue, as well as explore how the new BoE QE will affect markets. In Japan, we are focused on changes to BoJ policy ahead and how helicopter money is not yet in our base case.
All About the Flows (into Fixed Income)
It has become paramount to monitor investor flows – more often than not, market positioning, rather than economic fundamentals, becomes a key driver of price action. The presence of a captive buyer base that is not economically incentivized (e.g., central bank QEs and/or some ALM-based flows) tends to make any deviation from traditional “fair value” more persistent than usual. We pay close attention to the activities of Japanese investors in foreign bond markets, UK pension funds in GBP products, foreign FX reserve managers’ impact on US bonds versus the new local LCR bank bid, and local Asia debt flows.
- Malaysia debt flows: Fourth consecutive month of outflows
- Modest Japanese buying of AUD assets in January, but still outperforming
- Debt flows: Strong September for India and Indonesia
- US - Foreign Flows and the impact on US Fixed Income
- US – Bank Buying of US Bonds
- Japan - Japanese investor’s net buying of foreign bonds reach record high
- Japan - Lifer AL duration adjustment under negative rates
- UK - UK supply and demand picture
- UK - PPF7800 = PPI meets LDI?
The Yield Hunt: Out of Reach or Out of sight?
Yield on fixed income securities has certainly become a scarce commodity, given the NIRP policies and the prevalence of negative term premia in developed bond markets. Lofty valuations, and hence limited room for outright price appreciation (at least in theory), have led investors to flock to “yields” in long-end or down the credit spectrum as the only somewhat predictable source of return for fixed income. Prior episodes of the yield hunt, however, were met with sharp repricing known as “tantrums,” which in hindsight ultimately provided the best buying opportunity in years. We aim to help investors along this rollercoaster ride of the yield hunt and look at fading the UK long-end richness; the overall yield grab in real space, however, makes the case for bulls to flock to the Asia rates space and buy strategically the US long end on large pullbacks (to the top of recent ranges).
- US - The pervasive effect of the "compressed" US term premium on LatAM rates
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