Description
In 2016, a slow recovery pace of the US economy will not only keep the Fed staying relatively dovish but also keep ECB, BOJ and PBOC continuing/expanding current easing programs.
1Q 2016 Investment Outlook
7 Jan 2016
Page 1, Total 24 Pages
Highlight
In 2016, a slow recovery pace of the US economy will not only keep the
Fed staying relatively dovish but also keep ECB, BOJ and PBOC
continuing/expanding current easing programs. Looking ahead the Fed
statement and China’s economic indicators would continue to drive the
global risk appetite, and the indication of US economic strength and dollar
direction are likely to result in EM volatility again.
Global equities
Low DM inflation and a mild global growth remain in the scene for 2016 for
investors to favor fund flows to DM equities. Our preferred DM market
remains European equities, as the additional monetary policy easing will be
an important driver of returns in the Stoxx, while corporate profitability
improvement is likely to be another catalyst moving into this year. The
other focus market will be Japanese stocks.
HK/China
On HK/China, since the central government is proactive in reducing
obsolete capacities and de-leveraging, it is unlikely to boost investment or
expand the balance sheets of local governments. During stock selection,
investors should focus on the outperformers related to the new economies.
Fixed Income Markets
On credit market, US high yield has been suffering in 2015, with
liquidity/redemption risk continuing to pressure the prices, whereas Asia
bond market was relatively resilient. Investors who look for a stable income
and yield could continue to expose in Asian USD bonds.
Forex Markets
On FX, USD is on track to strengthen further in 2016, although the
magnitude of USD appreciation might not be as dramatic as we have seen
in 2015. Our top FX idea in 1Q16 is to short CAD. We think Canada’s
Central Bank may need to cut interest rates further to cushion against the
oil shock and stimulate the sluggish economy. Our 1Q16 target for
USDCAD is 1.42.
INVESTMENT OUTLOOK
Third Quarter 2003
Internal Use Only
JULY 2003
1Q 2016 Investment Outlook
7 Jan 2016
Page 2, Total 24 Pages
Executive Summary 3
Equities
US 5
Emerging Markets (EM) 7
Europe 10
Japan 12
China / Hong Kong 14
Global Bond Market 18
Currencies
NZD
AUD
20
21
CAD
21
EUR 22
GBP 22
C
O
N
T
E
N
T
S
1Q 2016 Investment Outlook
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EXECUTIVE SUMMARY
Investment Analysis
Asset Class 1Q 2016
US equities =
European equities +
Japanese equities +
Hong Kong China equities +
Emerging market equities =
DM Corporate Bonds =/+
EM Sovereign bonds =
Asian bonds =/+
Commodity currencies =
Gold =
“Red” means changes have been made recently
Symbol representation:
=/+ Neutral with a Positive bias
=/- Neutral with a Negative bias
+ Positive
- Negative
= Neutral
? In 2016, a slow recovery pace of US economy
will not only keep the Fed staying relatively
dovish but also keep ECB, BOJ and PBOC
continuing/expanding current easing programs.
? Low DM inflation and a mild global growth
remain in the scene for investors to favour fund
flows to DM equities. Our preferred DM market
remains European equities, and the other focus
market will be Japanese stocks.
? On HK/China, since the central government is
proactive in reducing obsolete capacities and
de-leveraging, it is unlikely to boost investment
or expand the balance sheets of local
governments. During stock selection, investors
should focus on the outperformers related to the
new economies.
? On credit market, US high yield has been
suffering in 2015, with liquidity/redemption risk
continuing to pressure the prices, whereas Asia
bond market was relatively resilient. Investors
who look for a stable income and yield could
continue to expose in Asian USD bonds.
? On FX, USD is on track to strengthen further in
2016, although the magnitude of USD
appreciation might not as dramatic as we have
seen in 2015. Our top FX idea in 1Q16 is to
short CAD and our target for USDCAD is 1.42.
Global equities hit their troughs at the end of 3Q15 and rebounded sharply in October, thanks to a
more dovish than expected statement from Fed. As US has finally hiked the Fed Funds Rate in
Dec 2015, the market seemed to react so calmly that neither the US dollar nor the long term
Treasury yield has had much obvious movement since. We viewed this as the best case scenario
for the global markets, as a not-too-hot and not-too-cold economic temperature should continue to
support global asset prices. A slow recovery of US economy will not only keep the Fed stay
relatively dovish but also keep ECB, BOJ and PBOC continue their current easing program. Going
forward, Fed statement and China’s economic indicators would continue to drive the global risk
appetite, and the indication of US economic strength and dollar direction are likely to result in EM
volatility again.
On the other hand, low DM inflation and a mild global growth remain in the scene for 2016 for
investors to favor fund flows to DM equities, in our view. Our preferred DM market remains
European equities, as the additional monetary policy easing will be an important driver of returns in
the Stoxx, while corporate profitability improvement is likely to be another catalyst moving into this
year. The other focus market will be Japanese stocks, although the case of BOJ easing and Yen
weakness does not look as strong as that in Europe in 2016. In this quarter, we downgraded US
1Q 2016 Investment Outlook
7 Jan 2016
Page 4, Total 24 Pages
equities, as we expect US stock market to show another year of range trading. Concerns on rising
labor cost and profit margin sustainability would likely emerge this year, and we would like to focus
on a few key sectors such as consumption related technology and healthcare stocks as they are
the major beneficiaries of further strength in US consumer spending.
On Asia, all eyes are still on China growth slowdown and government’s reform agenda. Economic
growth is likely to face further downward pressure going into 1Q16, and it is widely anticipated that
more aggressive policy supports are needed to prevent a hard-landing. In 2016, we expect
consumer and service sectors to perform relatively better than the industrial sector, as the former
is supported by policy makers and the latter still faces the overcapacity and restructuring
challenges. With de-capacity and de-leverage in sight, China is not likely to rejuvenate its
investment spending and expand local government balance sheet in the coming years. Investors
should focus on winners emerging from the new economy.
On credit market, US high yield has been suffering in 2015, with liquidity/redemption risk
continuing to pressure the prices, whereas Asia bond market was relatively resilient thanks to its
undemanding valuation and investors’ risk averse attitude toward Asia’s more volatile equities
price performance. Chinese property sector USD high yield bonds have outperformed the market
expectation thanks to policy support to allow developers to issue onshore bonds with lower costs,
as well as the loosening of controls on property purchase restrictions. Investors who look for a
stable income and yield could continue to expose in Asian USD bonds. On the other hand, a
weakened RMB exchange rate has dampened the sentiment toward offshore RMB Dim Sum
bonds. The market consensus is for RMB to weaken further going into 2016. We expect the short
tenor high yield Dim Sum bonds remain supportive thanks to the limited supply and the spill-over
effect from onshore RMB bond market to the offshore.
On FX, USD is on track to strengthen further in 2016, although the magnitude of USD appreciation
might not be as dramatic as we have seen in 2015. Our top FX idea in 1Q16 is to short CAD.
Canadian economy grew only 1% in 3Q15 after a technical recession in the first two quarters of
2015. The weak oil prices and sector spending cut would continue to dampen the Canadian
economy going forward. The outlook for oil price remains pessimistic due to supply demand
imbalance. We think the Canada’s Central Bank may need to cut interest rates further to cushion
against the oil shock and stimulate the sluggish economy. Our 1Q16 target for USDCAD is 1.42.
1Q 2016 Investment Outlook
7 Jan 2016
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12-Month Performance
???? S&P 500 Index
S&P 500 Index Data
Market cap (USD) 18.7 trillion
52-week Hi / Lo 2,131/1,868
3-Mth Total Return 7.3%
Y-T-D Total Return 1.4%
50 / 250 Mov.Avg. 2,064/2,061
2015 Est. Yield 2.2%
2015 Estimated P/E 18.3x
2016 Estimated P/E 16.0x
2015 Estimated P/B 2.76x
Source: Bloomberg L.P.
As of 12/31/2015
UNITED STATES
INVESTMENT SUMMARY
- U.S. equity markets surged by 7.3% in 4Q15 and 3% for the year of
2015. .
- U.S. economic backdrop remains healthy.
- Earnings season kicking off in January will be in focus.
- Dollar strength and oil prices hold the key.
- An aging bull market, but not turning into bearish yet.
- Valuations of U.S. equities are not cheap.
U.S. equity markets (S&P 500) surged by 7.3% in 4Q15 and 3% for the
year of 2015. U.S. equities saw wild swings on global growth concerns,
interest rate hike uncertainty and oil prices slump and strong dollar affecting
manufacturers.
U.S. economic backdrop remains healthy. The Federal Reserve also
raised its policy rate by 25 bp for the first time in ten years, supported by
healthy economic backdrop of strong labor market, easy credit conditions
and improving consumer spending, although overall wage pressures
remain subdued. Low oil prices and the strong dollar are also factors
holding back headline inflation. The latter is unlikely to exceed the Fed’s 2%
target before the end of 2016.
Earnings season kicking off in January will be in focus. Affected by
strong dollar, U.S. corporates revised downward their revenue and earnings
forecast. According to Factset’s earnings insight, the estimated earnings
for 4Q15 are expected to decline by 4.5%, which would mark the first time
of declines in U.S. corporate earnings since 2009.
Dollar strength and oil prices hold the key. A key determinant of the
pace at which the Fed continues to raise rates is likely to center around the
U.S. dollar strength and oil prices. A stronger dollar acts as a drag on the
U.S. economy, and hurts corporate earnings and commodity prices.
Suppressed oil prices drag down inflation outlook. Therefore, continued
dollar strength and low oil prices would likely slow the pace of the Fed’s
rate increases. On the other hand, counter moves in the dollar and rebound
in commodity prices or inflation could trigger a faster pace of rate increases.
An aging bull market, but not turning into bearish yet. Looking into
2016, we remain positive on U.S. equities, given its healthier economic
backdrop than other countries and regions. Stronger dollar and better
fundamentals would allow the country to be more appealing than the
others. But we also note that entering its seventh year, which is now in its
82nd month (versus the 50-year average of 54 months), the ageing US
equity bull market looks vulnerable. Taking history as reference, U.S.
equities tend to underperform the global benchmark on average after the
start of the first rate hike. Monetary divergence would make Eurozone and
Japan to be more attractive than the U.S markets.
1Q 2016 Investment Outlook
7 Jan 2016
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Valuations of U.S. equities are not cheap. The S&P 500 is trading at 16x
forward 2016 earnings, which is above its 5-year historical average of
15.8x. We therefore expect U.S. equity markets to be volatile in narrow
trading ranges heading into 1Q16. We recommend investors to focus on
sectors like financial and information technology, and favor stocks with high
U.S sales exposure, strong balance sheets and strong fundamentals.
Sector Outlooks
Technology (Overweight) The sector performed well in 2015. Having
broken through 5000, Nasdaq Index might come due for some profit taking.
But we believe the innovation and entrepreneurial spirit driving the
technology sector still pervade. Technologies that offer consumer-related or
business-oriented services are appealing to investors. Positive factors for
technology sector include increased investment, M&A, and strong balance
sheets. Sector-wise, big data, cloud computing, internet of things, mobile
internet and social media will be the areas for future growth.
Healthcare (Overweight) The long-term growth story of
healthcare/biotechnology is still intact. The health care sector covers two
industry groups, 1) companies that make healthcare equipment and provide
healthcare services, and 2) those that are involved in pharmaceuticals and
biotechnology. While the latter group has been outperforming the market
for a while and valuations appear fair, we prefer more of the first group,
which are still benefiting from numerous provisions of the Affordable Care
Act and valuations are not over-stretched yet.
Consumer Discretionary (Overweight) Consumer sentiment in the U.S. is
improving, as strengthening job market and money saved from lower
energy prices boosted spending power. Among consumer discretionary
sub-sectors, we favor travelling and tourism related businesses, benefit
from higher demand in travelling and entertainment not only from
Americans but also from other developed and emerging economies.
Risk Considerations: 1) uneven economic growth in Europe and the BRIC
nations, 2) economic trends in China, 3) oil price volatility and 4) geopolitical
threats in Europe and the Middle East. 5) a global low inflation environment
that could turn deflationary.
1Q 2016 Investment Outlook
7 Jan 2016
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12-Month Performance
???? MSCI Emerging Index
MSCI Emerging Index Data
Market cap (USD) 7.01 trillion
52-week Hi / Lo 1,067/771
3-Mth Total Return 0.52%
Y-T-D Total Return -14.83%
50 / 250 Mov.Avg. 822/916
2015 Est. Yield 2.92%
2015 Estimated P/E 12.16x
2016 Estimated P/E 10.97x
2015 Estimated P/B 1.26x
Source: Bloomberg L.P.
As of 12/31/2015
EMERGING MARKETS (EMS)
INVESTMENT SUMMARY
- Fed starts the interest rate normalization
- China’s economic slowdown and devaluation of Yuan
- Oil price slumps further
- Expect EM to pick up in 2nd Half
Fed starts the interest rate normalization The FOMC moved to raise the
target range for the Fed funds rate in the December 2015 meeting, the first
time since December 2008. Market expects Fed to raise rates by another
50-100bps in the year 2016. Financial conditions of some emerging
markets could be under pressure with higher levels of US dollar
denominated debt with the backdrop of rising interest rates and a
strengthening value in US Dollar. However, given that emerging markets
have fewer dollar-denominated debts than they did in the past decades, it
makes them less vulnerable than before. On the other hand, since Fed’s
taper tantrum in 2013, emerging markets currencies have suffered
significant devaluations. We believe that the EM currency values have
already been reflecting any potential Fed rate hikes in the near future. The
cheaper currency also makes emerging markets' products look more
attractive; eventually boosting exports and improving economic growth.
With US economic improvements, we believe the exports of emerging
market will finally pick up in the second half of 2016.
China’s economic slowdown and devaluation of Yuan China's
continued slowdown poses a serious headwind for the emerging markets.
For years, the world's second largest economy had been a major importer
of raw materials from around the world. As China posted the weakest
economic growth data since 2009, increasing concerns are felt around the
global market. China’s currency, the Renminbi also saw its value fall by 4%
in 2015, posting a four and a half year low. Both the economic slowdown
and currency devaluation could have detrimental effects on the emerging
market’s weakening, export-reliant economy. As People’s Bank of China
engages in the easing of monetary policies, central banks of the emerging
markets would also devalue their own currency to preserve their
competitive advantage in international trade. We believe that China remains
a key risk component for the emerging market economies.
Oil price slumps further Nymex crude oil closed at $37.04 a barrel which
translates to a loss of about 30% in 2015. Down for two straight years,
Nymex crude has suffered a total loss of more than 60% of its value since
its record high in 2013. Oil-exporting nations have undoubtedly suffered
from reducing government revenues and weaker currencies. For example,
Russia's 2016 budget was calculated on the basis oil prices at $50 per
barrel. Currently the oil price at around $37 would create financial
difficulties for Russian government to meets it fiscal and monetary budget
goals. On the other hand, Russia's Central Bank predicts that if oil prices
remain at current levels, GDP could shrink by as much as 2% in 2016.
OPEC reveals that, the oversupply of oil market would not see any reversal
until the 3Q of 2016.
1Q 2016 Investment Outlook
7 Jan 2016
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Expect EM to pick up in 2
nd
Half The headwinds that have been battering
emerging markets still exist in 2016 making any attempts of reversal in
2016 a difficult task, but the hope is that some countries will begin to turn
the corner. The cheap valuation is beginning to attract the attention of
investors. We believe the fund flows to emerging markets will start picking
up in the second half of this year.
Market Outlook
Indonesia (Overweight) Indonesia’s inflation rate posted in December fell
to the lowest figure in the last 6 years. Inflation rate went down to 3.35% in
December, from 4.89% in November, paving the way for the central bank to
further ease monetary policy as early as the 1st quarter. The low inflation
rate allows for total rate cuts of 75 bps this year, shifting from contractionary
to stimulatory monetary policy. Along with seven economic packages
announced by Indonesian government, we expect the domestic demand
could continue to improve. We think Indonesia could outperform among its
emerging market counterparts.
Korea (Overweight) The economic slowdown of China, the largest trading
partner of Korea, would continue to put pressure on Korea's export growth.
While Korea's external demand is expected to remain sluggish, an
improvement in domestic demand could help to alleviate its weak exports.
The unemployment condition remains stably low at 3.4% in recent months
despite the slowdown in external demand. The rise in home prices and low
interest rate environment are also likely to boost domestic consumption.
With cheap valuation, we believe Korea can outperform its emerging
market rivals.
Taiwan (Neutral) Taiwan's export and industrial production in November
went down by 16.9% and down by 4.94% year-on-year respectively.
Continued weakness in Chinese and emerging markets’ demand will exert
further headwinds on Taiwan's exports. Also, Taiwan‘s main opposition, the
Democratic Progressive Party, being the front runner of the upcoming
presidential election in January may lead to a potential shift in the
government’s bias towards Pro-China economic policies. We see this
change as a risk and hence rate Taiwan as neutral.
Russia (Neutral) Oil price began falling in the summer of 2014 from over
$110 per barrel to just above $35 per barrel today. Russia's economy relies
heavily on its oil related industry. The fall in oil price drives Russia towards
another year of recession. However, the terrorist attacks on the Russian
civil airplane in Egypt and Paris may lead to broad coalition between Russia
and Western countries, even though the EU extended the sanctions for
another 6 months in December. We believe that continued cooperation
between Russia and the West in the Syrian crisis gives Russia a genuine
opportunity to revert away from its economic and political isolation. We rate
Russia stock market as neutral.
India (Underweight) The total washout of Parliament's winter session was
a big disappointment and largely a repeat of the Monsoon Session.
Investors started to raise questions on the ability of Modi-led government in
pushing ahead with its reform agenda in the aftermath of a massive defeat
BJP suffered in Bihar polls. The failure to pass critical economic reforms
such as Goods and Services Tax (GST) Bill could put immense pressure on
the government’s effort to assure concerned investors. Indian stocks are
1Q 2016 Investment Outlook
7 Jan 2016
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trading at 30% premium compared to its Asian peers, we believe the gap
would reduce over time and hence Indian stock market is expected to
underperform in 2016.
Brazil (Underweight) Brazil's economy is expected to contract by 3.5% in
2015 and again in 2016, due to growing unemployment, budget deficit as
large as 9.5% of GDP and political uncertainty remaining elevated. Finance
Minister Levy resigned in December as he felt a lack of proper conditions
for him to carry on with reforms. The increasing tension in the Congress
significantly undermined the ability of government to implement austerity
measures. Last but not least, the lower house of Congress will likely decide
by March on whether to recommend for the impeachment of President
Rousseff. We believe that Brazil will be facing difficult economic and
political challenges in the coming quarter.
Risk Considerations:
1) Political, liquidity, and currency risks, 2) further downside on oil /
commodity prices, 3) Further slowdown in China or U.S, 4) unexpected
tightening on Fed funds rate
1Q 2016 Investment Outlook
7 Jan 2016
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12-Month Performance
???? Stoxx Europe 600 Index
Stoxx Europe 600 Index Data
Market cap (EUR) 9.5 trillion
52-week Hi / Lo 414/331
3-Mth Total Return 5.6%
Y-T-D Total Return 10.3%
50 / 250 Mov.Avg. 371/381
2015 Est. Yield 3.5%
2015 Estimated P/E 23.4x
2016 Estimated P/E 14.7x
2015 Estimated P/B 1.82x
Source: Bloomberg L.P.
As of 12/31/2015
EUROPE
INVESTMENT SUMMARY
- The Stoxx 600 Price Index recorded gain in 4Q15
- Eurozone’s economic growth is expected to remain solid in 2016
- Growth not only found in Germany but also in peripheral countries
- Consumer spending leads the recovery.
- We are still positive on European equities.
The Stoxx 600 Price Index recovered in 4Q15 from previous quarter’s
loss. Europe was the most outperforming developed market, recording
10.3% gain last year. European equities were volatile due to Greek debt
crisis, migrant crisis, terrorism, fear of slowdown in China, depreciation of
emerging market currencies, and uncertainty of U.S. interest rate hike.
Volkswagen emissions scandal and Glencore debt-related worries added
on the selling pressure. But European shares managed to recover well
after every correction.
Eurozone’s economic growth is expected to remain solid in 2016. The
Eurozone economy improved in 2015 although at a modest pace of 1.6%.
The gradual recovery is expected to continue in 2016, supported by solid
domestic demand, low oil prices and the continuation of the region’s
accommodative monetary policy. However, slow inflation is still a concern
triggering the risk of deflation. So we believe ECB, though not adding
more, will still maintain and extend its quantitative easing program to
support economic growth in 2016.
Growth not only found in Germany but also in peripheral countries.
Despite the Greek debt crisis, migrant crisis and the terrorists’ attack,
economic growth in Europe has been resilient, led by the strength in
Germany. We believe going into 2016, recovery will be more broad-based
from other Eurozone countries. The Organization for Economic Cooperation
and Development’s leading indicators for the Eurozone economy suggested
that the region will continue to grow modestly in coming months,
accelerating in France and Italy while remaining stable in Germany.
Consumer spending leads the recovery. Even though economic
weakness in emerging markets has hurt exports, consumer spending has
been the leading driver for the Eurozone recovery. Boosted by lower energy
prices, Eurozone consumers are encouraged with higher disposable
income. An improving labor market with falling unemployment also boosted
consumer confidence. We expect consumer spending to continue to play its
part in driving growth in the region.
We are still positive on European equities. We think that the outlook for
European stocks seems favorable, due to a combination of positive growth,
low inflation and the ECB’s continued monetary stimulus in 2016. Fiscal
spending is likely to get a boost from spending on immigrants and defense,
while low oil prices, weak currencies and credit growth should also bolster
economic expansion. With a prospective P/E level of 14.7x, the valuation
of Stoxx Europe 600 Price Index is still lower than its latest 5 years’
averages of 17.5x.
1Q 2016 Investment Outlook
7 Jan 2016
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Germany (Overweight) The German economy has proven remarkably
robust over the past two years, supported by private and public
consumption (though smaller contribution from the latter). Even though
sluggish exports and shrinking investment were a drag on growth, a strong
labor market (unemployment was at record-lows in October and November)
and expansionary monetary policy are all supporting private consumption.
Consumer sentiment was resilient in 4Q15 and is expected to continue to
drive growth. Public spending will likely also lift growth, partly due to
increased spending related to heightened immigration.
U.K. (Neutral) UK economy is slowing, which is partially attributed to
downside risk in sterling against the euro. Sterling pound is now close to a
20-year high relative to the euro. U.K. calling for a referendum on the
country’s membership of the European Union would likely pose a political
risk. A vote to leave would bring significant political uncertainty which could
affect confidence of investment in the country. Trading at 15x prospective
PE, the valuations of UK equities (FTSE 100 Index) are not overstretched
but also not as attractive as other Eurozone countries. The index’s high
exposure to financial and energy sectors might also cap the market’s near-
term upside.
France (Neutral) The French economy tends to be less volatile than other
Eurozone economies, because the substantial weight of government
expenditures stabilizes growth while the share of exports is relatively low.
In 1Q16, we expect consumption growth to remain solid but somewhat less
dynamic than in 2015 after the terrorist’s attack. Notably, labor market
conditions remain challenging as unemployment is still rising.
Italy (Overweight) Italian growth has remained on a gradually accelerating
path during the past year, thanks to improving labor market conditions,
lower oil prices, accommodative monetary policy and some progress on
administrative reforms. We expect the acceleration in consumption growth
to continue in 2016, as the mentioned drivers remain in place and fiscal
policy becomes less restrictive. Consumer confidence has climbed to an all-
time high; unemployment has edged down from elevated levels and
nominal wage growth has accelerated. However, investment growth has so
far remained more subdued.
Spain (Neutral) Given still high leverage in the economy, Spain is one of
the prime beneficiaries of the improving financing conditions induced by
various ECB measures. Debt servicing costs have fallen significantly due to
lower rate. Low energy and moderate inflation have continued to support
the country’s domestic demand. However, the results of a fragmented
parliament following the 20
th
Dec 2015 election will set the stage for weeks
of political uncertainty in 1Q16, which will be a short-term headwind to the
country.
Risk Considerations: 1) Challenge of low inflation; 2) Political stresses
related to the refugee crisis, Spanish election, and UK referendum; 3)
Resurgence of tension with Russia; 4) Slowdown in emerging markets,
especially China, or weaker-than-expected demand in major emerging
markets; 5) Failures to act timely by the ECB on stimulus program; 6)
Slump in oil prices which further adds pressure on inflation.
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7 Jan 2016
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12-Month Performance
???? Nikkei 225 Index
Nikkei 225 Index Data
Market cap (JPY) 349.3million
52-week Hi / Lo 20,868/16,796
3-Mth Total Return 9.6%
Y-T-D Total Return 11%
50 / 250 Mov.Avg. 19,233/19,175
2015 Est. Yield 1.7%
2015 Estimated P/E 19.8x
2016 Estimated P/E 17.1x
2015 Estimated P/B 1.7x
Source: Bloomberg L.P.
As of 12/31/2015
Japan
INVESTMENT SUMMARY
- The Japanese Nikkei 225 Stock Index advanced 9.6% in 4Q15 and
maintained positive up 11% in 2015.
- The BoJ has kept monetary policy on hold.
- Abe focuses on domestic economic policy.
- Improving corporate earnings and governance
- Japan in crucial phase to build solid base for sustained growth.
- We maintain our positive view on Japan
The Japanese Nikkei 225 Stock Index advanced 9.6% in 4Q15 and
maintained positive up 11% in 2015. Despite the yen showed modest
strength at 117-121 levels most of the time, investors re-entered the
Japanese equity markets after the heavy sell-off in 3Q15.
The BoJ has kept monetary policy on hold. On 18 Dec 2015, the Bank of
Japan (BoJ) kept its main target for monetary stimulus unchanged, but at
the same time, it announced a new program for buying exchange-traded
funds and decided to extend the average remaining maturity of its
Japanese government bond purchases. At the 30 Oct 2015, the BoJ
pushed back the time frame for reaching its ambitious 2% inflation target to
late 2016. However, most market participants doubt that inflation will hit 2%
next year as forecast, due to global disinflationary environment, no further
support from JPY depreciation, and modest wage growth. However, rising
CPI and a tight labor market are positive factors to keep the BoJ on hold
over the next few months. But with core inflation measures leveling off at
0.9%, pressure on the BoJ to show a policy reaction could mount again in
the course of 2016.
Abe focuses on domestic economic policy. On 5
th
Oct 2015, the Trans-
Pacific Partnership (TPP) negotiations have finally come to an agreement,
which encompasses 12 countries and roughly 40% of global GDP. The
government said it expects the TTP trade pact to boost GDP by ¥13.6
trillion or 2.59% from fiscal 2014 in its first estimate. Consequently, the
potential benefits of the TPP is believed to improve Japan’s productivity and
mid-term growth potentials, which include increasing the attractiveness of
foreign direct investment in Japan, and also increase the competition in the
country’s domestic-oriented sectors that suffer from low productivity.
Improving corporate earnings and governance. Japanese companies’
earnings have been growing at a solid pace. On a corporate front, the
introduction of Corporate Governance Code last year added to positive
development in Japan. The pressure exerted by shareholders on
management is beginning to see pay off, as increased dividends and share
buybacks by Japanese companies.
Japan in crucial phase to build solid base for sustained growth. We
think that Japan will be in a crucial phase to build a solid base for extended
economic growth over a medium-to-long-term horizon. From the market’s
point of view, sector selection in equities will also be important according to
the policy theme under the growth strategy. As the feasibility of these policy
measures increases, we expect upside potential for stocks exposed to
domestic demand over the longer term.
1Q 2016 Investment Outlook
7 Jan 2016
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We maintain our positive view on Japan. Although economic data from
Japan present a mixed picture on the country’s growth, the overall trend for
Japanese economy remains positive. In an environment of low growth and
low inflation, Japanese equity markets are supported by firm corporate
earnings growth and growing returns to shareholders. Furthermore,
valuations of Japanese equities are reasonable, with the Nikkei and Topix
Indexes trading at prospective earnings of 17.5and 14.6 respectively. On
corporate levels, positive news from M&As, capex, dividend payout and
share buybacks will continue to serve as short-term catalysts. We expect
Nikkei to trade between the ranges of 17500-20000.
Risk Considerations: 1) Inability to implement structural and other
economic reforms; 2) Yen appreciation due to global risk-off sentiment; 3)
significant surge in JGB yield 4) fiscal deficits caused by delayed sales taxes
increase; 5) BOJ fails to enact further easing in order to boost inflation; 6)
China’s slow-down, as China is Japan’s second largest trading partner.
1Q 2016 Investment Outlook
7 Jan 2016
Page 14, Total 24 Pages
12-Month Performance
???? HS China Enterprise Index
HS China Enterprise Index Data
Market cap (HKD) 2.58Trillion
52-week Hi / Lo 14,963 /9,059
3-Mth Return 2.72%
Y-T-D Return -16.91%
50 / 250 Mov.Avg. 10,046 /11,642
2015 Est Yield 4.1%
2015 Estimated P/E 7.2x
2016 Estimated P/E 7.2x
2015 Estimated P/B 1.0x
Source: Bloomberg L.P.
As of 12/31/2015
12-Month Performance
???? CSI 300 Index
CSI 300 Index Data
Market cap (RMB) 9.83Trillion
52-week Hi / Lo 5,380 / 2,952
3-Mth Total Return 16.52%
Y-T-D Total Return 7.23%
50 / 250 Mov.Avg. 3,704 / 3,917
2015 Est Yield 1.7%
2015 Estimated P/E 15.7x
2016 Estimated P/E 13.4x
2015 Estimated P/B 2.1x
Source: Bloomberg L.P.
As of 12/31/2015
CHINA / HONG KONG
INVESTMENT SUMMARY
- We expect to see a mild recovery in China’s economy in 2016 amid
greater visibility in the global outlook after the US rate hike.
- Policy support for the property sector and financial reform will be the
highlights in 2016
- We prefer China insurance, China brokerage, China property, TMT,
pharmaceutical and infrastructure
Greater visibility in the global economic outlook in 2016 Going into
2016, we expect higher visibility in the outlook of the global economy than
in 2015, since the US Fed has initiated the rate hike cycle on December 17.
With this major uncertainty removed, the capital flight situation in the EM
should be relieved. First, the Federal Reserve is likely to keep the monetary
environment loose during the presidential election year. Second, the US
dollar is unlikely to be so strong as to hurt the U.S. economy. In fact, the US
dollar index barely exceeded the 100 level on November 30, and it later
weakened to 97-98 by end of December. Against this backdrop, we believe
China will see a mild recovery in its economic activities in 2016.
Expects more supportive policies for the property sector China has
stated its five economic goals for 2016 in the Central Economic Work
Conference: to cut excessive inventory, to reduce obsolete capacities, to
de-leverage, to cut costs and to provide remedy for the poor regions.
Among these goals, the most important is destocking in the property sector.
The wide range of policies, both existing and under proposal (such as lower
installment rate for first time home buyers), suggests the Chinese
government is relying on the property market for reviving the economy. We
expect more effective policies (possibly tax deduction with mortgage
interests) to be rolled out and see it as a major theme in 2016.
Financial reform continues to unfold With the successful inclusion of
RMB into SDR, the market anticipates Shenzhen-HK Stock Connect will be
the next to come. Along with it, the quota for Shanghai-HK Stock Connect is
likely to be expanded, and hence the launch should be positive to the HK
stock market. Separately, a number of U.S.-listed China concept stocks
were included in the MSCI China index back in November. Thus, it is
natural to expect that A shares would be included in the MSCI Index in the
foreseeable future, or possibly in 2016. Other important measures include
the reform of the IPO registration system and mutual recognition of
HK/China funds. Overall, the financial reform continues to unfold quickly
and it will be a key driver on the HK/China markets in 2016. We raise our
year-end target for CSI 300 Index from 4,200 to 4,400.
Sentiment on HK market should improve in 2016 We continue to favor
the HK market as a means to gain China exposure because valuation is
more attractive than the A-shares (HSI trading at 11x vs. CSI 300 at 15x).
Currently, the HK market is oversold, as foreign investors fear there might
be a hard landing in China when a soft landing is more likely in our view.
Given lower earnings estimate, we lower our year-end targets for HSI and
HSCEI from 25,000 and 12,000 to 24,000 and 11,000 respectively.
Risk Considerations: 1) deflation; 2) policy undershoot; 3) slowdown in
demand growth 4) faster than expected rate hike 5) RMB depreciation risks.
1Q 2016 Investment Outlook
7 Jan 2016
Page 15, Total 24 Pages
12-Month Performance
???? Hang Seng Index
Hang Seng Index Data
Market cap (HKD) 7.28Trillion
52-week Hi / Lo
28,589 /
20,368
3-Mth Total Return 5.42%
Y-T-D Total Return -3.9%
50 / 250 Mov.Avg.
22,308 /
24,291
2015 Est Yield 3.9%
2015 Estimated P/E 9.7x
2016 Estimated P/E 10.7x
2015 Estimated P/B 1.2x
Source: Bloomberg L.P.
As of 12/31/2015
China Sector Snapshot
China insurance (maintain Overweight) Insurance penetration (insurance
premium per GDP) and insurance density (insurance premium per capita)
are still low, comparing to Western countries. There is still large room for
premium growth. On the other hand, government has introduced some
supportive policies to boost industry development. Recently, it launched
trial program of individual income tax reduction on commercial healthcare
insurance in 31 cities. It is expected that tax reduction policy will be also
introduced in pension insurance which would be one of the catalysts.
Moreover, we expect government to further relax the investment restriction
of insurance company’s portfolio which can enhance their investment yield
and diversify investment risk.
China brokerage (maintain Overweight) Trading volume for A-shares
picked up with an average daily trading turnover of Rmb1,065bn in Nov vs
Rmb890bn in Oct. Margin finance balance also increased from Rmb1.1tn in
Oct to Rmb1.2tn. That indicates strong momentum supported by increasing
turnover. Looking forward, China brokerage sector still has many catalysts
in 2016. The registration-based IPO system will be implemented on as soon
as 1 March 2016 which will gradually apply to over 700 companies in the
pipeline. Such policy will improve the transparency and price-mechanism of
the IPO system, which will favour brokers with ibank business. The opening
of Shenzhen-Hong Kong Stock Connect and fine-tuning of Shanghai-Hong
Kong Stock Connect will attract global investors for A and H shares,
moreover. The inclusion of A shares in MSCI index will introduce more
institutional investors in the market. Mutual fund recognition will provide
more choices for investors. We expect more reforms will be released in
order to re-consolidate the confidence of investors. The sector currently
trades at 9.1x PE, which is undemanding, thanks to industry policy release,
loose monetary policy and lack of investment vehicles in China.
China property (maintain Overweight) According to China Index
Academy, CREIS China Residential HPI-100 Index in Dec was up 4.15%
yoy to RMB 10,980/sq m. Meanwhile, national property sales value
continued to grow 20.2% yoy in Nov (vs 12.4% yoy in Oct), supporting YTD
sales growth of 15.6% yoy. We believe policy will remain positive and
supportive for China property sector in 2016. Apart from credit loosening,
discussions are under way on a personal tax deduction for mortgage
interest, a further down-payment cut for first-home purchases, more flexible
use of the Housing Provident Fund, and local government subsidies (eg,
Puyang in Henan province subsidises CNY150/sqm to rural citizens buying
their first home). More importantly, President Xi and many government
officials emphasize many times the importance of de-stocking of property,
which means government encourages developers to increase inventory
turnover, and thus stimulate related consumption and real estate
investment in the economy. As such, China property sector will continue to
outperform in 2016, whereas large players will take competitive advantages
for comprehensive landbank, lower finance costs, and synergy.
Technology, Media & Telecommunications (maintain Overweight)
Driven by faster speed and better network coverage, 3G/4G penetration
has ramped up to 60.2% as at end-Nov 2015, comparing with 46.7% as at
end-2014. In Oct 2015, average monthly data usage per user was around
362MB. It is expected that 2G users will likely direct upgrade to 4G network.
As data usage of 4G user is much higher than 3G and 2G, fast growing 4G
1Q 2016 Investment Outlook
7 Jan 2016
Page 16, Total 24 Pages
user base will boost data service revenue of China telcos, offsetting the
negative impact from “data roll-over”.
We expect the 4G migration will also benefit the internet and software
names which could monetize on the scalable ecosystems in the mobile
internet. Under 13th Five Year Plan, “Internet +” would be one of the key
policies. Government will encourage more sector upgrades by applying
internet technology which could boost new replacement demand. On the
back of solid balance sheet and strong cashflow, technology giants could
expand its business horizontally and vertically.
Pharmaceutical (maintain Overweight) China healthcare reform (started
in 2009) will make structural change in the whole healthcare industry. We
expect it will be challenging in downstream and most resources (such as
doctors) are still dominated by public hospitals. Yet, restructuring in
upstream (manufacturers and distributors) could be more straightforward,
and will be the government's main focus in near term.
China pharma manufacturing sector is fragmented. In 2014, top 100 drug
manufacturers contributed only 45.8% drug sales in China. Market expects
industry consolidation will result in the top 100 players reaching ~52% in
2020E. Domestic pharma leaders will continue consolidating market share
from the exiting of domestic manufacturers with inferior quality products and
weak R&D abilities and MNCs with lower price flexibility, less understanding
of tenders and lower penetration ability to lower tier markets. Drug
manufacturers with strong R&D capabilities are still likely to outperform.
For distributors, top 5 players contributed 37.4% market share in 2014,
compared with +90% in US. It is believed that tight regulations with
government committed enforcement should reaccelerate distributor
consolidation over the next 3-5 yrs. Market estimates ~70% distributors will
be eliminated in the next 5 years due to failure to pass the new Good
Supply Practice (GSP), unfavourable tendering rules/business environment,
falling along with "shadow distributors" in the government's ongoing anti-
bribery/VAT tax pursuit. As such, market will favour big distributors.
Infrastructure (maintain Overweight) The value of new railway contracts
surged 28% yoy in 3Q15 (vs -33% in 1H15) and many new projects were
approved. Media reports that many new potential overseas railway projects
will be launched. Market expects railway investment will rise 1% yoy, with
railway infrastructure investment staying flat and railway equipment
investment increasing 7% yoy in 2016E. According to the NDRC, there are
34 potential PPP railway projects, with required total investments
amounting to Rmb236.9bn. At present, China is expanding its overseas
market for the railway sector, which includes Thailand, Indonesia, Eastern
Europe, US, UK and so forth. It is expected that new overseas railway
contracts in the next three to six months might exceed US$20bn, this
estimate includes China-Laos, Thailand, and Jakarta-Bandung contracts.
Better still, China's policy banks and commercial banks, four new financial
institutions have been established to finance "One Belt, One Road" (OBOR)
projects. These include the Silk Road Foundation (SRF), the Asian
Infrastructure Investment Bank (AIIB), the China Investment Corporation
Capital (CIC Capital) and the New Development Bank. Market expects they
could provide US$2tn in funding. Thus, we are still bullish for the sector
thanks to both strong demands from domestic and overseas markets.
1Q 2016 Investment Outlook
7 Jan 2016
Page 17, Total 24 Pages
Rating Sectors Comments
Overweight
Insurance
Strong insurance premium growth and
policies support, such as tax benefit
Brokerage
Shenzhen-HK Stock Connect to boost
market sentiment and turnover
China
property
Destocking policy and strong inelastic
demand
Pharmace
utical
Consolidation of the small players and
positive policy support
TMT
Ramp up of 4G will boost data usage;
benefit from “internet +” policy
Infrastruct
ure
Strong demand from domestic and
overseas markets, policy support and AIIB
commence operation
Neutral
China
banks
Undemanding valuations, but fall in NIM,
sluggish loan growth and rising NPL
Consumer
Positive from Two-Child policy and rising
disposable income but keen competition
Macau
gaming
Low base effect and new properties will
launch but anti-corruption measures go on
Gas
Government’s supportive policy but low
crude oil prices will squeeze gas demand
New
energy
Government’s supportive policy but low
crude oil prices will squeeze demand
HK banks
Benefit from US rate hike but weak loan
demand from China and weak mortgage
demand
HK
property
Developers provide incentive programs for
marketing, strong balance sheet, higher
inventory turnover
Underweight
Basic
materials
Weak demand and oversupply
Energy Weak demand and oversupply
Utilities
Sensitive to US interest rate and expensive
valuation
1Q 2016 Investment Outlook
7 Jan 2016
Page 18, Total 24 Pages
US Treasury 2 Year Yield
US Treasury 10 Year Yield
BONDS
US entered rate hike cycle but low yields may be staying
Federal Open Market Committee (FOMC) has lifted its policy rate by 25
basis points in December 2015, which was the first hike since June 2006.
While this move may be small for now, market consensus expects the next
rate hike to occur in the 2
nd
Quarter of 2016. This expectation will be
reflected in short-dated US Treasury market, providing an upward
momentum for short-dated US Treasury yield to reach new highs in the
future. However, long-dated US Treasury market is in a more complicated
situation. Further quantitative easing in Europe, Japan and China will not
only provide a strong headwind for aggressive rate hikes in US, but also
attract further foreign demand to look for higher yields in Treasuries,
pressuring yields down. Therefore, longer-dated US Treasury yields are
expected to remain capped.
High quality credits to outperform high yield credits
FOMC Meeting in December suggested that US household spending was
solid, the labor market was strong and the underutilization of layout
resources has diminished appreciably in 2015. This provides strong
evidence that the US domestic economy is undergoing a modest recovery.
On the other hand, China and emerging markets’ economy continues to
suffer from an ongoing slowdown. Persistent oversupply in key commodity
markets will continue to exert downward pressure on commodities prices
which will further damage the economic outlook for countries reliant on the
export of resources such as Russia, Brazil, Chile and South Africa. This will
have an adverse impact on the emerging market economies as corporates
profit margins reduce in these countries. Credit conditions are expected to
be worsening too. This is the reason why high quality credits from
developed countries performed generally better than the high yield credits
from emerging market countries at the end of 2015. This trend is expected
to carry on towards 2016. US high yield bonds comprised primarily of
resources-related companies and this sector faces similar problems as high
yield bonds from emerging market countries. They are expected to remain
under pressure in 2016.
Stay focus in Chinese property, technology and consumer staples
sectors
China’s policymakers held their annual Central Economic Work Conference
last month, laying out key tasks in economic policies for 2016, the year of
initiation for the 13th “Five-Year Plan”. These tasks address the main
structural problems in the economy (overcapacity, high debt, and the
evolving financial risk) and new sources of growth. Market expects it would
lead to further cut in interest rates and Reserve Requirement Ratio,
reformation of the Hukou policy, subsidizing home purchases for migrant
workers, and promotion of high-tech and servicing industries. Looking
forward, we believe that the creditability in domestic properties, technology
and retail sectors will improve due to the favorable policy invoked. In
contrast, sectors such as natural resources, oil and industrials are less
favorable and investors should remain vigilant.
1Q 2016 Investment Outlook
7 Jan 2016
Page 19, Total 24 Pages
CNY depreciation keeps offshore CNY bonds under pressure
CNY depreciation played a strong role in the performance of the offshore
CNY bonds in 2015 and the effects are expected to continue in 2016. The
successful inclusion of CNY into IMF’s Special Drawing Rights basket
caused some concerns as the opening up of the capital account would
induce more capital outflows due to the loss of confidence on China’s
slowing economy and the turmoil faced in China’s stock markets last
summer. Sell-off in offshore CNY bonds occurred as CNY depreciation
reduced investors return. However, The Chinese government has been
reiterating that the recent devaluation in CNY is merely a correction and
that further depreciation would be limited. China’s rates are also expected
to be reduced, thus stabilizing the performance on offshore CNY bonds. In
addition, since issuers can sell CNY bonds with a lower coupon in the
domestic market, new issuances of offshore CNY bonds are expected to
maintain at lower level in 2016. This will reduce the supply of offshore CNY
bond in the market. As of the demand side, domestic investors continue to
look for ways to maximize their CNY investment returns, including
increasing their positions in offshore CNY bonds which would provide a
stabilizing force in the market. We expect high quality names with attractive
yields and short tenors to maintain its attractiveness to investors.
Risk Considerations:
i) Unexpected and aggressive rate hike in US;
ii) Deterioration of US and Chinese economy;
iii) Prolonged global recession;
iv) Unexpected global deflation;
Sharp decline in asset prices.
1Q 2016 Investment Outlook
7 Jan 2016
Page 20, Total 24 Pages
NZD/USD
12-Month Performance
RBA Cash Rate 2.50%
52-week Hi / Lo 0.7836 / 0.6259
12-Mth Change -12.41%
Source: Bloomberg L.P.
As of 31/12/2015
NZD / USD
INVESTMENT SUMMARY
- Dairy prices gradually stabilized
- Possibility of RBNZ deferring rate cut may help NZD rebound
Dairy prices gradually stabilized
Last year, the international dairy prices have fallen sharply until signs of
stabilization occurred this month. But still, it remained weak overall. Since
dairy products accounted for about thirty percent of New Zealand’s exports,
a price decline will hurt its export earnings and harm its economic
development. From the demand side, China announced a relaxation of “Two-
Child Policy” during the Fifth Plenary Session. In theory, it should boost
China’s import demand for dairy products and support dairy prices in long-
term, but in mid-short term, the effect is not significant. Also, the
implementation of policies to encourage fertility may result far less than
expected impact when China is experiencing slowdown in economic growth.
Mainland government had implemented the “Standalone Two Child” policy in
2013, but until the end of last year, applications from qualified “Standalone”
couple were far below expectation. From the supply perspective, the current
US corn bumper harvest and tariff relaxation on Argentina agricultural
exports will increase corn output, causing downward pressure on corn prices
and drop of cost of animal husbandry, and is not favorable to milk price
trend. We expect the international dairy price will begin to stabilize after it
has fallen sharply last year, but the imbalance of supply and demand will still
limit its upside.
Possibility of RBNZ deferring rate cut may help NZD rebound
From a fundamental perspective, New Zealand’s economy slowed down and
the inflation rate remained well below the lower limit of RBNZ’s target range
of 1-3% last year. The recent sharp decline of oil prices will increase the risk
of inflation slowdown. RBNZ stated that rising exchange rate will have no
benefit, and a further depreciation of NZD would be appropriate. Still, RBNZ
had cut interest rate for four times already, returning to the historic low of
2.5%. The RBNZ governor Wheeler raised the 2016 1Q economic growth
forecast and stated that an interest rate of 2.5% can stimulate the inflation
rate this year to within the target range set by RBNZ, along with a weak NZD
currency. The implication seems to imply that a temporary easing of
monetary policy is no longer necessary. In addition, New Zealand’s housing
prices remain high and will increase risks to financial stability. As there were
no clues of further rate hike of Fed in short term, NZD may have a rebound
as RBNZ’s rate cut has made the currency drop sharply last year. We
expect NZD/USD to be traded in range in 1Q with year-end target at
0.6900.
1Q 2016 Investment Outlook
7 Jan 2016
Page 21, Total 24 Pages
AUD/USD
12-Month Performance
RBA Official Cash
Rate
2.00%
52-week Hi / Lo 0.8223 / 0.6908
12-Mth Change -10.96%
Source: Bloomberg L.P.
As of 31/12/2015
USD/CAD
12-Month Performance
BoC Overnight
Rate Target
0.50%
52-week Hi / Lo 1.3959 / 1.1611
12-Mth Change 19.19%
Source: Bloomberg L.P.
As of 31/12/2015
AUD / USD
INVESTMENT SUMMARY
- Commodity weakness, China’s economic slowdown and tightening
U.S. monetary policy weigh on Australian dollar
Commodity weakness weighs on AUD
The declining price of main commodities has remained a limiting factor for
the Australian dollar because of Australia’s excessive reliance on the
resources sector. Iron ore price has dropped by more than 40% last year and
it is not expected to resume its rising trend with supply continuing to outstrip
demand.
China’s economic slowdown is likely to continue in 2016
As Australia’s biggest trading partner, any kind of slowdown in China could
have a serious impact on Australia’s export sector. Australia’s widening trade
deficit will keep adding downward pressure to the Australian dollar.
Moreover, the U.S. Federal Reserve is forecasting gradual rate hikes in
2016, while the Reserve Bank of Australia could conduct further easing of
monetary policy to boost its economy. A combination of US policy changes
and struggling commodity prices is likely to weigh on the outlook for the
Australian dollar. We remain cautious on AUD/USD in 1Q with year-end
target at 0.7300.
USD / CAD
INVESTMENT SUMMARY
- Global oil glut may worsen
- Canada’s economy is expected to remain on a slower growth path
Global oil glut may worsen
With the slump in oil prices, The Organization of the Petroleum Exporting
Countries (OPEC) has no plan to cut oil production targets, resulting in
market disappointment. Most of the OPEC’s countries, leading by Saudi
Arabia, have been reluctant to reduce productions armed with the fact that
their costs of extraction are one of the world’s lowest. Iran is set to rejoin
the world’s crude market this year, US has lifted 40-year ban on crude oil
exports and Russia have spoken about increasing energy production in
order to battle competitors. The lack of an agreement between these
parties is estimated to cause even higher levels of crude supply. With
global economic growth expected to be modest this year, the growth in the
demand for oil is also set to slow. Increasing oil surplus will put further
pressure on the crude price.
Canada’s economy growth remains slow
Energy companies are being forced to scale back expenditure plans in face
of sharply falling revenues. This resulted in a drop in investment and also
layoffs. Moreover, the falling oil price hurt exports and Canada has marked
monthly trade deficit for over a year. We expect Canada’s economy to
remain on a slower growth path in 2016. If conditions get worse, Canada’s
central bank may need to cut interest rates further to cushion against the oil
shock and stimulate the sluggish economy. We remain bullish on
USD/CAD with 2016 year-end target at 1.4500.
1Q 2016 Investment Outlook
7 Jan 2016
Page 22, Total 24 Pages
EUR/USD
12-Month Performance
ECB Main
Refinancing Rate
0.05%
52-week Hi / Lo 1.2104 / 1.0496
12-Mth Change -10.26%
Source: Bloomberg L.P.
As of 31/12/2015
GBP/USD
12-Month Performance
BoE Benchmark
Interest Rate
0.05%
52-week Hi / Lo 1.5883 / 1.4632
12-Mth Change -5.45%
Source: Bloomberg L.P.
As of 31/12/2015
EUR / USD
INVESTMENT SUMMARY
- Eurozone recovery increasingly supported by domestic demand
- Fed’s gradual hike may relieve pressure off Euro
Domestic demand continues to drive Eurozone growth
Supported by the impact of lower oil prices, consumer spending has been
the main driver of the economic recovery in the Eurozone last year. And the
recently extended quantitative easing program by the European Central
Bank to extend bond purchases and cut the deposit rate could boost capital
investment and help drive employment and wage growth. Recent macro
statistics in the Eurozone were better than expected and inflation showed a
tentative recovery. The damage of the Paris attacks and Volkswagen’s
emission scandal is limited. And the rising manufacturing activity signals a
weaker euro is benefiting the region’s exporters. The Eurozone is set to
continue its gradual recovery this year. But still, the region faces headwinds
from refugee problem and a general global slowdown particularly on the
back of slowing growth in China and other emerging markets.
Fed’s gradual hike may relieve pressure off Euro
The euro had hovered near the lows before the Fed’s first rate hike. Yet it is
believed that the policy divergence between Fed and ECB has been fully
priced in by currency markets and the pressure on euro would be relieved
by the Fed’s promise of slow rate rises. We expect EUR/USD to trade
within range in 1Q with year-end target at 1.1200.
GBP / USD
INVESTMENT SUMMARY
- UK economy is expected to expand steady this year
- Eurozone economic recovery supports UK’s export
Consumer-driven growth continues with economy expanding steadily
The British pound has been in decline with weakness being driven by the
shift in tone at the Bank of England concerning the timing of UK interest
rate rises. Yet recent economic performance of the country has been
stable. Unemployment has come down to about 5% and consumer-driven
growth continues. After the Federal Reserve raises interest rates for the
first time in nearly a decade, we expect the UK won’t be long behind.
Eurozone economic outlook is improving
Meanwhile, with an improving performance of the European economy, UK’s
major export market, worries that the pound will be excessively strong if the
BoE raises interest rates are likely to be a much less significant factor this
year. This also supports higher UK interest rates. It is expected that the
pound could face headwinds in short term from a strong dollar and “Brexit”
challenges. But the outlook of the currency remains positive. We remain
cautious on GBP/USD in 1Q due to the uncertainty of “Brexit” with
year-end target at 1.5200.
1Q 2016 Investment Outlook
7 Jan 2016
Page 23, Total 24 Pages
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1Q 2016 Investment Outlook
7 Jan 2016
Page 24, Total 24 Pages
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doc_402933532.pdf
In 2016, a slow recovery pace of the US economy will not only keep the Fed staying relatively dovish but also keep ECB, BOJ and PBOC continuing/expanding current easing programs.
1Q 2016 Investment Outlook
7 Jan 2016
Page 1, Total 24 Pages
Highlight
In 2016, a slow recovery pace of the US economy will not only keep the
Fed staying relatively dovish but also keep ECB, BOJ and PBOC
continuing/expanding current easing programs. Looking ahead the Fed
statement and China’s economic indicators would continue to drive the
global risk appetite, and the indication of US economic strength and dollar
direction are likely to result in EM volatility again.
Global equities
Low DM inflation and a mild global growth remain in the scene for 2016 for
investors to favor fund flows to DM equities. Our preferred DM market
remains European equities, as the additional monetary policy easing will be
an important driver of returns in the Stoxx, while corporate profitability
improvement is likely to be another catalyst moving into this year. The
other focus market will be Japanese stocks.
HK/China
On HK/China, since the central government is proactive in reducing
obsolete capacities and de-leveraging, it is unlikely to boost investment or
expand the balance sheets of local governments. During stock selection,
investors should focus on the outperformers related to the new economies.
Fixed Income Markets
On credit market, US high yield has been suffering in 2015, with
liquidity/redemption risk continuing to pressure the prices, whereas Asia
bond market was relatively resilient. Investors who look for a stable income
and yield could continue to expose in Asian USD bonds.
Forex Markets
On FX, USD is on track to strengthen further in 2016, although the
magnitude of USD appreciation might not be as dramatic as we have seen
in 2015. Our top FX idea in 1Q16 is to short CAD. We think Canada’s
Central Bank may need to cut interest rates further to cushion against the
oil shock and stimulate the sluggish economy. Our 1Q16 target for
USDCAD is 1.42.
INVESTMENT OUTLOOK
Third Quarter 2003
Internal Use Only
JULY 2003
1Q 2016 Investment Outlook
7 Jan 2016
Page 2, Total 24 Pages
Executive Summary 3
Equities
US 5
Emerging Markets (EM) 7
Europe 10
Japan 12
China / Hong Kong 14
Global Bond Market 18
Currencies
NZD
AUD
20
21
CAD
21
EUR 22
GBP 22
C
O
N
T
E
N
T
S
1Q 2016 Investment Outlook
7 Jan 2016
Page 3, Total 24 Pages
EXECUTIVE SUMMARY
Investment Analysis
Asset Class 1Q 2016
US equities =
European equities +
Japanese equities +
Hong Kong China equities +
Emerging market equities =
DM Corporate Bonds =/+
EM Sovereign bonds =
Asian bonds =/+
Commodity currencies =
Gold =
“Red” means changes have been made recently
Symbol representation:
=/+ Neutral with a Positive bias
=/- Neutral with a Negative bias
+ Positive
- Negative
= Neutral
? In 2016, a slow recovery pace of US economy
will not only keep the Fed staying relatively
dovish but also keep ECB, BOJ and PBOC
continuing/expanding current easing programs.
? Low DM inflation and a mild global growth
remain in the scene for investors to favour fund
flows to DM equities. Our preferred DM market
remains European equities, and the other focus
market will be Japanese stocks.
? On HK/China, since the central government is
proactive in reducing obsolete capacities and
de-leveraging, it is unlikely to boost investment
or expand the balance sheets of local
governments. During stock selection, investors
should focus on the outperformers related to the
new economies.
? On credit market, US high yield has been
suffering in 2015, with liquidity/redemption risk
continuing to pressure the prices, whereas Asia
bond market was relatively resilient. Investors
who look for a stable income and yield could
continue to expose in Asian USD bonds.
? On FX, USD is on track to strengthen further in
2016, although the magnitude of USD
appreciation might not as dramatic as we have
seen in 2015. Our top FX idea in 1Q16 is to
short CAD and our target for USDCAD is 1.42.
Global equities hit their troughs at the end of 3Q15 and rebounded sharply in October, thanks to a
more dovish than expected statement from Fed. As US has finally hiked the Fed Funds Rate in
Dec 2015, the market seemed to react so calmly that neither the US dollar nor the long term
Treasury yield has had much obvious movement since. We viewed this as the best case scenario
for the global markets, as a not-too-hot and not-too-cold economic temperature should continue to
support global asset prices. A slow recovery of US economy will not only keep the Fed stay
relatively dovish but also keep ECB, BOJ and PBOC continue their current easing program. Going
forward, Fed statement and China’s economic indicators would continue to drive the global risk
appetite, and the indication of US economic strength and dollar direction are likely to result in EM
volatility again.
On the other hand, low DM inflation and a mild global growth remain in the scene for 2016 for
investors to favor fund flows to DM equities, in our view. Our preferred DM market remains
European equities, as the additional monetary policy easing will be an important driver of returns in
the Stoxx, while corporate profitability improvement is likely to be another catalyst moving into this
year. The other focus market will be Japanese stocks, although the case of BOJ easing and Yen
weakness does not look as strong as that in Europe in 2016. In this quarter, we downgraded US
1Q 2016 Investment Outlook
7 Jan 2016
Page 4, Total 24 Pages
equities, as we expect US stock market to show another year of range trading. Concerns on rising
labor cost and profit margin sustainability would likely emerge this year, and we would like to focus
on a few key sectors such as consumption related technology and healthcare stocks as they are
the major beneficiaries of further strength in US consumer spending.
On Asia, all eyes are still on China growth slowdown and government’s reform agenda. Economic
growth is likely to face further downward pressure going into 1Q16, and it is widely anticipated that
more aggressive policy supports are needed to prevent a hard-landing. In 2016, we expect
consumer and service sectors to perform relatively better than the industrial sector, as the former
is supported by policy makers and the latter still faces the overcapacity and restructuring
challenges. With de-capacity and de-leverage in sight, China is not likely to rejuvenate its
investment spending and expand local government balance sheet in the coming years. Investors
should focus on winners emerging from the new economy.
On credit market, US high yield has been suffering in 2015, with liquidity/redemption risk
continuing to pressure the prices, whereas Asia bond market was relatively resilient thanks to its
undemanding valuation and investors’ risk averse attitude toward Asia’s more volatile equities
price performance. Chinese property sector USD high yield bonds have outperformed the market
expectation thanks to policy support to allow developers to issue onshore bonds with lower costs,
as well as the loosening of controls on property purchase restrictions. Investors who look for a
stable income and yield could continue to expose in Asian USD bonds. On the other hand, a
weakened RMB exchange rate has dampened the sentiment toward offshore RMB Dim Sum
bonds. The market consensus is for RMB to weaken further going into 2016. We expect the short
tenor high yield Dim Sum bonds remain supportive thanks to the limited supply and the spill-over
effect from onshore RMB bond market to the offshore.
On FX, USD is on track to strengthen further in 2016, although the magnitude of USD appreciation
might not be as dramatic as we have seen in 2015. Our top FX idea in 1Q16 is to short CAD.
Canadian economy grew only 1% in 3Q15 after a technical recession in the first two quarters of
2015. The weak oil prices and sector spending cut would continue to dampen the Canadian
economy going forward. The outlook for oil price remains pessimistic due to supply demand
imbalance. We think the Canada’s Central Bank may need to cut interest rates further to cushion
against the oil shock and stimulate the sluggish economy. Our 1Q16 target for USDCAD is 1.42.
1Q 2016 Investment Outlook
7 Jan 2016
Page 5, Total 24 Pages
12-Month Performance
???? S&P 500 Index
S&P 500 Index Data
Market cap (USD) 18.7 trillion
52-week Hi / Lo 2,131/1,868
3-Mth Total Return 7.3%
Y-T-D Total Return 1.4%
50 / 250 Mov.Avg. 2,064/2,061
2015 Est. Yield 2.2%
2015 Estimated P/E 18.3x
2016 Estimated P/E 16.0x
2015 Estimated P/B 2.76x
Source: Bloomberg L.P.
As of 12/31/2015
UNITED STATES
INVESTMENT SUMMARY
- U.S. equity markets surged by 7.3% in 4Q15 and 3% for the year of
2015. .
- U.S. economic backdrop remains healthy.
- Earnings season kicking off in January will be in focus.
- Dollar strength and oil prices hold the key.
- An aging bull market, but not turning into bearish yet.
- Valuations of U.S. equities are not cheap.
U.S. equity markets (S&P 500) surged by 7.3% in 4Q15 and 3% for the
year of 2015. U.S. equities saw wild swings on global growth concerns,
interest rate hike uncertainty and oil prices slump and strong dollar affecting
manufacturers.
U.S. economic backdrop remains healthy. The Federal Reserve also
raised its policy rate by 25 bp for the first time in ten years, supported by
healthy economic backdrop of strong labor market, easy credit conditions
and improving consumer spending, although overall wage pressures
remain subdued. Low oil prices and the strong dollar are also factors
holding back headline inflation. The latter is unlikely to exceed the Fed’s 2%
target before the end of 2016.
Earnings season kicking off in January will be in focus. Affected by
strong dollar, U.S. corporates revised downward their revenue and earnings
forecast. According to Factset’s earnings insight, the estimated earnings
for 4Q15 are expected to decline by 4.5%, which would mark the first time
of declines in U.S. corporate earnings since 2009.
Dollar strength and oil prices hold the key. A key determinant of the
pace at which the Fed continues to raise rates is likely to center around the
U.S. dollar strength and oil prices. A stronger dollar acts as a drag on the
U.S. economy, and hurts corporate earnings and commodity prices.
Suppressed oil prices drag down inflation outlook. Therefore, continued
dollar strength and low oil prices would likely slow the pace of the Fed’s
rate increases. On the other hand, counter moves in the dollar and rebound
in commodity prices or inflation could trigger a faster pace of rate increases.
An aging bull market, but not turning into bearish yet. Looking into
2016, we remain positive on U.S. equities, given its healthier economic
backdrop than other countries and regions. Stronger dollar and better
fundamentals would allow the country to be more appealing than the
others. But we also note that entering its seventh year, which is now in its
82nd month (versus the 50-year average of 54 months), the ageing US
equity bull market looks vulnerable. Taking history as reference, U.S.
equities tend to underperform the global benchmark on average after the
start of the first rate hike. Monetary divergence would make Eurozone and
Japan to be more attractive than the U.S markets.
1Q 2016 Investment Outlook
7 Jan 2016
Page 6, Total 24 Pages
Valuations of U.S. equities are not cheap. The S&P 500 is trading at 16x
forward 2016 earnings, which is above its 5-year historical average of
15.8x. We therefore expect U.S. equity markets to be volatile in narrow
trading ranges heading into 1Q16. We recommend investors to focus on
sectors like financial and information technology, and favor stocks with high
U.S sales exposure, strong balance sheets and strong fundamentals.
Sector Outlooks
Technology (Overweight) The sector performed well in 2015. Having
broken through 5000, Nasdaq Index might come due for some profit taking.
But we believe the innovation and entrepreneurial spirit driving the
technology sector still pervade. Technologies that offer consumer-related or
business-oriented services are appealing to investors. Positive factors for
technology sector include increased investment, M&A, and strong balance
sheets. Sector-wise, big data, cloud computing, internet of things, mobile
internet and social media will be the areas for future growth.
Healthcare (Overweight) The long-term growth story of
healthcare/biotechnology is still intact. The health care sector covers two
industry groups, 1) companies that make healthcare equipment and provide
healthcare services, and 2) those that are involved in pharmaceuticals and
biotechnology. While the latter group has been outperforming the market
for a while and valuations appear fair, we prefer more of the first group,
which are still benefiting from numerous provisions of the Affordable Care
Act and valuations are not over-stretched yet.
Consumer Discretionary (Overweight) Consumer sentiment in the U.S. is
improving, as strengthening job market and money saved from lower
energy prices boosted spending power. Among consumer discretionary
sub-sectors, we favor travelling and tourism related businesses, benefit
from higher demand in travelling and entertainment not only from
Americans but also from other developed and emerging economies.
Risk Considerations: 1) uneven economic growth in Europe and the BRIC
nations, 2) economic trends in China, 3) oil price volatility and 4) geopolitical
threats in Europe and the Middle East. 5) a global low inflation environment
that could turn deflationary.
1Q 2016 Investment Outlook
7 Jan 2016
Page 7, Total 24 Pages
12-Month Performance
???? MSCI Emerging Index
MSCI Emerging Index Data
Market cap (USD) 7.01 trillion
52-week Hi / Lo 1,067/771
3-Mth Total Return 0.52%
Y-T-D Total Return -14.83%
50 / 250 Mov.Avg. 822/916
2015 Est. Yield 2.92%
2015 Estimated P/E 12.16x
2016 Estimated P/E 10.97x
2015 Estimated P/B 1.26x
Source: Bloomberg L.P.
As of 12/31/2015
EMERGING MARKETS (EMS)
INVESTMENT SUMMARY
- Fed starts the interest rate normalization
- China’s economic slowdown and devaluation of Yuan
- Oil price slumps further
- Expect EM to pick up in 2nd Half
Fed starts the interest rate normalization The FOMC moved to raise the
target range for the Fed funds rate in the December 2015 meeting, the first
time since December 2008. Market expects Fed to raise rates by another
50-100bps in the year 2016. Financial conditions of some emerging
markets could be under pressure with higher levels of US dollar
denominated debt with the backdrop of rising interest rates and a
strengthening value in US Dollar. However, given that emerging markets
have fewer dollar-denominated debts than they did in the past decades, it
makes them less vulnerable than before. On the other hand, since Fed’s
taper tantrum in 2013, emerging markets currencies have suffered
significant devaluations. We believe that the EM currency values have
already been reflecting any potential Fed rate hikes in the near future. The
cheaper currency also makes emerging markets' products look more
attractive; eventually boosting exports and improving economic growth.
With US economic improvements, we believe the exports of emerging
market will finally pick up in the second half of 2016.
China’s economic slowdown and devaluation of Yuan China's
continued slowdown poses a serious headwind for the emerging markets.
For years, the world's second largest economy had been a major importer
of raw materials from around the world. As China posted the weakest
economic growth data since 2009, increasing concerns are felt around the
global market. China’s currency, the Renminbi also saw its value fall by 4%
in 2015, posting a four and a half year low. Both the economic slowdown
and currency devaluation could have detrimental effects on the emerging
market’s weakening, export-reliant economy. As People’s Bank of China
engages in the easing of monetary policies, central banks of the emerging
markets would also devalue their own currency to preserve their
competitive advantage in international trade. We believe that China remains
a key risk component for the emerging market economies.
Oil price slumps further Nymex crude oil closed at $37.04 a barrel which
translates to a loss of about 30% in 2015. Down for two straight years,
Nymex crude has suffered a total loss of more than 60% of its value since
its record high in 2013. Oil-exporting nations have undoubtedly suffered
from reducing government revenues and weaker currencies. For example,
Russia's 2016 budget was calculated on the basis oil prices at $50 per
barrel. Currently the oil price at around $37 would create financial
difficulties for Russian government to meets it fiscal and monetary budget
goals. On the other hand, Russia's Central Bank predicts that if oil prices
remain at current levels, GDP could shrink by as much as 2% in 2016.
OPEC reveals that, the oversupply of oil market would not see any reversal
until the 3Q of 2016.
1Q 2016 Investment Outlook
7 Jan 2016
Page 8, Total 24 Pages
Expect EM to pick up in 2
nd
Half The headwinds that have been battering
emerging markets still exist in 2016 making any attempts of reversal in
2016 a difficult task, but the hope is that some countries will begin to turn
the corner. The cheap valuation is beginning to attract the attention of
investors. We believe the fund flows to emerging markets will start picking
up in the second half of this year.
Market Outlook
Indonesia (Overweight) Indonesia’s inflation rate posted in December fell
to the lowest figure in the last 6 years. Inflation rate went down to 3.35% in
December, from 4.89% in November, paving the way for the central bank to
further ease monetary policy as early as the 1st quarter. The low inflation
rate allows for total rate cuts of 75 bps this year, shifting from contractionary
to stimulatory monetary policy. Along with seven economic packages
announced by Indonesian government, we expect the domestic demand
could continue to improve. We think Indonesia could outperform among its
emerging market counterparts.
Korea (Overweight) The economic slowdown of China, the largest trading
partner of Korea, would continue to put pressure on Korea's export growth.
While Korea's external demand is expected to remain sluggish, an
improvement in domestic demand could help to alleviate its weak exports.
The unemployment condition remains stably low at 3.4% in recent months
despite the slowdown in external demand. The rise in home prices and low
interest rate environment are also likely to boost domestic consumption.
With cheap valuation, we believe Korea can outperform its emerging
market rivals.
Taiwan (Neutral) Taiwan's export and industrial production in November
went down by 16.9% and down by 4.94% year-on-year respectively.
Continued weakness in Chinese and emerging markets’ demand will exert
further headwinds on Taiwan's exports. Also, Taiwan‘s main opposition, the
Democratic Progressive Party, being the front runner of the upcoming
presidential election in January may lead to a potential shift in the
government’s bias towards Pro-China economic policies. We see this
change as a risk and hence rate Taiwan as neutral.
Russia (Neutral) Oil price began falling in the summer of 2014 from over
$110 per barrel to just above $35 per barrel today. Russia's economy relies
heavily on its oil related industry. The fall in oil price drives Russia towards
another year of recession. However, the terrorist attacks on the Russian
civil airplane in Egypt and Paris may lead to broad coalition between Russia
and Western countries, even though the EU extended the sanctions for
another 6 months in December. We believe that continued cooperation
between Russia and the West in the Syrian crisis gives Russia a genuine
opportunity to revert away from its economic and political isolation. We rate
Russia stock market as neutral.
India (Underweight) The total washout of Parliament's winter session was
a big disappointment and largely a repeat of the Monsoon Session.
Investors started to raise questions on the ability of Modi-led government in
pushing ahead with its reform agenda in the aftermath of a massive defeat
BJP suffered in Bihar polls. The failure to pass critical economic reforms
such as Goods and Services Tax (GST) Bill could put immense pressure on
the government’s effort to assure concerned investors. Indian stocks are
1Q 2016 Investment Outlook
7 Jan 2016
Page 9, Total 24 Pages
trading at 30% premium compared to its Asian peers, we believe the gap
would reduce over time and hence Indian stock market is expected to
underperform in 2016.
Brazil (Underweight) Brazil's economy is expected to contract by 3.5% in
2015 and again in 2016, due to growing unemployment, budget deficit as
large as 9.5% of GDP and political uncertainty remaining elevated. Finance
Minister Levy resigned in December as he felt a lack of proper conditions
for him to carry on with reforms. The increasing tension in the Congress
significantly undermined the ability of government to implement austerity
measures. Last but not least, the lower house of Congress will likely decide
by March on whether to recommend for the impeachment of President
Rousseff. We believe that Brazil will be facing difficult economic and
political challenges in the coming quarter.
Risk Considerations:
1) Political, liquidity, and currency risks, 2) further downside on oil /
commodity prices, 3) Further slowdown in China or U.S, 4) unexpected
tightening on Fed funds rate
1Q 2016 Investment Outlook
7 Jan 2016
Page 10, Total 24 Pages
12-Month Performance
???? Stoxx Europe 600 Index
Stoxx Europe 600 Index Data
Market cap (EUR) 9.5 trillion
52-week Hi / Lo 414/331
3-Mth Total Return 5.6%
Y-T-D Total Return 10.3%
50 / 250 Mov.Avg. 371/381
2015 Est. Yield 3.5%
2015 Estimated P/E 23.4x
2016 Estimated P/E 14.7x
2015 Estimated P/B 1.82x
Source: Bloomberg L.P.
As of 12/31/2015
EUROPE
INVESTMENT SUMMARY
- The Stoxx 600 Price Index recorded gain in 4Q15
- Eurozone’s economic growth is expected to remain solid in 2016
- Growth not only found in Germany but also in peripheral countries
- Consumer spending leads the recovery.
- We are still positive on European equities.
The Stoxx 600 Price Index recovered in 4Q15 from previous quarter’s
loss. Europe was the most outperforming developed market, recording
10.3% gain last year. European equities were volatile due to Greek debt
crisis, migrant crisis, terrorism, fear of slowdown in China, depreciation of
emerging market currencies, and uncertainty of U.S. interest rate hike.
Volkswagen emissions scandal and Glencore debt-related worries added
on the selling pressure. But European shares managed to recover well
after every correction.
Eurozone’s economic growth is expected to remain solid in 2016. The
Eurozone economy improved in 2015 although at a modest pace of 1.6%.
The gradual recovery is expected to continue in 2016, supported by solid
domestic demand, low oil prices and the continuation of the region’s
accommodative monetary policy. However, slow inflation is still a concern
triggering the risk of deflation. So we believe ECB, though not adding
more, will still maintain and extend its quantitative easing program to
support economic growth in 2016.
Growth not only found in Germany but also in peripheral countries.
Despite the Greek debt crisis, migrant crisis and the terrorists’ attack,
economic growth in Europe has been resilient, led by the strength in
Germany. We believe going into 2016, recovery will be more broad-based
from other Eurozone countries. The Organization for Economic Cooperation
and Development’s leading indicators for the Eurozone economy suggested
that the region will continue to grow modestly in coming months,
accelerating in France and Italy while remaining stable in Germany.
Consumer spending leads the recovery. Even though economic
weakness in emerging markets has hurt exports, consumer spending has
been the leading driver for the Eurozone recovery. Boosted by lower energy
prices, Eurozone consumers are encouraged with higher disposable
income. An improving labor market with falling unemployment also boosted
consumer confidence. We expect consumer spending to continue to play its
part in driving growth in the region.
We are still positive on European equities. We think that the outlook for
European stocks seems favorable, due to a combination of positive growth,
low inflation and the ECB’s continued monetary stimulus in 2016. Fiscal
spending is likely to get a boost from spending on immigrants and defense,
while low oil prices, weak currencies and credit growth should also bolster
economic expansion. With a prospective P/E level of 14.7x, the valuation
of Stoxx Europe 600 Price Index is still lower than its latest 5 years’
averages of 17.5x.
1Q 2016 Investment Outlook
7 Jan 2016
Page 11, Total 24 Pages
Germany (Overweight) The German economy has proven remarkably
robust over the past two years, supported by private and public
consumption (though smaller contribution from the latter). Even though
sluggish exports and shrinking investment were a drag on growth, a strong
labor market (unemployment was at record-lows in October and November)
and expansionary monetary policy are all supporting private consumption.
Consumer sentiment was resilient in 4Q15 and is expected to continue to
drive growth. Public spending will likely also lift growth, partly due to
increased spending related to heightened immigration.
U.K. (Neutral) UK economy is slowing, which is partially attributed to
downside risk in sterling against the euro. Sterling pound is now close to a
20-year high relative to the euro. U.K. calling for a referendum on the
country’s membership of the European Union would likely pose a political
risk. A vote to leave would bring significant political uncertainty which could
affect confidence of investment in the country. Trading at 15x prospective
PE, the valuations of UK equities (FTSE 100 Index) are not overstretched
but also not as attractive as other Eurozone countries. The index’s high
exposure to financial and energy sectors might also cap the market’s near-
term upside.
France (Neutral) The French economy tends to be less volatile than other
Eurozone economies, because the substantial weight of government
expenditures stabilizes growth while the share of exports is relatively low.
In 1Q16, we expect consumption growth to remain solid but somewhat less
dynamic than in 2015 after the terrorist’s attack. Notably, labor market
conditions remain challenging as unemployment is still rising.
Italy (Overweight) Italian growth has remained on a gradually accelerating
path during the past year, thanks to improving labor market conditions,
lower oil prices, accommodative monetary policy and some progress on
administrative reforms. We expect the acceleration in consumption growth
to continue in 2016, as the mentioned drivers remain in place and fiscal
policy becomes less restrictive. Consumer confidence has climbed to an all-
time high; unemployment has edged down from elevated levels and
nominal wage growth has accelerated. However, investment growth has so
far remained more subdued.
Spain (Neutral) Given still high leverage in the economy, Spain is one of
the prime beneficiaries of the improving financing conditions induced by
various ECB measures. Debt servicing costs have fallen significantly due to
lower rate. Low energy and moderate inflation have continued to support
the country’s domestic demand. However, the results of a fragmented
parliament following the 20
th
Dec 2015 election will set the stage for weeks
of political uncertainty in 1Q16, which will be a short-term headwind to the
country.
Risk Considerations: 1) Challenge of low inflation; 2) Political stresses
related to the refugee crisis, Spanish election, and UK referendum; 3)
Resurgence of tension with Russia; 4) Slowdown in emerging markets,
especially China, or weaker-than-expected demand in major emerging
markets; 5) Failures to act timely by the ECB on stimulus program; 6)
Slump in oil prices which further adds pressure on inflation.
1Q 2016 Investment Outlook
7 Jan 2016
Page 12, Total 24 Pages
12-Month Performance
???? Nikkei 225 Index
Nikkei 225 Index Data
Market cap (JPY) 349.3million
52-week Hi / Lo 20,868/16,796
3-Mth Total Return 9.6%
Y-T-D Total Return 11%
50 / 250 Mov.Avg. 19,233/19,175
2015 Est. Yield 1.7%
2015 Estimated P/E 19.8x
2016 Estimated P/E 17.1x
2015 Estimated P/B 1.7x
Source: Bloomberg L.P.
As of 12/31/2015
Japan
INVESTMENT SUMMARY
- The Japanese Nikkei 225 Stock Index advanced 9.6% in 4Q15 and
maintained positive up 11% in 2015.
- The BoJ has kept monetary policy on hold.
- Abe focuses on domestic economic policy.
- Improving corporate earnings and governance
- Japan in crucial phase to build solid base for sustained growth.
- We maintain our positive view on Japan
The Japanese Nikkei 225 Stock Index advanced 9.6% in 4Q15 and
maintained positive up 11% in 2015. Despite the yen showed modest
strength at 117-121 levels most of the time, investors re-entered the
Japanese equity markets after the heavy sell-off in 3Q15.
The BoJ has kept monetary policy on hold. On 18 Dec 2015, the Bank of
Japan (BoJ) kept its main target for monetary stimulus unchanged, but at
the same time, it announced a new program for buying exchange-traded
funds and decided to extend the average remaining maturity of its
Japanese government bond purchases. At the 30 Oct 2015, the BoJ
pushed back the time frame for reaching its ambitious 2% inflation target to
late 2016. However, most market participants doubt that inflation will hit 2%
next year as forecast, due to global disinflationary environment, no further
support from JPY depreciation, and modest wage growth. However, rising
CPI and a tight labor market are positive factors to keep the BoJ on hold
over the next few months. But with core inflation measures leveling off at
0.9%, pressure on the BoJ to show a policy reaction could mount again in
the course of 2016.
Abe focuses on domestic economic policy. On 5
th
Oct 2015, the Trans-
Pacific Partnership (TPP) negotiations have finally come to an agreement,
which encompasses 12 countries and roughly 40% of global GDP. The
government said it expects the TTP trade pact to boost GDP by ¥13.6
trillion or 2.59% from fiscal 2014 in its first estimate. Consequently, the
potential benefits of the TPP is believed to improve Japan’s productivity and
mid-term growth potentials, which include increasing the attractiveness of
foreign direct investment in Japan, and also increase the competition in the
country’s domestic-oriented sectors that suffer from low productivity.
Improving corporate earnings and governance. Japanese companies’
earnings have been growing at a solid pace. On a corporate front, the
introduction of Corporate Governance Code last year added to positive
development in Japan. The pressure exerted by shareholders on
management is beginning to see pay off, as increased dividends and share
buybacks by Japanese companies.
Japan in crucial phase to build solid base for sustained growth. We
think that Japan will be in a crucial phase to build a solid base for extended
economic growth over a medium-to-long-term horizon. From the market’s
point of view, sector selection in equities will also be important according to
the policy theme under the growth strategy. As the feasibility of these policy
measures increases, we expect upside potential for stocks exposed to
domestic demand over the longer term.
1Q 2016 Investment Outlook
7 Jan 2016
Page 13, Total 24 Pages
We maintain our positive view on Japan. Although economic data from
Japan present a mixed picture on the country’s growth, the overall trend for
Japanese economy remains positive. In an environment of low growth and
low inflation, Japanese equity markets are supported by firm corporate
earnings growth and growing returns to shareholders. Furthermore,
valuations of Japanese equities are reasonable, with the Nikkei and Topix
Indexes trading at prospective earnings of 17.5and 14.6 respectively. On
corporate levels, positive news from M&As, capex, dividend payout and
share buybacks will continue to serve as short-term catalysts. We expect
Nikkei to trade between the ranges of 17500-20000.
Risk Considerations: 1) Inability to implement structural and other
economic reforms; 2) Yen appreciation due to global risk-off sentiment; 3)
significant surge in JGB yield 4) fiscal deficits caused by delayed sales taxes
increase; 5) BOJ fails to enact further easing in order to boost inflation; 6)
China’s slow-down, as China is Japan’s second largest trading partner.
1Q 2016 Investment Outlook
7 Jan 2016
Page 14, Total 24 Pages
12-Month Performance
???? HS China Enterprise Index
HS China Enterprise Index Data
Market cap (HKD) 2.58Trillion
52-week Hi / Lo 14,963 /9,059
3-Mth Return 2.72%
Y-T-D Return -16.91%
50 / 250 Mov.Avg. 10,046 /11,642
2015 Est Yield 4.1%
2015 Estimated P/E 7.2x
2016 Estimated P/E 7.2x
2015 Estimated P/B 1.0x
Source: Bloomberg L.P.
As of 12/31/2015
12-Month Performance
???? CSI 300 Index
CSI 300 Index Data
Market cap (RMB) 9.83Trillion
52-week Hi / Lo 5,380 / 2,952
3-Mth Total Return 16.52%
Y-T-D Total Return 7.23%
50 / 250 Mov.Avg. 3,704 / 3,917
2015 Est Yield 1.7%
2015 Estimated P/E 15.7x
2016 Estimated P/E 13.4x
2015 Estimated P/B 2.1x
Source: Bloomberg L.P.
As of 12/31/2015
CHINA / HONG KONG
INVESTMENT SUMMARY
- We expect to see a mild recovery in China’s economy in 2016 amid
greater visibility in the global outlook after the US rate hike.
- Policy support for the property sector and financial reform will be the
highlights in 2016
- We prefer China insurance, China brokerage, China property, TMT,
pharmaceutical and infrastructure
Greater visibility in the global economic outlook in 2016 Going into
2016, we expect higher visibility in the outlook of the global economy than
in 2015, since the US Fed has initiated the rate hike cycle on December 17.
With this major uncertainty removed, the capital flight situation in the EM
should be relieved. First, the Federal Reserve is likely to keep the monetary
environment loose during the presidential election year. Second, the US
dollar is unlikely to be so strong as to hurt the U.S. economy. In fact, the US
dollar index barely exceeded the 100 level on November 30, and it later
weakened to 97-98 by end of December. Against this backdrop, we believe
China will see a mild recovery in its economic activities in 2016.
Expects more supportive policies for the property sector China has
stated its five economic goals for 2016 in the Central Economic Work
Conference: to cut excessive inventory, to reduce obsolete capacities, to
de-leverage, to cut costs and to provide remedy for the poor regions.
Among these goals, the most important is destocking in the property sector.
The wide range of policies, both existing and under proposal (such as lower
installment rate for first time home buyers), suggests the Chinese
government is relying on the property market for reviving the economy. We
expect more effective policies (possibly tax deduction with mortgage
interests) to be rolled out and see it as a major theme in 2016.
Financial reform continues to unfold With the successful inclusion of
RMB into SDR, the market anticipates Shenzhen-HK Stock Connect will be
the next to come. Along with it, the quota for Shanghai-HK Stock Connect is
likely to be expanded, and hence the launch should be positive to the HK
stock market. Separately, a number of U.S.-listed China concept stocks
were included in the MSCI China index back in November. Thus, it is
natural to expect that A shares would be included in the MSCI Index in the
foreseeable future, or possibly in 2016. Other important measures include
the reform of the IPO registration system and mutual recognition of
HK/China funds. Overall, the financial reform continues to unfold quickly
and it will be a key driver on the HK/China markets in 2016. We raise our
year-end target for CSI 300 Index from 4,200 to 4,400.
Sentiment on HK market should improve in 2016 We continue to favor
the HK market as a means to gain China exposure because valuation is
more attractive than the A-shares (HSI trading at 11x vs. CSI 300 at 15x).
Currently, the HK market is oversold, as foreign investors fear there might
be a hard landing in China when a soft landing is more likely in our view.
Given lower earnings estimate, we lower our year-end targets for HSI and
HSCEI from 25,000 and 12,000 to 24,000 and 11,000 respectively.
Risk Considerations: 1) deflation; 2) policy undershoot; 3) slowdown in
demand growth 4) faster than expected rate hike 5) RMB depreciation risks.
1Q 2016 Investment Outlook
7 Jan 2016
Page 15, Total 24 Pages
12-Month Performance
???? Hang Seng Index
Hang Seng Index Data
Market cap (HKD) 7.28Trillion
52-week Hi / Lo
28,589 /
20,368
3-Mth Total Return 5.42%
Y-T-D Total Return -3.9%
50 / 250 Mov.Avg.
22,308 /
24,291
2015 Est Yield 3.9%
2015 Estimated P/E 9.7x
2016 Estimated P/E 10.7x
2015 Estimated P/B 1.2x
Source: Bloomberg L.P.
As of 12/31/2015
China Sector Snapshot
China insurance (maintain Overweight) Insurance penetration (insurance
premium per GDP) and insurance density (insurance premium per capita)
are still low, comparing to Western countries. There is still large room for
premium growth. On the other hand, government has introduced some
supportive policies to boost industry development. Recently, it launched
trial program of individual income tax reduction on commercial healthcare
insurance in 31 cities. It is expected that tax reduction policy will be also
introduced in pension insurance which would be one of the catalysts.
Moreover, we expect government to further relax the investment restriction
of insurance company’s portfolio which can enhance their investment yield
and diversify investment risk.
China brokerage (maintain Overweight) Trading volume for A-shares
picked up with an average daily trading turnover of Rmb1,065bn in Nov vs
Rmb890bn in Oct. Margin finance balance also increased from Rmb1.1tn in
Oct to Rmb1.2tn. That indicates strong momentum supported by increasing
turnover. Looking forward, China brokerage sector still has many catalysts
in 2016. The registration-based IPO system will be implemented on as soon
as 1 March 2016 which will gradually apply to over 700 companies in the
pipeline. Such policy will improve the transparency and price-mechanism of
the IPO system, which will favour brokers with ibank business. The opening
of Shenzhen-Hong Kong Stock Connect and fine-tuning of Shanghai-Hong
Kong Stock Connect will attract global investors for A and H shares,
moreover. The inclusion of A shares in MSCI index will introduce more
institutional investors in the market. Mutual fund recognition will provide
more choices for investors. We expect more reforms will be released in
order to re-consolidate the confidence of investors. The sector currently
trades at 9.1x PE, which is undemanding, thanks to industry policy release,
loose monetary policy and lack of investment vehicles in China.
China property (maintain Overweight) According to China Index
Academy, CREIS China Residential HPI-100 Index in Dec was up 4.15%
yoy to RMB 10,980/sq m. Meanwhile, national property sales value
continued to grow 20.2% yoy in Nov (vs 12.4% yoy in Oct), supporting YTD
sales growth of 15.6% yoy. We believe policy will remain positive and
supportive for China property sector in 2016. Apart from credit loosening,
discussions are under way on a personal tax deduction for mortgage
interest, a further down-payment cut for first-home purchases, more flexible
use of the Housing Provident Fund, and local government subsidies (eg,
Puyang in Henan province subsidises CNY150/sqm to rural citizens buying
their first home). More importantly, President Xi and many government
officials emphasize many times the importance of de-stocking of property,
which means government encourages developers to increase inventory
turnover, and thus stimulate related consumption and real estate
investment in the economy. As such, China property sector will continue to
outperform in 2016, whereas large players will take competitive advantages
for comprehensive landbank, lower finance costs, and synergy.
Technology, Media & Telecommunications (maintain Overweight)
Driven by faster speed and better network coverage, 3G/4G penetration
has ramped up to 60.2% as at end-Nov 2015, comparing with 46.7% as at
end-2014. In Oct 2015, average monthly data usage per user was around
362MB. It is expected that 2G users will likely direct upgrade to 4G network.
As data usage of 4G user is much higher than 3G and 2G, fast growing 4G
1Q 2016 Investment Outlook
7 Jan 2016
Page 16, Total 24 Pages
user base will boost data service revenue of China telcos, offsetting the
negative impact from “data roll-over”.
We expect the 4G migration will also benefit the internet and software
names which could monetize on the scalable ecosystems in the mobile
internet. Under 13th Five Year Plan, “Internet +” would be one of the key
policies. Government will encourage more sector upgrades by applying
internet technology which could boost new replacement demand. On the
back of solid balance sheet and strong cashflow, technology giants could
expand its business horizontally and vertically.
Pharmaceutical (maintain Overweight) China healthcare reform (started
in 2009) will make structural change in the whole healthcare industry. We
expect it will be challenging in downstream and most resources (such as
doctors) are still dominated by public hospitals. Yet, restructuring in
upstream (manufacturers and distributors) could be more straightforward,
and will be the government's main focus in near term.
China pharma manufacturing sector is fragmented. In 2014, top 100 drug
manufacturers contributed only 45.8% drug sales in China. Market expects
industry consolidation will result in the top 100 players reaching ~52% in
2020E. Domestic pharma leaders will continue consolidating market share
from the exiting of domestic manufacturers with inferior quality products and
weak R&D abilities and MNCs with lower price flexibility, less understanding
of tenders and lower penetration ability to lower tier markets. Drug
manufacturers with strong R&D capabilities are still likely to outperform.
For distributors, top 5 players contributed 37.4% market share in 2014,
compared with +90% in US. It is believed that tight regulations with
government committed enforcement should reaccelerate distributor
consolidation over the next 3-5 yrs. Market estimates ~70% distributors will
be eliminated in the next 5 years due to failure to pass the new Good
Supply Practice (GSP), unfavourable tendering rules/business environment,
falling along with "shadow distributors" in the government's ongoing anti-
bribery/VAT tax pursuit. As such, market will favour big distributors.
Infrastructure (maintain Overweight) The value of new railway contracts
surged 28% yoy in 3Q15 (vs -33% in 1H15) and many new projects were
approved. Media reports that many new potential overseas railway projects
will be launched. Market expects railway investment will rise 1% yoy, with
railway infrastructure investment staying flat and railway equipment
investment increasing 7% yoy in 2016E. According to the NDRC, there are
34 potential PPP railway projects, with required total investments
amounting to Rmb236.9bn. At present, China is expanding its overseas
market for the railway sector, which includes Thailand, Indonesia, Eastern
Europe, US, UK and so forth. It is expected that new overseas railway
contracts in the next three to six months might exceed US$20bn, this
estimate includes China-Laos, Thailand, and Jakarta-Bandung contracts.
Better still, China's policy banks and commercial banks, four new financial
institutions have been established to finance "One Belt, One Road" (OBOR)
projects. These include the Silk Road Foundation (SRF), the Asian
Infrastructure Investment Bank (AIIB), the China Investment Corporation
Capital (CIC Capital) and the New Development Bank. Market expects they
could provide US$2tn in funding. Thus, we are still bullish for the sector
thanks to both strong demands from domestic and overseas markets.
1Q 2016 Investment Outlook
7 Jan 2016
Page 17, Total 24 Pages
Rating Sectors Comments
Overweight
Insurance
Strong insurance premium growth and
policies support, such as tax benefit
Brokerage
Shenzhen-HK Stock Connect to boost
market sentiment and turnover
China
property
Destocking policy and strong inelastic
demand
Pharmace
utical
Consolidation of the small players and
positive policy support
TMT
Ramp up of 4G will boost data usage;
benefit from “internet +” policy
Infrastruct
ure
Strong demand from domestic and
overseas markets, policy support and AIIB
commence operation
Neutral
China
banks
Undemanding valuations, but fall in NIM,
sluggish loan growth and rising NPL
Consumer
Positive from Two-Child policy and rising
disposable income but keen competition
Macau
gaming
Low base effect and new properties will
launch but anti-corruption measures go on
Gas
Government’s supportive policy but low
crude oil prices will squeeze gas demand
New
energy
Government’s supportive policy but low
crude oil prices will squeeze demand
HK banks
Benefit from US rate hike but weak loan
demand from China and weak mortgage
demand
HK
property
Developers provide incentive programs for
marketing, strong balance sheet, higher
inventory turnover
Underweight
Basic
materials
Weak demand and oversupply
Energy Weak demand and oversupply
Utilities
Sensitive to US interest rate and expensive
valuation
1Q 2016 Investment Outlook
7 Jan 2016
Page 18, Total 24 Pages
US Treasury 2 Year Yield
US Treasury 10 Year Yield
BONDS
US entered rate hike cycle but low yields may be staying
Federal Open Market Committee (FOMC) has lifted its policy rate by 25
basis points in December 2015, which was the first hike since June 2006.
While this move may be small for now, market consensus expects the next
rate hike to occur in the 2
nd
Quarter of 2016. This expectation will be
reflected in short-dated US Treasury market, providing an upward
momentum for short-dated US Treasury yield to reach new highs in the
future. However, long-dated US Treasury market is in a more complicated
situation. Further quantitative easing in Europe, Japan and China will not
only provide a strong headwind for aggressive rate hikes in US, but also
attract further foreign demand to look for higher yields in Treasuries,
pressuring yields down. Therefore, longer-dated US Treasury yields are
expected to remain capped.
High quality credits to outperform high yield credits
FOMC Meeting in December suggested that US household spending was
solid, the labor market was strong and the underutilization of layout
resources has diminished appreciably in 2015. This provides strong
evidence that the US domestic economy is undergoing a modest recovery.
On the other hand, China and emerging markets’ economy continues to
suffer from an ongoing slowdown. Persistent oversupply in key commodity
markets will continue to exert downward pressure on commodities prices
which will further damage the economic outlook for countries reliant on the
export of resources such as Russia, Brazil, Chile and South Africa. This will
have an adverse impact on the emerging market economies as corporates
profit margins reduce in these countries. Credit conditions are expected to
be worsening too. This is the reason why high quality credits from
developed countries performed generally better than the high yield credits
from emerging market countries at the end of 2015. This trend is expected
to carry on towards 2016. US high yield bonds comprised primarily of
resources-related companies and this sector faces similar problems as high
yield bonds from emerging market countries. They are expected to remain
under pressure in 2016.
Stay focus in Chinese property, technology and consumer staples
sectors
China’s policymakers held their annual Central Economic Work Conference
last month, laying out key tasks in economic policies for 2016, the year of
initiation for the 13th “Five-Year Plan”. These tasks address the main
structural problems in the economy (overcapacity, high debt, and the
evolving financial risk) and new sources of growth. Market expects it would
lead to further cut in interest rates and Reserve Requirement Ratio,
reformation of the Hukou policy, subsidizing home purchases for migrant
workers, and promotion of high-tech and servicing industries. Looking
forward, we believe that the creditability in domestic properties, technology
and retail sectors will improve due to the favorable policy invoked. In
contrast, sectors such as natural resources, oil and industrials are less
favorable and investors should remain vigilant.
1Q 2016 Investment Outlook
7 Jan 2016
Page 19, Total 24 Pages
CNY depreciation keeps offshore CNY bonds under pressure
CNY depreciation played a strong role in the performance of the offshore
CNY bonds in 2015 and the effects are expected to continue in 2016. The
successful inclusion of CNY into IMF’s Special Drawing Rights basket
caused some concerns as the opening up of the capital account would
induce more capital outflows due to the loss of confidence on China’s
slowing economy and the turmoil faced in China’s stock markets last
summer. Sell-off in offshore CNY bonds occurred as CNY depreciation
reduced investors return. However, The Chinese government has been
reiterating that the recent devaluation in CNY is merely a correction and
that further depreciation would be limited. China’s rates are also expected
to be reduced, thus stabilizing the performance on offshore CNY bonds. In
addition, since issuers can sell CNY bonds with a lower coupon in the
domestic market, new issuances of offshore CNY bonds are expected to
maintain at lower level in 2016. This will reduce the supply of offshore CNY
bond in the market. As of the demand side, domestic investors continue to
look for ways to maximize their CNY investment returns, including
increasing their positions in offshore CNY bonds which would provide a
stabilizing force in the market. We expect high quality names with attractive
yields and short tenors to maintain its attractiveness to investors.
Risk Considerations:
i) Unexpected and aggressive rate hike in US;
ii) Deterioration of US and Chinese economy;
iii) Prolonged global recession;
iv) Unexpected global deflation;
Sharp decline in asset prices.
1Q 2016 Investment Outlook
7 Jan 2016
Page 20, Total 24 Pages
NZD/USD
12-Month Performance
RBA Cash Rate 2.50%
52-week Hi / Lo 0.7836 / 0.6259
12-Mth Change -12.41%
Source: Bloomberg L.P.
As of 31/12/2015
NZD / USD
INVESTMENT SUMMARY
- Dairy prices gradually stabilized
- Possibility of RBNZ deferring rate cut may help NZD rebound
Dairy prices gradually stabilized
Last year, the international dairy prices have fallen sharply until signs of
stabilization occurred this month. But still, it remained weak overall. Since
dairy products accounted for about thirty percent of New Zealand’s exports,
a price decline will hurt its export earnings and harm its economic
development. From the demand side, China announced a relaxation of “Two-
Child Policy” during the Fifth Plenary Session. In theory, it should boost
China’s import demand for dairy products and support dairy prices in long-
term, but in mid-short term, the effect is not significant. Also, the
implementation of policies to encourage fertility may result far less than
expected impact when China is experiencing slowdown in economic growth.
Mainland government had implemented the “Standalone Two Child” policy in
2013, but until the end of last year, applications from qualified “Standalone”
couple were far below expectation. From the supply perspective, the current
US corn bumper harvest and tariff relaxation on Argentina agricultural
exports will increase corn output, causing downward pressure on corn prices
and drop of cost of animal husbandry, and is not favorable to milk price
trend. We expect the international dairy price will begin to stabilize after it
has fallen sharply last year, but the imbalance of supply and demand will still
limit its upside.
Possibility of RBNZ deferring rate cut may help NZD rebound
From a fundamental perspective, New Zealand’s economy slowed down and
the inflation rate remained well below the lower limit of RBNZ’s target range
of 1-3% last year. The recent sharp decline of oil prices will increase the risk
of inflation slowdown. RBNZ stated that rising exchange rate will have no
benefit, and a further depreciation of NZD would be appropriate. Still, RBNZ
had cut interest rate for four times already, returning to the historic low of
2.5%. The RBNZ governor Wheeler raised the 2016 1Q economic growth
forecast and stated that an interest rate of 2.5% can stimulate the inflation
rate this year to within the target range set by RBNZ, along with a weak NZD
currency. The implication seems to imply that a temporary easing of
monetary policy is no longer necessary. In addition, New Zealand’s housing
prices remain high and will increase risks to financial stability. As there were
no clues of further rate hike of Fed in short term, NZD may have a rebound
as RBNZ’s rate cut has made the currency drop sharply last year. We
expect NZD/USD to be traded in range in 1Q with year-end target at
0.6900.
1Q 2016 Investment Outlook
7 Jan 2016
Page 21, Total 24 Pages
AUD/USD
12-Month Performance
RBA Official Cash
Rate
2.00%
52-week Hi / Lo 0.8223 / 0.6908
12-Mth Change -10.96%
Source: Bloomberg L.P.
As of 31/12/2015
USD/CAD
12-Month Performance
BoC Overnight
Rate Target
0.50%
52-week Hi / Lo 1.3959 / 1.1611
12-Mth Change 19.19%
Source: Bloomberg L.P.
As of 31/12/2015
AUD / USD
INVESTMENT SUMMARY
- Commodity weakness, China’s economic slowdown and tightening
U.S. monetary policy weigh on Australian dollar
Commodity weakness weighs on AUD
The declining price of main commodities has remained a limiting factor for
the Australian dollar because of Australia’s excessive reliance on the
resources sector. Iron ore price has dropped by more than 40% last year and
it is not expected to resume its rising trend with supply continuing to outstrip
demand.
China’s economic slowdown is likely to continue in 2016
As Australia’s biggest trading partner, any kind of slowdown in China could
have a serious impact on Australia’s export sector. Australia’s widening trade
deficit will keep adding downward pressure to the Australian dollar.
Moreover, the U.S. Federal Reserve is forecasting gradual rate hikes in
2016, while the Reserve Bank of Australia could conduct further easing of
monetary policy to boost its economy. A combination of US policy changes
and struggling commodity prices is likely to weigh on the outlook for the
Australian dollar. We remain cautious on AUD/USD in 1Q with year-end
target at 0.7300.
USD / CAD
INVESTMENT SUMMARY
- Global oil glut may worsen
- Canada’s economy is expected to remain on a slower growth path
Global oil glut may worsen
With the slump in oil prices, The Organization of the Petroleum Exporting
Countries (OPEC) has no plan to cut oil production targets, resulting in
market disappointment. Most of the OPEC’s countries, leading by Saudi
Arabia, have been reluctant to reduce productions armed with the fact that
their costs of extraction are one of the world’s lowest. Iran is set to rejoin
the world’s crude market this year, US has lifted 40-year ban on crude oil
exports and Russia have spoken about increasing energy production in
order to battle competitors. The lack of an agreement between these
parties is estimated to cause even higher levels of crude supply. With
global economic growth expected to be modest this year, the growth in the
demand for oil is also set to slow. Increasing oil surplus will put further
pressure on the crude price.
Canada’s economy growth remains slow
Energy companies are being forced to scale back expenditure plans in face
of sharply falling revenues. This resulted in a drop in investment and also
layoffs. Moreover, the falling oil price hurt exports and Canada has marked
monthly trade deficit for over a year. We expect Canada’s economy to
remain on a slower growth path in 2016. If conditions get worse, Canada’s
central bank may need to cut interest rates further to cushion against the oil
shock and stimulate the sluggish economy. We remain bullish on
USD/CAD with 2016 year-end target at 1.4500.
1Q 2016 Investment Outlook
7 Jan 2016
Page 22, Total 24 Pages
EUR/USD
12-Month Performance
ECB Main
Refinancing Rate
0.05%
52-week Hi / Lo 1.2104 / 1.0496
12-Mth Change -10.26%
Source: Bloomberg L.P.
As of 31/12/2015
GBP/USD
12-Month Performance
BoE Benchmark
Interest Rate
0.05%
52-week Hi / Lo 1.5883 / 1.4632
12-Mth Change -5.45%
Source: Bloomberg L.P.
As of 31/12/2015
EUR / USD
INVESTMENT SUMMARY
- Eurozone recovery increasingly supported by domestic demand
- Fed’s gradual hike may relieve pressure off Euro
Domestic demand continues to drive Eurozone growth
Supported by the impact of lower oil prices, consumer spending has been
the main driver of the economic recovery in the Eurozone last year. And the
recently extended quantitative easing program by the European Central
Bank to extend bond purchases and cut the deposit rate could boost capital
investment and help drive employment and wage growth. Recent macro
statistics in the Eurozone were better than expected and inflation showed a
tentative recovery. The damage of the Paris attacks and Volkswagen’s
emission scandal is limited. And the rising manufacturing activity signals a
weaker euro is benefiting the region’s exporters. The Eurozone is set to
continue its gradual recovery this year. But still, the region faces headwinds
from refugee problem and a general global slowdown particularly on the
back of slowing growth in China and other emerging markets.
Fed’s gradual hike may relieve pressure off Euro
The euro had hovered near the lows before the Fed’s first rate hike. Yet it is
believed that the policy divergence between Fed and ECB has been fully
priced in by currency markets and the pressure on euro would be relieved
by the Fed’s promise of slow rate rises. We expect EUR/USD to trade
within range in 1Q with year-end target at 1.1200.
GBP / USD
INVESTMENT SUMMARY
- UK economy is expected to expand steady this year
- Eurozone economic recovery supports UK’s export
Consumer-driven growth continues with economy expanding steadily
The British pound has been in decline with weakness being driven by the
shift in tone at the Bank of England concerning the timing of UK interest
rate rises. Yet recent economic performance of the country has been
stable. Unemployment has come down to about 5% and consumer-driven
growth continues. After the Federal Reserve raises interest rates for the
first time in nearly a decade, we expect the UK won’t be long behind.
Eurozone economic outlook is improving
Meanwhile, with an improving performance of the European economy, UK’s
major export market, worries that the pound will be excessively strong if the
BoE raises interest rates are likely to be a much less significant factor this
year. This also supports higher UK interest rates. It is expected that the
pound could face headwinds in short term from a strong dollar and “Brexit”
challenges. But the outlook of the currency remains positive. We remain
cautious on GBP/USD in 1Q due to the uncertainty of “Brexit” with
year-end target at 1.5200.
1Q 2016 Investment Outlook
7 Jan 2016
Page 23, Total 24 Pages
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that the views expressed herein accurately reflect the research analyst’s(s’) personal views about the company(ies) or products covered therein and that no
part of his/her/their compensation was, is or will be directly or indirectly related to the specific recommendation(s)
or views contained in this document.
© Copyright. Hang Seng Investment Services Limited. ALL RIGHTS RESERVED.
No part of this document may be reproduced, stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Hang
Seng Investment Services Limited.
(HSIS 08/14)
1Q 2016 Investment Outlook
7 Jan 2016
Page 24, Total 24 Pages
Disclosures
Procedures are in place to identify and manage any potential conflicts of interest that arise in connection with the
research operations. HSIS’s analysts and its other staff who are involved in the preparation and dissemination of
research studies operate and have a management reporting line independent of HSBC Group’s investment
banking business. Chinese wall procedures are in place between the research business operations and other
banking operations to ensure that any confidential and price sensitive information is handled in an appropriate
manner.
Analyst(s) is(are) paid in part by reference to the profitability of Hang Seng Bank Limited which includes
brokerage commission revenues.
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