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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.
- NEWOur Global Economic outlook: Paradigm shifts
- NEWOur 2017 Rates outlook: Dawn of a new era?
- NEWOur Asia 2017 outlook: Sailing into the storm
- NEWMarket risks next year: 10 Grey Swan Events For 2017
- NEWBob’s World: "Trumpocalypse" later?
- NEWRichard Koo: President-elect Trump and the economy he will inherit
Will upcoming European elections be a game changer?
There has been a significant increase in popular support for anti-establishment political parties over the past few years. Currently, these parties are not part of the government and are unable to set the political agenda. This could change in the coming 12 months with elections/referendums taking place in the five major euro area economies. Based on current polls, anti-establishment parties are likely to increase their representation in parliament but are unlikely to form governments or set the policy agenda. In the Netherlands however, the PVV party may prove an exception given a minority government, and could again play an important role.
Welcome to a new era - a Trump presidency
Yet again, the polls were wrong but this time on the election of the president of the largest economy in the world. With the votes in, Donald Trump is the next president of the US. Not only that, but the Republicans have retained the Senate. This will be the first time one party has controlled the Presidency and Congress since Obama’s first win in 2008 and before that George W Bush’s second term in 2004. We look at what this means for US policy making but also the widespread impact on NAFTA and global economies, as well at the immediate implications for markets.
- NEWPolicy watch - Trump's economic policy
- MOST READTop Trump Trades
- December FOMC Recap
- Asia Special Report: Policy responses to capital outflows
- US Outlook Update: Factoring in the "Trump Effect"
- EEMEA: Alpha over carry under Trump?
- Trumping LatAm: Macro Risks Under New Normal
- Welcome to a new era - a Trump presidency
- Special Report - US Election and Economic Policy
- US FI Outlook: Mission Accomplished?
- President Trump and the Japanese economy
- President Trump and Europe
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?
- MOST READRichard 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?
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 expect a shallower slowdown path in 2017 and 2018 as the government leverages up to boost infrastructure investment to achieve its growth targets. Meanwhile, inflationary pressures from the supply side may build up rapidly in the first half of this year.
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.
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.
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
Virtual/augmented reality and Pokémon GO
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.
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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