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Positive on global equities, backed by solid global growth and improved corporate profits
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U.S. Fed likely to raise rates in each of the first three quarters of 2017
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Bullish on U.S. dollar versus the yen and the euro, on hawkish Fed
Nikko Asset Management's (Nikko AM) Global Investment Committee (GIC) has lifted its view on global
equities to overweight and is bullish on the U.S. dollar in its latest house view, due to stronger prospects for
the global economy with the election of Donald Trump as U.S. President and expectations of a hawkish
monetary policy by the U.S. Federal Reserve.
The committee, which consists of senior investment professionals from across the firm's global network,
met on December 19 to review global economic conditions, following an ad-hoc meeting in late November
reflecting the outcome of the U.S. Presidential election. At the ad-hoc meeting, it maintained its positive
view on Japanese equities, while moving to a slightly overweight stance on global equities.
Nikko AM Chief Global Strategist and GIC Chairman John Vail said, "This is the most positive view that the
Global Investment Committee has had on global equities in a long time. Although the surprising Trump
victory carries many uncertainties, the net effect for global economic growth and corporate profits has
clearly improved. This justifies an overweight stance on global equities, particularly for the United States
and the Developed Pacific ex-Japan region."
Although there is uncertainty about how Trump will deliver, the GIC believes his goal is clear: to spur
investment and create news jobs in the United States through lower corporate taxes and decreased
regulation. The committee thinks U.S. equities benefit in the intermediate term, forecasting the S&P500 to
stand at 2,478 at the end of June and 2,533 at the end of 2017.
Both European and Japanese equities are expected to perform well in local currency terms, backed by
strong U.S. and global growth, but their gains are likely to be limited in U.S. dollar terms.
The outlook for Japanese equities in yen-terms is also positive, amid rising corporate earnings helped by a
weaker yen and stronger growth both domestically and abroad. As the global economy continues to
expand, the Japanese economy will likely grow well above its trend, driven by improved consumer and
corporate sentiment, as well as improvements in net trade. In addition, corporate governance
improvements, including profit orientation and better returns to shareholders, are prime positive factors.
Still, the GIC reduced its stance on Japanese equities to neutral from overweight, based on the view that U.S.
equity returns are expected to be higher than those of Japanese equities.
As for currencies, the GIC is bullish on the U.S. dollar against the yen and the euro, on the view that the Fed
will take a more hawkish stance. The committee forecast the Fed to raise interest rates in each of the first
three quarters of 2017, as the central bank normalizes policy.
The Bank of Japan is expected to take a less dovish monetary stance, but remain dovish relative to the Fed,
undermining the Japanese currency. The GIC forecasts the yen to weaken further to 123 against the U.S.
dollar at the end of June and to 125 at the end of December 2017. Meanwhile, the committee forecasts the
euro to stand around parity by the end of June and at 0.98 against the U.S. dollar at the end of 2017.
For bonds, the GIC expects G-3 (Japan, the Eurozone and the U.S.) yields to continue rising through 2017 as
the Bank of Japan, the European Central Bank and the Fed are expected to be more hawkish. For U.S. 10-
year Treasuries, the committee's forecast for the end of June is 2.85 percent, while those for 10-year
Japanese government bonds and German bunds are 0.25 percent and 0.65 percent, respectively. The GIC
believes the BOJ will shift up its 10-year JGB target by 20 basis points in both the 2nd quarter and 4th quarter.
The committee meets on a quarterly basis to review its view of global economic conditions. Based on the
findings of its senior investment professionals around the world, the firm periodically reconsiders house
views on major global markets and asset classes.
The committee's main forecasts1 at this time are:
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U.S.: Half-year GDP growth (January to June 2017) of 2.5 percent half-on-half seasonally adjusted annual
rate (HoH SAAR), with the S&P 500 rising 10.7 percent in dollar terms over the next six months to June
2017.
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Japan: Half-year GDP growth of 1.9 percent HoH SAAR, with TOPIX rising 10.1 percent in yen terms over
the next six months to June 2017.
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Eurozone: Half-year GDP growth of 1.9 percent HoH SAAR, with MSCI Europe rising 8.0 percent in euro
terms over the next six months to June 2017.
1 Total return from the base date of December 15, 2016
Note: all dates in this report are Calendar Year (CY)-based unless otherwise specified.
