United States
Driver: The general consensus among FOMC members was that the first quarter weakness was “partly or even largely transitory.” Committee members also observed that reported 1Q growth in recent years has tended to underperform the rest of the year, despite having seasonally adjusted the data.
Risk: However, the FOMC was concerned that there may be more fundamental influences retarding growth even after the temporary influences have dissipated.
Implication: Although the financial stability risks appear to be rising and merit an earlier move, the flow of slow-growth cum no inflation data warrants delay in a rate hike. Citi analysts expect the first rate hike to take place in Dec 15. End-2015 Target: 2200 Source: Bloomberg as of 22 May 2015
Europe
Driver: We project real GDP to rise by 0.8% in 2015 in Italy, making it the lowestgrowing economy among the largest euro area countries. The modest economic expansion is driven by domestic demand, supported by a combination of better financial conditions, pent-up demand, and the probable absence of fiscal tightening.
Risk: The large public debt-to-GDP ratio has failed to stabilise, and a 3% of GDP fiscal deficit leaves no room for any fiscal slippage. The weak fiscal position leaves Italy potentially ‘one shock’ away from being subjected to a new Excessive Deficit Procedure, a risk recently highlighted by a Constitutional Court ruling on pensions.
Implication: Within Europe, we prefer Germany, France, Switzerland and UK while remaining neutral on Italy. End-2015 Target: 450 Source: Bloomberg as of 22 May 2015
Japan
Driver: Consumer spending may continue to grow at a moderate pace, with continued growth in employment, a modest rise in per-capita nominal wages and lower energy prices expected to lift real total employment income. In addition, public pension benefits will be raised, starting with this June’s payments, for the first increase since FY1999. Business investment could pick up in the context of increasing corporate profits and dissipating spare capacity at Japanese companies.
Risk: Potential risks include 1) the risk of yen strength if hopes of an escape from deflation mount, and 2) the consumption tax hike in April 2017. Implication: From a macro perspective, we overweight basic materials and IT, which may benefit from improving domestic and overseas economies. From a valuation perspective, we underweight consumer staples and healthcare, where overvaluation concerns have not been dispelled. End-2015 Target: 1750 Source: Bloomberg as of 22 May 2015
Asia
Driver: We forecast China’s weight into MSCI World to be 3.2% (with ADRs inclusion in Nov-15), 3.5% (with A-share 10% inclusion factor in mid-17), and 5.8% (with A-share 100% inclusion factor, but still subject to 30% foreign ownership limit, post 2020E), more than doubling the current 2.7%. Correspondingly, China’s weight into MSCI EM will be 28%, 30%, 43%, from current 25%. Risk: We estimate 1/3rd chance for June 10th 2015 MSCI A-share inclusion given still premature timing, but expect 2/3rd chance for June 2016 review with implementation likely in mid-2017. Implication: We forecast potential US$40bn/ 50bn ADRs/ A-share inflows, which will be a game changer for ADRs given the 11X daily trading value, but not for Ashares given the 0.6X.
