What impact will a Trump US President have on Australia?

Much like the BREXIT vote, which seemed doomed at the end by the assassination of a key “Remain” politician that was deemed to make many “Leave” voters think their movement was hopelessly stained, Americans surprised the consensus with an anti-establishment vote, in particular by disagreeing with Clinton’s policies and with the FBI’s leadership’s view that she was not guilty in her activities during recent years.

Moreover, in what could easily be termed a revolution, voters thought that the economic and social system trends of the last decade needed reversal. Whether President Trump can deliver new trends or not is open to question, but certainly attempts will be made and the rhetoric will change towards “silent majority” populism, anti-“globalism at all costs”, deregulation and less progressive social policies, not only within the US, but globally to a large extent, as well. Volatility in most affairs will be substantial, as it is with all major political changes, and civil unrest is likely to be large.

Even though the Senate will remain Republican, his ability to pass legislation will be somewhat limited, as he is not admired by many Republicans in Congress, but he can use “executive actions” (in areas that do not require legislation, but rather just a moderate re-interpretation of existing laws) and the regulatory process (including Department of Justice investigations) quite freely, so he can have an impact on the economy and business.

In particular, rules regarding international trade are likely to change, especially regarding currency manipulation. Federal Reserve policies, although independent from the government in many respects, will likely become less dovish and entail new leadership before very long.

Although many of his policies are pro-business, especially regarding taxes and less regulation, risk markets will not likely respond well to his election for a while, especially given a less pro-trade environment, civil unrest, and likely major confrontations with Iran, North Korea and China.

In most respects, despite all the volatility of life over the past decade, it has actually been a very stable period and we all likely face a more unsettled globe that is full of change, much like the 1960s or even more troubled periods. This does not mean there will not be a way for such to settle down into a new balance of power and social systems eventually, but it will likely require stamina and flexibility for quite some time.

by John Vail, Chief Global Strategist

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Healthy economic growth prospects in the United States, which are expected to drive corporate earnings, have led Nikko Asset Management’s Global Investment Committee (GIC) to lift its stance on global equities to moderately overweight from neutral, according to the Tokyo-based asset manager’s latest house view.

The company’s key investment committee maintained an underweight stance on global bonds against U.S. dollar cash for U.S. dollar-based clients due to a forecasted moderate rise in global bond yields. Meanwhile, the U.S. dollar is expected to continue appreciating, the committee noted.

“Our new macro-backdrop scenario had moderately more positive ramifications for global equities, with the U.S. rising mildly but the other regions posting substantial gains,” said John F. Vail, chief global strategist and head of the GIC. “We forecast that global equities will continue to rise, especially developed markets outside of the United States, but we do not wish to be aggressively overweight.”

In October, the committee changed its overweight stance on global equities that was largely in place since September 2011. Committee members were less optimistic about the outlook of corporate earnings and share prices in the United States.

The GIC members, who consist of senior investment professionals from the company’s global offices, expect equities in Europe, Japan and Asia Pacific excluding Japan to outperform over the next six months. Conversely the United States should underperform on a relative basis, leading the committee to adopt an underweight stance on U.S. equities.

Eurozone equity prices in U.S. dollar terms should rebound after three quarters of weakness due to the euro’s fall, with corporate earnings and continued regional economic growth driving growth, the committee said.

Any delay in progress of the Trans-Pacific Partnership (TPP) will be a temporary headwind for Japanese equities, but improving corporate earnings should be positive, it added.

“We believe Abenomics is working well, especially for corporations, with third quarter pretax profit margins soaring to historical highs for both manufacturing and non-manufacturing sectors,” Vail said. “It is, thus, working very well for equity investors too, and should continue to do so, in our view.”

In currencies, the U.S. dollar is expected to be strong next year as central bank divergence continues. The U.S. Federal Reserve is expected to raise its interest rates in December followed by further 25 basis point hikes at alternating meetings through 2016.

Meanwhile, there is some chance for the Bank of Japan to ease if the yen strengthens to 110-115 against the U.S. dollar. For the European Central Bank, the GIC members expect mild easing moving forward as the ECB does not wish to cause a rupture while the Fed is hiking rates.

As for oil prices, the committee expects Brent crude oil to stand around $43 per barrel at the end of June. Oil prices should stabilize after recent declines, as global economic growth remains firm. Investors are starting to be concerned about a possible supply disruption as geopolitical risks are growing in the Middle East and North Africa (MENA) region, the committee noted.

Nikko Asset Management’s GIC met on December 8 for its quarterly review of global economic conditions. Based on the findings of its senior investment professionals around the world, the company periodically reconsiders house views on the major global markets and asset classes.

The committee’s main forecasts[1] at this time are:

• Japan: Half-year GDP growth (January to June 2016) of 0.8 percent half-on-half, seasonally adjusted, with equities, as measured by the TOPIX, rising 7.5 percent in yen terms over the next six months to June 2016.
• U.S.: Half-year GDP growth of 2.7 percent half-on-half, seasonally adjusted, with equities, as measured by the S&P 500, rising 3.0 percent in dollar terms over the next six months to June 2016.
• Eurozone: Half-year GDP growth of 1.3 percent half-on-half, seasonally adjusted, with equities, as measured by the MSCI Europe, rising 15.2 percent in euro terms over the next six months to June 2016.

———

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An overweight stance on global equities that was largely in place since September 2011 has been reduced to neutral by Nikko Asset Management’s Global Investment Committee (GIC) as the committee members were less optimistic about the outlook of corporate earnings and share prices in the United States, according to the company’s latest house view. The GIC noted that it has pushed back its forecasted timing of the U.S. Federal Reserve’s credit tightening to October from September.

“We calculated that global equity valuations are at reasonably fair levels and that stocks can rise in Europe, Japan and Australia, but because we are less optimistic on the United States, we do not think it is worthwhile, especially with the recently increased volatility, to be aggressive on global equities overall,” said John F. Vail, chief global strategist and head of the GIC. “We have been overweight global equities for U.S. dollar based investors, except for one neutral quarter, since September 2011 but we now believe that neutral is the proper stance.”

The GIC members, who consist of senior investment professionals from the company’s global offices, forecasted that U.S. equities will underperform over the next six months to March 2016, thus earning an underweight stance. The S&P 500 is now trading at 16.5 times NTM (next twelve month) bottom-up consensus earnings, which is high in a historical context. Still, the GIC noted that Europe and Japan will outperform over the next six months, with the committee lifting Eurozone equities to overweight after two successful quarters of underweighting.

“Eurozone equity prices should rebound after two quarters of weakness, with rising corporate earnings and continued regional economic growth being the main factors,” Vail said. “Even though the euro in our forecast weakens against the U.S. dollar, we expect a 2.9 percent unannualised return in U.S. dollar terms through December and 5.1 percent through March so we will move to an overweight stance.”

The GIC expects Japanese corporate earnings to rise over the next two quarters after their weak third quarter performance. The committee notes that Japanese equities are expected to produce a 5.5 percent unannualised return in U.S. dollar terms through March 2016.

“We believe that Abenomics is working well, especially for corporations, with the second quarter pretax profit margins soaring to historic highs for both manufacturing and non-manufacturing sectors,” Vail said. “It is thus working well for equity investors too, and should continue to do so in our view.”

The Tokyo-based firm’s key investment committee has shifted its stance on the timing of the U.S. Federal Reserve’s monetary tightening to October and expects Fed hikes of 25 basis points at alternating meetings. In June, the GIC committee expected the Fed’s monetary tightening to take place in September.

“We believe the Fed was merely scared by the recent global turmoil and that they would later be harshly blamed if they hiked at the wrong time, so they just desired a bit more time to be sure that global markets would stabilise and not provoke an economic slowdown,” Vail said. “Everyone knows now that October is a possible meeting for the first hike. As for December, it is very close to the holidays, so it is not an ideal time for a first hike, but we would suggest that if not October, then December would be likely.”

Regarding the Chinese economy, the GIC noted that China does not appear to be in an overall hard landing despite the fact that the country continues to struggle during its transition to a more balanced economy.

“Certainly, the recent volatility in its equity market and the yuan has lessened confidence in the country’s stability, but we expect it to achieve 6.4 percent HoH (half-on-half) SAAR (seasonally adjusted annual rate) growth in the next two quarters, which is moderately below consensus,” Vail said.

Nikko Asset Management’s GIC met on September 17th for its quarterly review of global economic conditions. Based on the findings of its senior investment professionals around the world, the company periodically reconsiders house views on the major global markets and asset classes.

The committee’s main forecasts[1] at this time are:

• Japan: Half-year GDP growth (October 2015 to March 2016) of 1.5 percent half-on-half, seasonally adjusted, with equities, as measured by the TOPIX, rising about 8.5 percent in yen terms over the next six months to March 2016.
• U.S.: Half-year GDP growth of 2.6 percent half-on-half, seasonally adjusted, with equities, as measured by the S&P 500, falling 0.1 percent in dollar terms over the next six months to March 2016.
• Eurozone: Half-year GDP growth of 1.9 percent half-on-half, seasonally adjusted, with equities, as measured by the MSCI Europe, rising 8.0 percent in euro terms over the next six months to March 2016.

———

[1] In comparison against the base date of September 11, 2015.

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The G3 economies are expected to remain strong thanks to U.S.-led growth which has prompted Nikko Asset Management to maintain its long-held overweight stance on global equities, according to the Tokyo-based asset manager’s Global Investment Committee (GIC). The committee noted that the U.S. Federal Reserve is likely to tighten its monetary policy more aggressively than the GIC had originally expected.

The members of the firm’s key investment committee now believe the timing of the Fed’s credit tightening will occur in September instead of the market consensus of October. Also the GIC members expect the Fed to raise interest rates three times by 25 basis points each starting in September, lifting the key Fed funds channel rate to 0.75-1.00% by the end of the year.

“If global economic growth remains firm led by the strong U.S. economy with no GREXIT or geopolitical crises, then it will be hard for the Fed not to hike in September, nor to skip an October hike,” said John F. Vail, chief global strategist and head of the GIC. “We believe the economy, plus the equity and bond markets, can absorb this normalization from extremely low rates.”

The company’s GIC members, which consist of senior investment professionals from the company’s global offices, have supported an overweight view on global equities for 15 of the past 16 quarters, since September 2011. The committee maintained its overweight stance on equities in the United States, Japan and Asia-Pacific excluding Japan, while it has kept its underweight stance on European equities after it reversed its six-month overweight view in March.

“We expect equities in the Eurozone will rise in the next two quarters after they stagnated in the second quarter. But we expect them to underperform due to a weaker euro, so we will maintain our underweight stance on the region,” Vail said.

The GIC members believe that Japanese equity prices will continue to perform strongly as export volumes increase on the back of a gradual improvement in the global economy and from the yen’s weakness, which is forecasted to fall to around 127 against the U.S. dollar by the end of the year. Also, they believe Abenomics is showing results, especially for corporations, with first-quarter pretax profit margins soaring to historical highs for both the manufacturing and non-manufacturing sectors.

“Abenomics is working very well for both local and international investors and it should continue to do so in our view,” Vail said. “The market PER of 16.0 times our forward earnings estimate is attractive and consensus earnings estimates will likely continue to improve, partly due to a slightly weaker yen but also due to the improving global economy.”

Elsewhere, the Chinese economy continued to struggle during its transition to a more balanced economy, but it does not appear to be in a hard-landing. The committee forecasts the world’s second largest economy to achieve growth of 6.6 percent half-on-half, seasonally adjusted, in the July-December period this year and in the January-June period in 2016.

The committee members were enthusiastic about the prospects for emerging economies due to stronger G3 and Chinese growth. But the strength of the U.S. dollar and the weakness in commodity prices could weigh on their economies. They think oil prices will decline slightly due to increased global supplies, especially from Iran, but other commodity prices should remain flat.

Nikko Asset Management’s GIC met on June 24th for its quarterly review of global economic conditions. Based on the findings of its senior investment professionals around the world, the company periodically reconsiders house views on the major global markets and asset classes.

• Japan: Half-year GDP growth (July to December) of 1.5 percent half-on-half, seasonally adjusted, with equities, as measured by TOPIX, rising about 8.4 percent in yen terms over the next six months to the end of the year.
• U.S.: Half-year GDP growth of 2.7 percent half-on-half, seasonally adjusted, with equities, as measured by the S&P 500, rising 8.5 percent in dollar terms over the next six months to December.
• Eurozone: Half-year GDP growth of 1.9 percent half-on-half, seasonally adjusted, with equities, as measured by the MSCI Europe, rising 7.8 percent in euro terms over the next six months to December.

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The G3[1] economies will continue to propel growth and gains in equities prices in the year ahead with valuations remaining steady despite rising U.S. interest rates, according to Nikko Asset Management’s Global Investment Committee (GIC), which is retaining an overweight stance on global equities.

The Tokyo-based firm’s key investment committee has held an overweight position on global equities in the last 14 quarters out of 15 since September 2011.The G3 economies are set to exceed the current consensus for economic growth going forward, committee members said, adding the United States should rebound from the unusually brutal winter and the West Coast port strike, while the Eurozone and Japan should recover faster than expected.

“There certainly are some worrisome issues, as always, but we find none of them are convincing enough to prevent moderate increases in equity prices,” said John F. Vail, chief global strategist and head of the GIC. “Rising U.S. interest rates are consensus now, so although there may be volatility as such crystallises, it may be no more problematic than the tapering process.” He noted that US equities rose very strongly during the tapering process.

On the U.S. Federal Reserve’s monetary policy, the committee is shifting its stance on the first rate hike to the fourth quarter from June/July. Nikko Asset Management’s analysts believe that a negative year-on-year CPI through September will steady the Fed’s hand despite firm economic growth.

“The FOMC roster includes more doves this year and the core Fed leadership is traditionally quite dovish, so we expect the Fed funds channel rate at only 0.50-0.75 percent at the year-end,” Vail said.

Surging equity valuations in the Eurozone has prompted the GIC to reverse its six-month overweight stance on the region to underweight. The committee thinks that Europe will underperform in the next six months, while the U.S., Japan and Asia-Pacific ex-Japan should perform the best and, thus, deserve an overweight stance.

“Eurozone equity valuations have surged to rather high levels, as equity prices increased with the lower euro and a rebound in economic confidence from very low levels,” Vail commented. “We think the market needs to pause for earnings to catch up, Vail noted.

Regarding U.S. equities, the S&P 500 is trading at 17 times next twelve month (NTM) earnings, which is high in a historical context, but the company’s analysts believe this is a fair valuation as interest rates remain structurally lower than any time since the 1950s. The U.S. economy’s conditions are mixed, but consumer spending is the most important factor, which the analysts believe will continue to be very firm.

Elsewhere, the company’s analysts were optimistic about China and emerging markets economies. China, as the world’s second-largest economy, is expected to achieve a 6.9 percent seasonally adjust annual growth rate in the April-September period.

“Given our view of stronger G3 and Chinese growth, coupled with dovish central banks and rising commodity prices, we are now more enthusiastic about emerging economies,” Vail said, reversing a long-held negative overall stance. He noted in particular that “we continue to believe that Asian emerging markets economies will remain firm as domestic demand is sturdy and external imbalances are quite small.”

Nikko Asset Management’s GIC met on March 24^th for its quarterly review of global economic conditions. Based on the findings of its senior investment professionals around the world, the company periodically reconsiders house views on the major global markets and asset classes.

The committee’s main forecasts[2] at this time are:

• Japan: Half-year GDP growth (April to September) of 2.8 percent half-on-half, seasonally adjusted, with equities, as measured by TOPIX, rising about 10.5 percent in yen terms over the next six months to September.
• U.S.: Half-year GDP growth of 3.2 percent half-on-half, seasonally adjusted, with equities, as measured by the S&P 500, rising 6.1 percent in dollar terms over the next six months to September.
• Eurozone: Half-year GDP growth of 2.1 percent half-on-half, seasonally adjusted, with equities, as measured by the MSCI Europe, rising 4.1 percent in euro terms over the next six months to September.

———-

[1] The United States, Eurozone and Japan

[2] In comparison against the base date on March 20.

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Developed economies are set to grow at a modest pace backed by healthy economic growth in G3[1] economies, while receiving support from lower energy prices, according to Nikko Asset Management’s Global Investment Committee (GIC), which is maintaining a moderately overweight position on global equities.

The Tokyo-based company’s investment committee continued to favour a moderately overweight stance on global equities, with Japan heavily overweight and the U.S. underweight, while global bonds are heavily underweight, with U.S. dollar cash remaining significantly overweight. The committee has favoured an overweight position on global equities in the last 13 quarters out of 14.

“We realised that there are many risks globally and the oil price plunge has surprised us along with nearly all other investors, but we think these risks will be overcome and note that lower energy prices are very positive for most developed economies,” said John F.
Vail, chief global strategist and head of the GIC. “For the coming two quarters, we expect overall G3 economic growth to rebound at economists’ consensus expectations and for the G3 central banks to continue to pursue divergent paths.”

In regards to energy prices, Nikko Asset Management’s analysts believe the healthy economic growth in the G3 economies, along with declining capital expenditure in the United States, will lead to a single-digit rise in Brent crude oil over the next six months. As for geopolitics, Nikko Asset Management continues to see that conflicts will remain mostly localized, with short-lived effects on developed markets, with the Ebola crisis becoming less severe.

The company’s analysts expect that the U.S. Federal Reserve will raise interest rates in June or July 2015, but only by “baby steps,” that is, after an initial 25-basis-point increase in June or July, 12.5 basis-point hikes thereafter. The analysts continue to forecast that the European Central Bank will initiate moderately sized sovereign quantitative easing in the first quarter of 2015, with a lesser chance that it will occur in the second quarter. For the Bank of Japan, the committee does not expect further major easing for the intermediate term due to the weaker yen.

Nikko Asset Management believes the recent Japanese GDP data overstates the decline in the economy and continues to be optimistic about growth in the world’s third-largest economy. Japanese equities could be supported by rising profits, especially as valuations remain attractive and as the BOJ and the Government Pension Investment Fund are expected to be large-scale buyers.

“Deflation is over in Japan and the structural bear market in equities is also dead, in our view,” Vail said. “Japanese investors will continue to be forced to change their methods, as TOPIX is already yielding far above all but a few fixed income investments, and this factor should accelerate as we expect the TOPIX dividend to double in the next five years.”

Forecasting through June, Nikko Asset Management expects Japan’s broader TOPIX index to reach 1,658, which is a 15.5 percent gain in yen terms (unannualised total return from the company’s base-date).

Nikko Asset Management’s GIC met on December 11th for its quarterly review of global economic conditions. Based on the findings of its senior investment professionals around the world, the company periodically reconsiders house views on the major global markets and asset classes.

The committee’s main forecasts2 at this time are:

• Japan: Half-year GDP growth (January to June 2015) of 2.5 percent half-on-half, seasonally adjusted, with equities, as measured by TOPIX, rising about 15.5 percent in yen terms over the next six months to June.
• U.S.: Half-year GDP growth of 2.9 percent half-on-half, seasonally adjusted, with equities, as measured by the S&P 500, rising 2.7 percent in dollar terms over the next six months to June.
• Eurozone: Half-year GDP growth of 1.3 percent half-on-half, seasonally adjusted, with equities, as measured by the MSCI Europe, rising 5.9 percent in dollar terms over the next six months to June.

———-

1 The United States, Eurozone and Japan

2 In comparison against the base date on December 8

Note: all dates in this report are Calendar Year (CY)-based unless otherwise specified.

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Ukraine volatility forces Nikoo AM to re-evaluate equities position.

The volatile geopolitical situation in Eastern Ukraine and the prospect for prolonged negative news out of China continue to weigh on Nikko Asset Management’s stance on global equities, which the Tokyo-based asset manager cut to neutral from overweight last month. Nikko Asset Management is a related entity of Tyndall Investment Management Limited. In its latest research report, Evolving Markets, the firm’s analysts provide detailed analysis of these risk factors as well as an overview of the most (and least) attractive emerging markets.

The situation in Eastern Ukraine may be more perilous than many realize because vital production facilities for military equipment, including missile, aircraft and naval engines are located in the region and which Russia is not likely to permit coming under the control of a hostile government.

“While we did not previously believe that Russia would invade Eastern Ukraine, we did expect ethnic violence to occur there,” said John F. Vail, Chief Global Strategist and Chairman of the Global Investment Committee. “However, now we have to admit that some form of Russian presence, perhaps ‘peacekeepers’ requested by the separatists, is likely. Whether opponents of strong Russian control in Eastern Ukraine decide to fight these peacekeepers is a key question, but it clearly could become more unstable than the Crimean example.”

Meanwhile, in China, Nikko Asset Management continues to believe the country will be able to avoid a hard landing even though negative news is accelerating on several fronts. Property price declines are spreading—with secondary prices starting to fall in many second- and third-tier cities—while the government is pushing even harder to rein in the shadow banking system, which provides funding to many struggling sectors of the economy.

“Falling property prices put a damper on investor sentiment, and also lead to less activity in the crucial housing construction industry,” Vail said. “Rising defaults among the shadow banks will lead to a rise in banks’ non-performing loans, but in the long run the government is doing the right thing in instilling some discipline in lending activity.”

In the emerging markets, Nikko Asset Management’s top investment professionals covering equities, fixed income and forex have updated their views on the relative attractiveness of several countries, based on a ranking of average scores across six categories: 1) the direction of the one-year interest rate, 2) the direction of the forex rate, 3) equity earnings growth, 4) equity valuations (based upon several measures), 5) political risk and 6) vulnerability to credit or property market downturns.

The most attractive emerging markets are India, Korea and Mexico, while the most unattractive markets are Chile, Egypt, Russia, South Africa, Thailand and Turkey. In the middle, average-scoring countries include China, Indonesia, Malaysia, Peru, the Philippines and Vietnam. Brazil scores slightly below average.

Overall, Nikko Asset Management is cautious on emerging markets equities as a whole, even though certain countries offer excellent prospects; nevertheless, investors should be cautious about the political risks associated with this asset class.

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Nikko AM adjusts its global equities position.

An overweight stance on global equities that lasted for over two-and-a-half years has been cut to neutral by Nikko Asset Management’s Global Investment Committee (GIC), the company announced yesterday. Nikko Asset Management is a related entity of Tyndall Investment Management Limited. In confirming the provisional decision made in early March, the Tokyo-based asset manager cited the following concerns:

1) Heightened fear of geopolitical risk,

2) Accelerating deterioration of China’s economy and financial system,

3) Subpar US and Japanese economic growth, and

4) Little room to re-rate Western equity valuations and continued deterioration in earnings estimates.

“We believe equity valuations have peaked and that markets will trade nervously going forward. On top of that, unsettled geopolitics make us uncomfortable and the fallout from China’s reform efforts could cause some shocks,” said John F. Vail, Chief Global Strategist and GIC Chairman. “In a few markets we expect equities to do well, but against the tunnel of uncertainty looming out there—and given the slim difference between our bond and equity return forecasts—we feel a neutral view on global equities versus bonds is warranted.”

Vail expressed his views in the firm’s most recent Evolving Markets research report. Elsewhere in the report, analysts reported that 2013 fourth-quarter data on overall corporate profits in Japan (including unlisted companies) was very positive, with a record-setting quarter-on-quarter increase in the pretax recurring profit margin, while the four-quarter average hit a new high of 4.6%.

The report concludes that several other indicators confirm that Abenomics is working much better than the pessimists suggest.

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Japanese market survives volatility.

Japan’s equity market weathered an onslaught of selling in February by global macro hedge funds who were disappointed that the Bank of Japan (BOJ) didn’t accelerate its easing plan, according to a new research report from Nikko Asset Management (Nikko AM), a related entity of Tyndall Investment Management Limited (Tyndall AM). As Japanese equities weakened and the yen appreciated, global risk markets dipped, though most rebounded quite quickly following the February trough. Risk markets will likely continue to be volatile through to the end of the second quarter, however, as underlying fundamentals remain intact, Nikko AM’s view is to maintain its longstanding overweight on global equities, and Japanese equities in particular.

“In our view, Japan does not need a much weaker yen, nor does the BOJ have to add to its monetary easing plan to achieve decent economic growth or a positive equity market,” said John F. Vail, Chief Global Strategist at Nikko AM’s Tokyo head office. “In fact, as the yen stabilises and forex hedge losses dissipate, this should accelerate corporate profitability and push up Japanese stock prices. This would be a boon for U.S. dollar-denominated investors, who would benefit from the rising stock market without losing half the gains from yen weakness. Japan’s Price-Earnings Ratio is very attractive, especially given the positive surprises in the current earnings season.”

Japan’s 2013 fourth quarter GDP growth was 1.0%, far below the consensus of 2.8%. However, Nikko AM’s research suggests that Japan’s GDP is greatly understated due to continuously falling inventories, and we expect that the figure will be revised upward. Assuming inventories had not declined, GDP growth in the fourth quarter would have been 3.4%. Despite such numbers, Japan had the highest year-on-year growth rate out of the G3 in both the third and fourth quarters of 2013, culminating in a 1.6% year-on-year growth for calendar year 2013.

Personal consumption in Japan also grew strongly in the fourth quarter of 2013 and should continue in the first quarter 2014, as buyers front-run the 3% VAT hike due in April 2014. We expect personal consumption in the second quarter to plunge following the VAT hike by as much as 13% quarter-on-quarter (seasonally adjusted annual rate) and minus 1% year-on-year, but will likely be reversed in the third and fourth quarters of 2014. This would lead to year-on-year growth in personal consumption being flat by the end of 2014.

Thus, we continue to believe that Japan’s recovery is intact, and our forecast is for 5.3% GDP growth quarter-on-quarter (seasonally adjusted annual rate) in the first quarter of 2014 and 2.0% GDP growth for calendar year 2014.

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China’s shadow banking more important than US Fed: Nikko AM

The impact of bad debts in China’s shadow banking system is likely more important to the global economy than Fed policy, latest research from Nikko Asset Management (Nikko AM), a related entity of Tyndall Investment Management Limited (Tyndall AM) shows.

Unfortunately, due to a lack of transparency and the extremely complicated system, even well-informed global investors cannot grasp the true nature of China’s financial difficulties. Several property trusts have already defaulted, but with rising land prices and generous credit, these have managed to be “worked out;” Recent defaults in the mining and industrial sectors with questionable collateral will likely have more serious repercussions, however.

“Local governments have less capacity to offer rescues considering their own funding issues, and so we expect that many more defaults are likely this year,” said John F. Vail, Chief Global Strategist at Nikko AM’s Tokyo head office. “Meanwhile, other efforts to increase regulation of the shadow banking sector are bound to reduce liquidity, especially to troubled borrowers, and this has some possibility of accelerating into a more serious credit crunch. Thus, we have long been cautious on Chinese equities and despite low valuations, we continue to believe that corporate profit margins will be under pressure and that bank earnings understate the true problem of bad debts.”

In other findings, iron ore is expected to fall in price from its current price level of around $130 per ton towards $110-$120 per ton by 2018, as a result of increased supply from Australia and Brazil. As a key component in steel products, demand for iron ore has surged as a result of China’s ongoing urbanisation process. The inability of iron ore producers to increase supply incrementally has led to a quadrupling of the iron ore price over the past 10 years.

“Looking forward to 2018, assuming the forecasted supply comes to the market, this should have the impact of reducing the iron ore price by around $20 per ton,” said James Eginton, a research analyst at

Nikko AM’s subsidiary, Tyndall AM in Australia. “Thus, the outlook for steel makers has begun to brighten with the potential for margin expansion and improved financial performance over the longer term.”

In Japan, inflation is moving strongly upward, with pipeline inflation rising 0.8% month-on-month in December (3.3% year-on-year). There are also strong signs that this is flowing through to retail prices, with the goods portion of the Consumer Price Index rising 0.7% month-on-month in November and up 5.4% on a 6-month annualised basis.

In an update to our previous report on the Abenomics Wealth Effect, the latest data from the Bank of Japan shows that ¥84 trillion ($805 billion) of household financial new worth (excluding real estate) was created in the 12 months to September 2013, summing to ¥1.24 quadrillion of net financial assets, a record high. The impact of more wealth on consumption will be key to the success of Abenomics.

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