December 5, 2016

Deutsche Asset Management believes 2017 will be another slow, stable growing year, with benign global growth at 3.5%; the world would focus on the US new presidential regime against the background of a stronger US dollar and US Fed interest rate hikes.

The following current hot topics are identified:

1. Bullish towards US dollar, due to interest rate differentiated with rate hikes and also US assets looking better after Trump win

2. Fiscal—at most three interest rate hikes expected by the US Fed, one of them as early as December 2016

3. China will experience another slow growth year, with 6.3% GDP growth

4. Prefer MSCI China over Hang Seng, as earnings growth projection in China is better than that of Hong Kong

5. Expect slow growth in Europe and Japan, with Europe at 1.3% and Japan at 0.7% 

ON GLOBAL FORECAST

  • While 2017 will be another year with benign global growth at 3.5%, there are a number of underlying problems
  • A number of political problems still have not been resolved—ISIS, Brexit, Russia-Ukraine etc.
  • And a number of key elections in Europe—starting with the Referendum in Italy in December, to Austria, France and then Germany at the end of next year
  • Central banks have pretty much used up all their amunitions with QEs, and therefore, there is much less monetary policy flexibility for them to work with in 2017, leaving behind the only tactic being fiscal policy

ON TRUMP WIN

  • The positive sentiments that the Trump win brings to the table are mainly: 1) potential corporate tax cuts, which would be extremely beneficial to corporate USA, and 2) possible high fiscal spending including massive infrastructure investments
  • Have improved US GDP growth forecast by 20 basis points in 2017 after the Trump win to 2.2%, and higher GDP growth in 2018-2019
  • Key is how much and how fast the stimulus would come in – the good thing is that the Republican Party is controlling both houses, so hopefully this will make the process to pass these significant changes easier

ON CURRENCIES

  • 2017 will be a US dollar year—it will be a strong US dollar
  • Our target is US dollar on parity with Euro, 115 with Japanese Yen, and 7.3 with the RMB (with more downward pressure)

ON EQUITIES

  • We will likely see single-digit return in 2017, similar to that of 2016, but more with risk and volatility; Overall, good macro story, the market is not that expensive, so equities are reasonably attractive
  • Overweight Emerging Markets—India has the best growing story in Asia in the medium-term, Russia and Brazil are going from negative to positive; and for China, it will continue with a slow yet stable growth; for ASEAN, we like Philippines, neutral on Indonesia, and we are underweight on Singapore and Thailand. Overall, we favor North Asia over South Asia. The outlook for Asian earnings is positive.
  • Neutral on Latin America
  • And a weaker Yen will benefit Japan Inc., thereby making Japanese equities more attractive
  • Underweight EMEA
  • Overall, the strategy should continue to be tactical, selective, but flexible enough to rotate fast between asset classes as cycles are now much shorter

ON CHINA

  • China will continue a slow, stable growthand the “bumpy decelerating model” is proving to work
  • Chinese equities are looking pretty interesting, and the market has gone cheaper
  • Therefore, the gap between H and A-shares has narrowed, mainly due to South-bound money; In fact, A-shares are now becoming more attractive than H-shares
  • We overweight MSCI China over Hang Seng
  • From a sector standpoint, we will look into opportunities in healthcare, tourism and e-commerce
  • From a currency standpoint, the world is now starting to get used to a weaker RMB, and the key going forward is how PBOC is going to manage the communications; and PBOC has been learning too—look at the US Fed, how they gradually manage the market expectation on rate change
  • Shenzhen-Hong Kong Stock Connect provided a good opportunity to access some of the companies with highest growth in China. It also shows China government’s commitment to open up its capital market. But investors need to be selective—pay attention to companies with good cash flows