BANJARAN ASSET MANAGEMENT MARKET OUTLOOK 2017 Developed Equity Markets Will Outperform. From a global macro perspective, we believe risks to growth and inflation are tilted to the upside in the G3 economies. In EM, we believe credit related risks will re-emerge in China in Q2 17. Growth is likely to disappoint in Asia ex-japan. Hence, our tactical view is to take profit on equities, long UST 10YR, and short USDJPY as we approach Q2 17. From a strategic perspective for 2017 as a whole, we are constructive on Global Equities (Figure 1). With-in Equities, we believe the S&P and DAX will outperform the Emerging Markets MSCI. US Financials and Industrials are our top sector picks. We are neutral on global commodities and believe EM domestic demand oriented sectors will underperform. In Fixed Income. We warn investors that the UST10YR will hit 3 to 3.2% yield by end 2017. CNH dim sum bonds will underperform. We favor 10YR India government bonds. In FX, we believe USDCNY will hit 7.5 and USDSGD 1.50 at end-2017. Long USDJPY. (Jan 2007 = 100) Global macro outlook: All boats will not rise in a rising US tidal wave In our assessment, US GDP growth will approach 3-4% q-o-q, saar in Q4 2017. US PCE inflation is likely to track above 2%YoY by Q4 2017. The implication for the US FED is that the FOMC will engage in 3 hikes in 2017 versus current market expectations of 2 hikes.
With a fairly bullish outlook for the US, we believe Europe and Japan will be the main beneficiaries as fiscal expansion also gathers traction in these two geographies alongside the US. In EM, Asia ex-japan growth is likely to disappoint. Exports in the region, with the exception of Korea, Taiwan, and Thailand, are likely to surprise on the downside. We favor defensive countries and fiscal expansion type countries such as Thailand, the Philippines, and Korea. In Singapore, the path of growth is likely to be on a deceleration path in 2017. Credit related risks in the property and commodity sectors are likely to re-emerge in Q2 17 in China. In India, we believe, the demonetization policy and continued disappointment on investment spending will restrain growth and induce 2 to 3 policy rate cuts in 2017. Equity market Outlook : Growth likely to be the main theme rather than valuations 2017. The consensus in our view is too fixated on looking at valuations across the world in its investment thesis. We believe, having come out of around seven years of very volatile economic data across the world, it will be a pleasant surprise that growth and inflation in the G3 will consistently surprise on the upside. This implies that earnings and margins will surprise on the upside in places such as the US and Germany. Hence, we believe the developed markets such as the S&P and the DAX will outperform the EM MSCI (Figure 2). (Jan 2007 = 100) In EM, the market s perception that the worst of the downside surprises in growth and credit related risks are over is a bit too optimistic in our view. Hence, in equity markets such as China, Singapore, Turkey, and Mexico we remain concerned. In Thailand, Korea, and Taiwan we are modestly optimistic as fiscal policy is likely to kick in and the electronics sector could recover. We are neutral on Indonesia as some fiscal and monetary policy support is likely to be forthcoming. Fixed Income Outlook: It s all about the UST 10YR yield In our assessment the US real interest rate should be around 1% (where our proxy for the nominal interest rate is UST10YR yield and inflation is core CPI) versus the current around 0.2%. In addition the UST2s10s spread should be around 2% (Figure 3) versus the current around 1.2%. Hence by both of these metrics, we believe UST10YR yield should be around 3 to 3.2% by end-2017 versus the futures market expectation of around 2.8% currently.
These assessments are based on our view that the market is under-pricing the extent to which the US FED is likely to hike in 2017, eg 2 hikes versus our view of 3 hikes. This comes against the backdrop where global Inflationary pressures are likely to continue to rise in 2017 (Figure 4). US growth and inflation are likely to surprise nicely on the upside (as indicated above and shown in Figure 5). The implications are that CNH bond yields are likely to continue to rise, eg in the dim sum bond market. In India, with the RBI likely to cut policy interest rates by 50 to 75 bps in 2017, the drop in GSEC10YR yields is likely to continue. (Jan 2007 = =100)
FX: Where will rising UST10YR yields hurt the most? In our view, USDCNY is likely to hit 7.5 by end-2017 as credit related risks induced by a peaking of the industrial profits cycle (Figure 6), property market, and some commodity oriented sectors. In addition, rising US market interest rates will induce continued net capital outflows. We also believe the current account balance will be under pressure as import tariffs by the US are imposed on China s capital and high end electronics goods exports (eg sectors where China has been gaining comparative advantage). With the pickup in US yields and USDCNY, we expect USDJPY to hit 120 to 125 by end-2017. The aforementioned dynamics of USDCNY and USDJPY then implies that USDSGD will hit 1.5, at least, by end-2017. Date of Publication: 5 th Jan 2017
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