Fra Citigroup
Drivers and Risk By Market
United States
Driver: The Fed recently released the quarterly US Flow of Funds data for Q3 2014 which is a very useful indicator to get a sense of the stage of the credit cycle. So far the credit cycle continues to be supportive of equity outperformance over credit in our view. US corporates are still taking advantage of low rates to finance equity friendly activity via credit markets, and we have seen increased M&A activity, share buybacks and dividend payouts.
Risk: While strong 2015 earnings outlook and other fundamental metrics do signal equity upside, sentiment appears to be not supportive.
Implication: Sector preferences next year remain Information Technology and Financials alongside large caps and value styles.
End-2014 Target: 2000
End-2015 Target: 2200
Europe
Driver: We stay bullish on European equities with our end-2015 Stoxx target of 400. Our bull case is based on (1) the ECB’s QE; (2) modest nominal GDP growth; (3) 10-15% earnings growth; (4) cheap valuations and; 5) rising equity demand.
Risk: Recent developments in Greece have highlighted political risks in the Eurozone. The situation in Greece is unique and we do not expect events there to trigger a major crisis in the region, but political risks may rise more broadly in 2015.
Implication: We prefer Financials/Cyclicals and strong balance sheet sectors/surplus cash flows. We overweight Banks, Insurance, Resources, Autos, Health Care and Tech.
End-2014 Target: 370
End-2015 Target: 400
Japan
Driver: Abe’s coalition won more than two-thirds seats with the LDP winning 291 seats in Lower House election and Komeito 35 for a total of 326. Without major disruptions in Abenomics, Japanese equities may receive more inflows on the GPIF’s expansion in Japanese equity investment and the BoJ’s additional purchases.
Risk: The Business Outlook Survey for the 4Q revealed a notable downward revision of capital investment plans at small firms, as well as some delay in actual spending at large firms. If PM Abe’s growth strategy does not prove a catalyst, business leaders may not step up capex.
Implication: We overweight financials, which are appealing in valuations and positively affected by Abenomics; consumer cyclicals, which should benefit from yen weakness and the recovery in the US economy; and industrials, which should benefit from improvement in capex in Japan and the US.
End-2014 Target: 1390
End-2015 Target: 1650
Source: Bloomberg as of 12 December 2014
Asia
Driver: In the week of 10 December, Asia funds saw inflows while US, European and other EM funds suffered outflows. We remain bullish on EM Asia on cheap valuations, strong earnings, and main beneficiary of weaker commodity prices support. We also expect China’s authorities to take more easing measures to, including two rate cuts (25bps each) by mid-2015 and 3-4 RRR cuts (50bps each) in 2015 (with one rate cut and RRR cut in Q1).
Risk: In China, M2 growth edged down from 12.6% in Oct to 12.3% in Nov, lower than market expectations. While property investment remains a drag, there is no sign of a quick reversal of the growth downtrend yet.
Implication: Citi’s 2015 MSCI Asia ex Japan target is 630 currently. With outlooks for a stronger US$
