In the China property market, we continue to see weakness after the severe tightening measures in tier 1 cities. Separately, a number of provincial government and municipal provinces have lowered their GDP growth targets in 2017 including Shanghai, Shanxi , Tianjin. The key reasons for the lowered targets are due to expectation of a slowdown in the property market and industrial activities. We see the government aims to gradually reduce its reliance on property sector but it should be a progressive gradual process rather than an abrupt one.

We reckon that the government will encourage more PPP investment with focus on environmental related projects.

The interesting point we note from recent official PMI is that the flattish new orders sub-index and slightly weaker new export orders sub-index suggest that the domestic demand may have helped up better than external demand on the back of continued fiscal support. We remain constructive in consumption sector driven by the acceleration of urbanization and consumption upgrade. We continue to have preference towards the new economy as the proportion of GDP of new economy is expected to increase further in China.

RMB Risks
In our opinion the forthcoming risks will be the Sino-American relationship and the RMB related movement. In particular the impact of the new Trump administration on US growth and its policy stance towards China. For RMB, we think government policies to control capital outflow are key factors we are monitoring. We do not anticipate sharp devaluation of RMB though.

On the other hand, we believe that supply side reform will be constructive for materials sector in 2017. Supply side reform and tighter environmental rules will impose more supply restriction of materials. As inflation expectation builds up, we observed that industrial companies have started a new round of restocking since 3Q last year.

FII flows continued to be negative for the third month in running on account of risk off sentiments in the global markets, while domestic flows continue their strength with positive flows for the fourth consecutive month. The markets would look for cues for the impact of demonetization in the results and how soon the impact fades away before deciding the next course of action. In terms of future strategy, we see weakness in domestic oriented sectors while at the same time we see tailwinds emerging for the IT and Pharma sector which also have very reasonable valuations. We are moving our portfolio towards both these sectors and would also look to increase positions in energy sector as oil and gas is relatively insulated from the current short term weakness in the economy.

Market movement in the short term will be driven by the strength and weakness of USD versus the rest of the emerging market currencies. We expect more clarity on Trump’s economic policies post his inauguration as the new US president on 20 January 2017, after which we can better evaluate the impact on ASEAN markets.

Looking forward, higher interest rates outlook in the US remains the biggest challenge for Latin America, but global economic environment and financial markets persist in a benign mode, which serves as a buffer. Another positive indicator for the region is inflation, which has been falling allowing room for looser monetary policy.

In Brazil, growth expectations for 2016 and 2017 have been revised downwards and the path to economic recovery seems to be longer and more gradual than previous estimated. On the political front fiscal reforms continue to move forward, which is a relevant source of strength to equity markets. The only positive side effect of current weak economic activity is that it has helped inflation to fall further, which opens room to an aggressive cut in interest rates throughout 2017. Overall, we see upside risks in the Brazilian equity markets, supported by falling interest rates and a fiscal agenda to be approved in congress in the first half of 2017.

In Mexico we have seen uncertainties increase, as the beginning of the Trump administration approaches. The Fed ́s monetary policy has a special importance for the Mexican equity market performance, as the Mexican Central Bank should follow a tighter monetary policy in an environment of already weak economic activity.

Similar to Brazil and unlike Mexico, Chile is in a mode of expansionary monetary policy – well behaved inflation and stable currency – which is always an important trigger to equity markets. Short term higher copper prices have sustained the currency, but we still have serious doubts as to the sustainability of current prices. We believe 2017 could be a good year for the Chilean equity markets depending on political events, namely the presidential election at the end of the year.

We have seen an improvement in the economic outlook for Colombia in the past month. First, oil prices strongly recovered after OPEC members reached an agreement to control supply. Second, an updated peace deal, signed by the government and the FARC (Revolutionary Force of Colombia), was ratified by congress. And last but not least, congress approved a structural tax reform, which should help secure Colombia ́s investment grade status, increase corporate profitability and boost business confidence and private investments. Economic activity remains weak in Colombia, and Investment remains the main drag. We expect the economic outlook to improve overtime.

As for Peru, we keep our positive stance. Economic activity is at reasonably healthy levels, with growth being driven by exports (mostly mining and fishery). However, domestic demand remains weak, given low private consumption. We do expect domestic activity to improve.

2016 was a gloomy year by many measures but markets disagreed! As markets look into 2017 and beyond, we see the possibility for a more efficient Saudi economy that is less dependent on oil driven by a young reform team, a non-deadlock Kuwaiti parliament, some kind of resolution of the Yemini war on the horizon and a more stable oil environment with an agreement between producers on cutting production (albeit short term).


We are optimistic about Russian equity and bond markets in 2017, even after the significant rally in 2016. Assuming our base case scenario for 2017, with an oil price average of $55/bbl and a ruble at 61/USD by year-end, our forecast is for Russian GDP growth reaching 1.7%. The consensus forecast of a -2.7% budget deficit seen on Bloomberg, probably assumes $40/bbl oil, and possibly some ruble appreciation. The budget deficit is sensitive to oil prices and the ruble exchange rate, but it is possible to see a transition into a surplus in 2017. Either way, with a government debt to GDP ratio of less than 20%, Russia can easily finance a possible deficit in this size range, and the bond market would love to see some new issues.

The ruble’s strength and new stability will likely cause investors to shift out of exporters, and refocus portfolios on the domestic economy once again. The ruble will be supported by high relative real rates, and potential ruble appreciation will be limited by possible intervention, as the CBR has explicitly stated its intention to build FX reserves to $500 billion, from $379 billon now. This new stability will help people and companies to plan for their future, providing a needed boost to confidence, which should lead to higher aggregate demand. If the CBR is successful in its inflation fighting efforts and it achieves its 4% CPI target, the domestic economy will find a new source of stability.

In Russia, we expect high EPS growth of more than 20%, particularly in the banking sector, due to loan quality improvements, loan volume growth, NIM stability and generally improving macro conditions. Consumption will likely improve, catching up with real wage increases and consumer sentiment, caused by falling inflation. Declining rates, combined with stronger consumer confidence, may also trigger a credit impulse, which will help our favorite banks, real estate developers, and durable goods retailers. Investment spending will probably bottom-out in 2017, given the rise in manufacturing PMI above 50 for the first time since 2014, and this could support steel and manufacturers.

Current Russian equity market valuations do not appear stretched and Russian equities remain the cheapest among major emerging market peers in terms of earnings multiples. At 6.8X forward 12m earnings, Russian equities are trading just slightly above its own 10 year average, but at a 45% discount to its peer group (MSCI EM Index PE is 12.2X), and despite the rally, Russian equities still have a dividend yield above 4.1%, a discount to its historical dividend yield, and much greater than the 2.5% dividend yield of the peer group.

So, what does this mean for expected market returns in 2017? Assuming Russia’s 45% discount to EM peers can close the gap to a 20% discount, and assuming market-cap weighted upside to 12 month target prices in our DCF models are accurate, we could potentially see a return of 25% for equities in 2017.

Read more on Russia here.

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