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Monthly Outlook December 2017 - Macro Picture
Shanggu Asset Management (Asia) Limited
Monthly Outlook December 2017
Macro Picture
US
• The US Senate passed the tax bill, cutting the corporate tax from 35% to 20%.
• Market expects three to four 25 bps each rate hikes in 2018
• The latest quarter showed that 78% of reported earnings beat expectation.
Europe
• Latest German political episode brings uncertainty. Angela Merkel and Social Democratic leaders are in talk about re-running the coalition government.
• ECB extended QE by nine months at a reduced pace of EUR 30 billion per month, ending in September 2018.
• The latest data reflected that only 55% of reported earnings beat expectation.
Japan
• The country's seventh straight quarter of GDP growth was much stronger than estimated. Nominal GDP was revised up to an annualized 3.2% expansion Q/Q from an initial 2.5% gain.
• BOJ is unlikely to tighten the monetary policy soon after Abe's winning in the election.
China
• PBOC uses macro-prudential policies to cool property market and contains leverage in the system.
• China's purchasing managers' index (PMI) for the manufacturing sector edged up to 51.8 in November from 51.6 in October.
Asset Allocation - Equities
US Equities
The key factor underpinning US equities has been the resilience of its corporate earnings. Almost 78% of companies’ earnings beat market expectation. S&P 500 has risen by 17.7% YTD, trading at 22.21x PE.
The corporate tax reform may have a significant impact on different sectors. Most IT companies already pay lower average taxes under the current system. However, the tax savings effect is much pronounced in the old economy stocks. Therefore, industrials, energy and consumption sectors are likely to be benefitted. Furthermore, The Feb chairman elect Powell indicated that the present regulations on banks are good enough, implying no further tightening on the way. This is supportive to the banking sector.
Europe Equities
The Euro Stoxx 50 has risen by 9.5% so far this year with P/E at 18.77x. After a relatively good year for European stocks, marked by a nice corporate profit revival, people expect further earnings growth for the region. That may help stocks withstand political risks as well as the negative impact from a potential rally in the EUR.
Equity multiples do not look cheap in absolute terms, but relatively to both bonds and credit. Further volatility in 2018 is anticipated given QE withdrawal, bond yield spikes and peak macro data. Overweight is assigned to construction, chemicals, financials; and underweight to utilities and food.
Japan Equities
The Japanese economy has grown for seven straight quarters, its longest expansion since comparable data back to the mid-1990s. A nearly year-long recovery in exports is driving corpoarte profits and business investment. Wage-inflation dynamics remain weak for the time being. Inflation expectations are subdued. A virtuous cycle of rising wages, demand, and prices is not yet clearly in sight.
The economy's reliance on external demand continues to increase. Therefore, exporters' stocks are preferred. With the TOPIX up by 19.7% YTD, trading at a modest 16.35x P/E, we maintain a neutral weight for the Japanese stock market.
China/HK Equities
Overweight rating is given to HK/China equities. The 19th Party Congress promotes the quality of growth and new areas of industry development while affirming the continuity of property tightening and corpoarte deleveraging process in 2018. However, the economy is likely to keep a 6.5% YOY growth supported by the fair global economy, industrial restructuring and consumption upgrades.
Thanks to the good momentum of China's economic growth, strong increase in Chinese corporate earnings, continued southbound net investment inflows and inexpensive valuation, HK market is still attractive.
Investors may focus on five investment themes in the months to come, namely, supply-side structural reform, SOE reform, Belt & Road initiatives, consumption upgrade and mainland-HK stock links.
Asset Allocation – Bonds
Corporate Credits
The year-end outlook is full of uncertainties: the unpredictable White House and fiscal agenda; and the Federal Reserves and European Central Bank that are unwinding or slowing down bond-buying programmes. Growth is picking up, keeping a lid on corporate defaults and leverage. On the other hand, we have warnings coming through from Chair Yellen and Mr. Powell about the level of debt, and there has been concerns about sustainability. And in the US it is particularly referring to the sovereign debt.
Fed seemed pretty determined to hike. Quite a few other central banks have got the same idea about wanting to try to normalize at some point, that puts a floor under rates, yields. However, some analysts doubt that the yield of 10-year US Treasuries can go beyond 2.6% level, which we saw earlier this year.
Disclaimers & Important Notice
Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable. However, we do not verify such information. We do not guarantee its accuracy or completeness, nor do we take responsibility for any loss occasioned by reliance placed upon the contents hereof. Any statements nonfactual in nature constitute only current opinions, which are subject to change. SG International Group Limited (or one of its affiliates) or their officers, directors, analysts, or employees may have positions in securities or commodities referred to herein, and may, as principal or agent, buy and sell such securities or commodities. An employee, analyst, officer, or a director of SG International Group Limited, or its affiliates, may serve as a director for companies mentioned in this report. Neither the information nor opinion expressed in this report shall constitute a solicitation to buy or sell any securities. There may be instances when fundamental, technical, and quantitative opinions may not be in concert. This firm (or one of its affiliates) may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this report.
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