Nomura: “The End of the End of the World”

Screen Shot 2013 11 27 at 5.45.33 AMNomura is publishing a big global economic outlook for 2014: “The End Of The End Of The World.” The main idea is that as 2013 comes to an end, the crisis is clearly and truly over. There are obviously some issues remainning, but concerns over systemic risk will no longer on top of investors agenda.

Strategist Michael Kurtz and Co. write:

“There wasn’t any memo, but FYI the Global Financial Crisis is over. Not that clocks have simply rewound to 2006, but: the US property market has been recovering for no less than 20 months, the US household balance sheet is largely repaired, the renminbi is stronger and the US-China current account imbalance vastly reduced, China is grasping the nettle of structural reform, European core-vs-periphery cost differentials have substantially narrowed, and Europe is growing again.

Looking forward, we thus see 2014 as a year in which macrosystemic risks will not dominate equity performance – unfinished QE ‘taper’ business notwithstanding – but equally as a result, a year in which returns will not be spirited along by ‘risk compression’ and multiple expansion either. Rather, global stocks in 2014 will stand or fall in large part simply on whether they deliver earnings. The good news is, 2014 should serve up a reasonably robust growth platform for global corporate earnings: Our economists expect global nominal GDP growth to rise to 7.0% next year from 2013’s 6.1% — leaving our strategy preferences inclined toward cyclical- and reflation-sensitive sectors. But the acceleration will be unevenly skewed toward the Developed Market economies, while Emerging Market growth plateaus and China’s growth further moderates (to 6.9% in real terms). For investors, this is a double-edged sword. No longer will markets be able to make gains just by wringing out lingering fears of collapse. Markets are going to need actual growth.”

He add: “Looking toward 2014, we believe much of the ‘deep value’ argument for stocks has now played out as the Global Equity Risk Premium has fallen to just 0.4 standard deviations currently vs. its late-2011 high of 2.2 standard deviations. With this, global equities have outperformed the aggregate global bond index since mid-2012 by a sizeable 45% over the same time period.

From here, equities will increasingly require more of a growth rationale for upside, rather than the macro-risk compression of 2012-13. The fact is, after fairly undramatic passages (by 2010-12 standards) of such episodes this year as the Cyprus banking failure and October’s US fiscal standoff, very few developments from here are likely to rise to the level of true systemic contagion threats. But this also begs the question where the superlative earnings growth will be found.”

Nomura’s strategists said growth will be found on Japan (really!?) and Europe. In their country allocation, they note margin compression will affect US companies and emerging markets are not offering an appealing prospect. In term of sector allocation, they favour financials, industrial, tech and consumer discretionary stocks.

The main point is the stock driver performance will be linked to their internal growth. The fear of systemic risk has dissolved away.

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