Chart 28: The world economy is improving — broad-based recovery —
good for Asia/EMs 100 Based on 29 1200 1100 80 1000 60 900 40 800 =— Percentage of Countries with J. ——MSCI EM, RS 20 700
1/11 1/12 1/13 1/14 1/15 1/16 Source: BofA Merrill Lynch Global Research, Haver, Bloomberg
Chart 29: EM cyclicals outperform as China’s NOMINAL GDP recovers. More to go.
eee SCI EM cyclicals/EM defensives price index, LS
180 === China Bloomberg Monthly GDP Estimate YoY +... 24
160 Cyclicals = energy, materials, consumer 19
140 14
120 9
100 4 80
Q =a
Oo Oo F&F Oo DD oO 9o 92 2&2 8& = = = = =
N Oo SF DO OO HM ~~ OSS
~~ a
Source: BofA Merrill Lynch Global Research, Bloomberg. Assumed GDP estimate for October-16 to be similar to that for September-16.
The question then is whether the strong USD or trade tensions from the new Trump administration can outweigh the more positive macro backdrop. We are inclined to back the view of our strategists and think that it will, so we are sticking with our long EM
Asia position. We are doing so with hedges via a long USD and a CNH put.
Long Nikkei: target 20,000
We had previously paired our long EM position with a long US oil equity position, but with our US strategists downgrading the sector ahead of OPEC we removed it earlier this week. We were therefore looking for another pro-growth trade to run alongside our EM position. Long Japanese equities seemed the logical place to look. While we acknowledge we have missed the lows and that today’s entry point may not be ideal, we suspect investors are not particularly long Japan yet since it was still showing as
modestly underweight in the last Fund Manager Survey.
Chart 30: Net % AA say they are overweight Japanese equities
Asset Allocation: JP Equities 60 _
~ 140
L 130
L120
L110
L 100
L 9O
80
2007 2008 2009 2010 2011 2012 2013 2014
FMS Net% say OW JP Equities, Ihs JP Performance vs World, rhs
Source: BofA Merrill Lynch Global Fund Manager Survey
2016
Our Japanese equity and FX strategist Shusuke Yamada has been arguing for a while that we would see both a weaker JPY and a rebound in Japanese equities. While arguably the JPY had turned beforehand, the Trump victory turbo charged the move. As the chart shows below Japanese equities do well historically during a period of bear steepening of the US yield curve. Our economists are also more upbeat on Japan thinking the weaker USD, the new policy stance of the BO) and the fiscal stimulus will push growth and
inflation higher next year.
16 Global Cross Asset Strategy - Year Ahead | 30 November 2016
BankofAmerica <2” Merrill Lynch
HOUSE_OVERSIGHT_014447