INVESTMENT STRATEGY & OUTLOOK

Transcription

1 INVESTMENT STRATEGY & OUTLOOK 2017

2 Table of Contents Asset Allocation Views for Global Macro Overview and Themes 4 1) Key Macro Trends 2) Themes i) Regime Shift towards Fiscal Stimulus / Reflation ii) Central Bank Policy Divergence among Developed Markets (DM) iii) Bleak outlook for EM 2017 Investment Strategy Fixed Income Outlook (Underweight) Equity Outlook (Neutral) FX Outlook 14 DISCLAIMER 16 Page 2

3 Asset Allocation Views for 2017 Executive Summary U.S. President-elect Donald Trump has recharged the engine for fiscal stimulus going into The global shift from monetary easing to fiscal spending and/or corporate tax cuts in selective Developed Markets (DM) could help lift global growth, support the reflation trade, and propel an upward shift in the yield curve. Current positive pro-growth sentiment is supportive of procyclical asset classes such as equities. However, we remain Neutral on equities, given the recent rally in DM equities, awaiting better opportunities to raise equities to Overweight. We still favor DM equity markets, given expectations that fiscal stimulus in these regions could garner pace into Meanwhile, solid multi-year returns have led to tighter valuations for fixed income, leaving limited room for the asset class to outperform. Negative returns from rising riskfree yields could also create headwinds. In particular, Emerging Market (EM) bonds are likely to underperform, given the combination of a strengthening USD, re-pricing of U.S. Fed rate expectations and possibly, disruptive trade policies from the U.S. We are Neutral on Alternative Investments with a positive bias towards Oil where fundamentals are underpinned by the recent production cuts and elevated geopolitical risks Outlook Asset Class Sector * Equity = U.S. = Europe - Japan + Asia ex-japan - Bonds - DM Investment Grade - DM High Yield = EM Investment Grade - EM High Yield - Alternatives = Gold = Oil + Hedge Funds = Cash + Source: Maybank * Overweight : +, Neutral : =, Underweight : - 3

4 Global Macro Overview and Themes Key Macro Trends Real GDP Growth Seeing Modest Pickup in 2017 Looking into 2017, global GDP growth is expected to see a modest pickup, as (1) drags from large DM economies fade, and (2) lagged impact from global central banks monetary easing filter through into the economy. Investment spending should also garner speed due to better demand growth, recovery of DM private sector balance sheet and Trump s reflationary initiatives. Headline inflation is anticipated to see greater momentum in 2017, aided by the low base effect, higher energy prices and possibly, higher wage growth in selective DM markets. The USD is likely to stay strong, as divergence in monetary policies among DM persists in the near term. In contrast to U.S. Fed s hawkish stance, the European Central Bank (ECB) and Bank of Japan (BOJ) are anchored at the dovish end of the scale is going be a big year for global politics. A busy election schedule in Europe, increased focus on populism, noise from Trump s policy implementation, and China s leadership transition, could add to uncertainties. Source: JPMorgan I November

5 Global Macro Overview and Themes i) Regime Shift towards Fiscal Stimulus / Reflation Fiscal Impact on Real GDP Growth (DM) Ongoing re-pricing of long-term growth and inflation expectations should continue into 2017, underpinned by a shift towards more fiscal stimulus in DM, ongoing central bank support (ex-u.s.) and higher commodity prices. This supports the reflationary trade. Bonds, which had been a major contributor to returns and shock absorber in times of volatility, could see headwinds against this backdrop. Highly leveraged corporates should also be avoided. On the other hand, yield curve steepeners and rising interest rates plays (such as U.S. banks) could see sustained interest. Nevertheless, we acknowledge the ongoing rotational shift out of bonds into risky assets such as equities could be curtailed by limited investment opportunities within higher beta asset classes due to elevated valuations. This might be exacerbated, especially if growth optimism does not materializes, or interest rates in the U.S rise too quickly. Besides, Trump s effectiveness is far from being assured. Any signs that Trump is unable to deliver might trigger adverse global responses. Hence, market volatility is here to stay. Source: JPMorgan I November

6 Global Macro Overview and Themes ii) Central Bank Policy Divergence among DM The U.S. reflationary impulse, coupled with higher wages and tight employment situation, support the trend of higher U.S. rates. We expect the U.S yield curve to steepen with the long-end yield rising faster than the short-end. U.S Federal Reserve Tapering versus BOJ and ECB Asset Purchase Programs On the other hand, we believe that bond yields could be more anchored in Europe and Japan. ECB s QE program has been extended, while BOJ s yield targeting should prevent an upward move in the longer-dated yields. The latter supports a weak JPY and more buoyant Japanese equity market. On the whole, this should drive a widening of rate differentials among DM countries, favoring further USD strength. The case for additional policy action from ECB and BOJ over the longer term, however, could see resistance, as both central banks seemed to have reached the limits of support that they can offer. Any premature termination of monetary easing may be ill-received by the market. Source: Credit Suisse I December

7 Global Macro Overview and Themes iii) Bleak outlook for EM The anticipation of Trump s reflationary and protectionist trade policies and consequent strength in USD, should continue to see shifts in fund flows away from EM into DM. This is especially so for EM countries with debt greater than GDP growth, such as China. Accompanied with risks that China s foreign reserves could be further depleted from the current US$3.1 trillion due to capital outflows. Nonetheless, China has the greatest capacity to provide stimulus among EM economies. Chinese economic growth has stabilized, underpinned by fiscal stimulus, and corporates/consumers responsiveness to monetary easing. Over the medium term, acceleration in Public- Private Partnership (PPP) should keep economic growth well supported. Overall, we expect EM to face headwinds in the near term due to persistent funds outflows We would look to revisit our cautious stance on EM, if (1) rising commodity price and stronger global growth start to benefit EM in a more meaningful manner, and/or (2) Trump s protectionist stance takes on a more moderate approach. China s FX Reserves - Risk of further depletion Source: JPMorgan I December

8 2017 Investment Strategy Overall we favour equities as an asset class in 2017, underpinned by the reflationary initiatives under a Trump regime, and resumption of earnings growth. However, we await for better entry levels for equities, in particular U.S. Beneficiaries of rising interest rate plays could be in focus such as U.S. Financial sector. We like U.S. Technology too, driven by balance sheet strength and secular trends. USD strength is likely to stay, on the back of higher U.S. interest rates. Therefore, the corresponding outlook for gold and EM assets are not particularly promising. With yields going higher, we prefer shorter duration bonds, to capture return with lower sensitivity to interest rate moves. Floating rate notes and credits with strong balance sheet should perform relatively well. Oil prices could trend higher, amid resilient demand growth, ongoing non-opec supply re-balancing, and recent OPEC production cut. Upstream energy companies to benefit. Looking into 2017, market volatility should persist, in light of elevated political risks globally, uncertainties surrounding global central banks decisions and prospects that Trump s policies could be watered down. Opportunistic Trading is preferred over large directional bets. Major market risks include (1) stagflation (high inflation / low growth), (2) policy/political risks (especially in U.S. / Europe), (3) financial condition tightening from faster-than-expected U.S. rate hikes, (4) hard landing in China and (5) abrupt tapering of monetary policies in Europe and Japan. 8

9 2017 Fixed Income Outlook Underweight in Fixed Income Global growth prospects have improved for 2017 driven by economic acceleration in DM. The U.S. economy with its tight labour market, is likely to receive a boost from Trump s potential pro-growth policies. The divergence in monetary policies of U.S. versus the rest of the world, suggests a major source of bond price volatility in EM economies are likely to face growth challenges, with the (1) U.S. rate hike cycle, (2) strong USD, (3) higher leverage, (4) tight liquidity and (5) Trump s protectionist trade policies. These should continue to see shifts in fund flows away from EM into DM assets. \ Global inflation is rising from a low base at the start of the year, aided by oil price recovery and Trump s reflationary policies. We expect the yield curve to remain steep as 2017 growth and inflation expectation could push yields up in the longer end more than the short end. U.S. Fed has guided to raise rates thrice in A fast and steep rise of UST10yr yield to 3% and beyond could pinch on U.S. economic recovery. This could also post a threat to global liquidity and financial stability, as current debt levels are higher than Global Financial Crisis levels in U.S. unemployment rate and average hourly earnings; %, %yoy Source: Bureau of Labor Statistics, JP Morgan I November

10 2017 Fixed Income Outlook China, while having the greatest flexibility to stimulate the economy, would likely concentrate its efforts to manage the economic transition and growth around the 6.5% level with an eye to maintain currency stability. For bonds, the two big themes are 1) a strong USD and 2) higher volatility in interest rates, especially in U.S. As such we prefer to keep duration short to dampen interest rate sensitivity for USD products and have an underweight in EM assets. We prefer DM High Yield (HY) for its shorter duration (JPM US Domestic HY Index: 3.9yr) and its higher yield compared to Investment Grade (IG) index longer duration (JPM JULI Index: 7.5yr). In DM, we expect the fading of bond asset purchase programmes to be more pronounced in the later part of The busy political calendar in Europe would be a constant source of uncertainty and volatility. Credit spreads are expected to have a widening bias in 2017, with the uncertain global economic policies and rising cost of debt impacting credit matrices. Within EM, we still have a preference towards Asia. Emerging Asia still shines in terms of better fundamentals and stronger local investors support compared to other regions. Global Economic policy uncertainty at all-time highs. Source: SG Cross Asset Research / Credit, BBD I Dec

11 2017 Equity Outlook SUMMARY : Resumption of Global Growth 1. Shift from Negative Interest Rate Policy (NIRP) to fiscal stimulus, positive impetus to earning revision, and ample liquidity to support equities. 2. DM and EM equities to see sustained divergence. 3. Market volatility to present short-term tactical trading opportunities. Stay Nimble. U.S.: REFLATION INTO 2017 Trump s pro-growth policies are likely to accelerate U.S. economic growth and raise inflation over the medium term. However, higher volatility could be expected given uncertainty over Trump s policies. U.S. equities are likely to benefit from prospective corporate tax cuts (from 35% to 20%), which could boost earnings by high-single digit. We favour U.S. Technology, driven by balance sheet strength, secular trends and potential cash repatriation. Positive global earnings momentum near its strongest level in 5 years U.S. small caps may continue to outperform large cap in a rising bull market as they could benefit more from potential tax cuts, whilst having limited impact from a strong USD due to their domestic nature. Source: Credit Suisse December

12 2017 Equity Outlook EUROPE: EUROZONE MARRED BY POLITICAL NOISES Political risks will remain elevated due to a busy election agenda in Europe and the start of the negotiations between U.K. and EU on Brexit Eurozone GDP growth is expected to consolidate at around 1.5% - 1.6%, due to slower expansion in France and Germany. ECB, while extending its asset purchase program at a reduced pace, will stay accommodative to support growth in the short run. JAPAN : BENEFITTING FROM WEAKER YEN With fiscal and monetary policies likely to stay accommodative, alongside a weak Yen, Japanese equities would remain a big beneficiary. In addition to currency, Japanese equities benefit from corporate share buy-backs, ETF buying program by BOJ (US$56 billion) and additional purchase of equities by government pension (US$29 billion) to reach its target domestic equity weight of 25%. MSCI Japan Price-to-Book relative to MSCI Word Despite the rise in Japan equities, valuations are relatively attractive, where MSCI Japan s Price/Book Ratio trading at a discount to historical level. Source: JPMorgan I December

13 2017 Equity Outlook ASIA EX JAPAN: LEADERSHIP TRANSITION IN CHINA We downgraded China to Neutral as positive catalysts effects have played out. Chinese leadership transition is scheduled for late Chinese President Xi Jinping is expected to take this opportunity to consolidate power, as 5 out of the 7 politburo standing committee members are set retire. But bold moves on State-owned Enterprise (SOE) reforms are unlikely ahead of the event. Meanwhile, Chinese infrastructure investments (PPP) could compensate for the slowing Chinese property market. Ongoing liberalization of capital accounts also paves the way for potential inclusion of A-shares into the MSCI Index in Jun Political uncertainties in Taiwan and South Korea could stay elevated as 1) changes in U.S. policy towards Taiwan could jeopardise One-China policy, and 2) challenges in Korean political leadership persist. U.S. trade protectionism policies will impact export dependent countries like Singapore, Malaysia and Thailand. Tax on U.S. corporates offshoring could also impact Philippines Business Process Outsourcing industry. Normalisation of interest rates and a strengthening USD could weaken ASEAN currencies and result in funds outflow. In addition, unattractive equities valuation could add to headwinds in ASEAN. China s PPP Project Implementation has accelerated Source: Deutsche Bank November

14 2017 FX Outlook THEMATIC DRIVERS 1. Trade, Monetary and Regulatory Policy Changes Expectations of an improved U.S. medium term growth outlook, due to increased fiscal spending, and changes in the regulatory environment and tax reforms (i.e. lower taxes) under the Trump administration is the key focus point. Fiscal boosts could lead to concerns of faster inflationary pressures and as such, affect the Fed rate hike trajectory. Longer term, concerns about changes in trade and immigration policy could have economic impacts. There will still be some policy uncertainty for the most part of In 1H 2017,we expect on average a steepening of the UST curve. This should lead to widening yield differentials in favor of the U.S. leading to unwinding of popular EM carry trades (in such cases favor long USD, short AXJs in particular IDR, INR and to some extent MYR). 2. Inflationary Price Pressures As the U.S. economy try to further improve in 2017, a expenditure reflation will require an increase in total expenditure on goods and services. This phase of reflation and eventual investment recovery we think will materialise in the U.S., albeit slower than previous cycle. If inflation picks up faster-than-expected, it leaves greater room for Fed to raise rates in Political Uncertainties Global politics has the potential to lead to further volatility with key concerns likely to emerge out of Eurozone. In 2017, we see pressures from general elections in Europe and post-brexit, affecting the EUR especially in an environment of growing monetary divergence between Fed and ECB. Our base case is for no Eurozone break up. In addition, worldwide anti-globalisation, protectionism, and rising China potentially filling up the political, trade and military vacuum in the world left by the U.S., may lay the foundation for China s growth stabilization. This could provide some buffer from U.S. anti-trade policies and thus allowing some floor to RMB and EM weakness. Our FX outlook is based on the assumption that oil prices will remain at an average price of US$55-65/bbl for Overall, moderate rise in oil prices following the recent OPEC agreement in Vienna in late Nov 2016 are likely to remain supportive of oil prices and further support our inflationary theme above. Source: Maybank GM FX Research 1 December

15 2017 FX Outlook We expect the dollar index to trade in higher range of Generally affected by (1) the pace of Fed hikes; (2) U.S. growth and inflation trajectory as well as (3) continued central bank monetary policy divergence. USDJPY Tracking Widening 2Y Yield Spreads EUR is expected to face further downside pressure amid an environment of growing difference in monetary policies (between ECB and Fed) and political contagion risks, mainly in 1Q 3Q 2017 before regaining strength towards end-2017 as monetary divergence slows. We see risks of EUR potentially trading a wider range of going into JPY weakness should continue into We expect the BOJ to keep its monetary policy loose in Meanwhile, Trump s expansionary fiscal policies could trigger more U.S. rate hikes. The widening yield differentials in favor of the U.S. should spur outflows from Japan to the U.S. in search of higher returns and see further USDJPY upside towards 125 in 3Q Asia EM FX : We are cautious on Asia EM FX. The downside for EM would be worsening debt sustainability arising from rates increase and USD strength. We remain bearish on currencies with signs of weak domestic demand, lower fiscal capacity and with uncertain sovereign credit situation. The bright spot lies with Philippines amid strong domestic demand support. Source: Maybank GM FX Research 16 December 2016 Source: Bloomberg, CEIC, Maybank FX Research 15

16 DISCLAIMER This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities or financial instruments referred to herein, or an offer or solicitation to any person to enter into any transaction or adopt any investment strategy. Investors should note that income from such securities or financial instruments, if any, may fluctuate and that each security s or financial instrument s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities and/or financial instruments or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Malayan Banking Berhad and/or its affiliates and related corporations (collectively, Maybank ) and consequently no representation is made as to the accuracy or completeness of this report by Maybank and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank and its officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities and/or financial instruments referred to herein and may further act as market maker or have assumed an underwriting commitment or deal with such securities and/or financial instruments and may also perform or seek to perform investment banking, advisory and other services for or relating to those companies whose securities are mentioned in this report. Any information or opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward looking statements. Maybank expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is prepared for the use of Maybank s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank. Maybank accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. 16