Macro Investment Prospects

- Growing Signs of Slowdown in Advanced Economies "The global economic recovery would continue, although at a slower pace. Advanced countries’ economy has bounced back, driven by fiscal and monetary stimulus measures; businesses replenishing depleted inventories; and sharp recovery in exports. However, production growth is peaking out as companies slowed their buildup of inventories. Sharp recovery in the volume of global trade after a slump is losing strength: World trade had plunged in the wake of the collapse of Lehman Brothers September 2008, caused by a sudden shortage of the trade credit which finances transactions and a sharp reduction in inventories amid falling demand. Stimulus effect from tax cuts and government spending measures would also fade. Furthermore, amid persistent concerns about sovereign debt following the Greek fiscal deficit crisis, European and other advanced economies are adopting austerity measures. The U.S. government is likely to extend former President George W. Bush’s tax cuts for low-and middle-income families, while letting the break for high-income people to expire. Overall, the U.S. would effectively raise tax in fiscal 2011 beginning October this year, compared with fiscal 2010. Corporate profits in the U.S. and other major economies are bouncing back strongly. That is mainly because companies cut costs as they remain cautious about taking on new workers. The economic growth of advanced countries would decelerate after rising solidly early this year. Supply-demand gap of the U.S. and European economy remains large and won’t close easily, as indicated by persistently high unemployment rate, raising the risks of a continued disinflationary trend. Meanwhile, because of low potential growth, even if the Japanese economy grows only moderately, the supply-demand gap would close over time. Against the backdrop, Japan would get out of deflation in the middle of 2011 at the earliest. Under the circumstances, chances have risen that central banks of developed economies maintain their monetary easing for some time. Government bond yields of the U.S. and Japan have been declining. The continued downtrend in long-term interest rates is caused not only by fund inflows to the perceived safe haven of the government securities amid lingering European sovereign debt worries, but also by market expectations of a slowing economy, disinflation and prolonged monetary easing by central banks. Although concern about an economic slowdown remain, continued monetary stimulus, low government bond yields and rebounding corporate profits constitute an environment positive to the stock market. The euro has been bouncing back since June as risk aversion among investors following the Greek debt crisis receded. European bank stress test released July 23 showed most lenders have sufficient capital to withstand a recession and a sovereign-debt crisis, although the outcome was still insufficient to remove worries about the state of the European banking industry. That said, after getting through a crucial event, the market would restore calm at least for now. Meanwhile, the dollar has been weakening against major currencies as yield curb between long and short term U.S. Treasury securities has been flattening amid growing worries about an economic slowdown in the U.S."
- A Peak Out in Emerging Market Economic Growth "Emerging country economy is growing much faster overall than advanced economies. However, many central banks have shifted their monetary policy to tighten amid growing concerns about an economic overheating and accelerating inflation. Therefore, economic growth should have hit peak in the first half of this year and would gradually lose steam. Meanwhile, in most countries, excluding India, inflation isn’t rising as fast as had been feared months ago. Accordingly, concern receded that central banks may need to aggressively tighten monetary policy to curb inflation, which could touch off a sharp economic slowdown. In this respect, chances have risen that emerging economies achieve a soft landing."
- Threat of Deflation and Competitive Devaluation "Despite expected slowdown in the global economy, due to strong profit growth, businesses in advanced countries aren’t likely to further trim payrolls and cut back on capital investment. Meanwhile, emerging economies’ central banks would avert implementing a sharp monetary tightening. Therefore, chances of the global economy slipping into a double-dip recession is low. However, risks remain. One is deflation worries in advanced economies. Core consumer price indices excluding food and energy in the U.S. and Europe have slowed to around 1% year on year. If inflation head lower to slip into deflation, businesses and households would restrain spending, causing a further weakness in economic growth. Another risk is that countries may move toward letting their currencies to depreciate in an effort to give exporters competitive advantage and spur economic growth. Neither the dollar, euro and yen is much overvalued in terms of the real effective exchange rate. However, having limited room for carrying out further fiscal stimulus, the governments may engage in aggressive monetary easing and competitive currency devaluation, possibly leaving the currency market volatile and fueling tension over trade relations. That could spark a runup in commodity prices as credibility of major currencies as a whole decline and the attractiveness of hard assets increase."

Nomura Macro Investment Prospects Aug2010

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