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John Vail, Nikko AM

Global equities have room to run

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Global equities have much more room to appreciate given the positive global economic backdrop, and US equities are likely to prove the star performer in 2014, according to John F Vail (pictured), Chief Global Strategist and Chair of the Nikko Asset Management’s Global Investment Committee (GIC)… 

On the back of a spectacular year of performance for indices such as the S&P 500 and the Nikkei 225, equities generally topped the GIC’s forecasts for 2013. We have been overweight equities since September 2011.

In the US, booming home prices added around USD428 billion to US household wealth in the 3rd quarter, leading to a combined ‘wealth effect’ of nearly USD1.9 trillion and soaring auto purchases and retail sales. US payrolls look set to continue expanding at a healthy rate, with Nikko AM’s estimates showing a 0.07% average monthly drop in the unemployment rate for the first half of 2014, and stabilising at the ‘full employment’ rate of 6.5% by June 2014. This all bodes well for the global economic recovery and US equities in particular.

Nikko AM’s GIC members have forecasted US Federal Reserve tapering to start in December or January 2014, quantitative easing to end in the 3rd quarter of 2014 and the first US interest rate hike to be deferred until the 3rd quarter of 2015.
 
The prospect of when the US Fed might start tightening had been rattling markets and causing volatility spikes throughout 2013, but markets have now adapted to the new consensus. If the Fed does start to taper in early 2014, it is a positive sign that the US economy is firm enough to withstand such efforts, and should be seen as a positive for the global economy. In Japan, we expect the BOJ to continue its “autopilot” massive monetary easing. Thus, we expect the yen to weaken further in the quarters ahead, with a target of 104 to the dollar by March 2014, falling to 105 by June 2014, from the current range of 102-103. A weaker yen means higher earnings for Japanese companies and we foresee earnings estimates to continue to surprise on the upside. Thus, we continue to be positive on Japanese equities as well.
 
Nikko AM’s growth target for US equities is 7% total return from December 6 through the end of March 2014 and 21% through 2014, with European and Japanese equities following close behind with 5% and 4% respectively, in USD terms. Our target for 10-year bonds as at June-end 2014 is 3.15%.

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