Académique Documents
Professionnel Documents
Culture Documents
13 November 2012
13 NOVEMBER 2012
Global Economics
nomura-globalEconomics@nomura.com Contributor names can be found within the body of this report and on the back cover This report can be accessed electronically via: www.nomura.com/research or on Bloomberg (NOMR)
ASIA EX-JAPAN
Asia Outlook | 2013: The heat is on Australia | The peak in resource investment is coming China |Up in H1, down in H2 Hong Kong |Looming fiscal stimulus India | A year of consolidation Indonesia | Watch policies and politics Malaysia | Time for fiscal tightening Philippines | Still likely to shine Singapore | The (long) road to restructuring South Korea | Growth to rebound from a very low base Taiwan | External demand holds the key Thailand | New growth engines 7 11 12 15 16 17 18 19 20 21 22 23
JAPAN
Japan | Export recovery likely to deliver positive growth in Q1 2013 24
AMERICAS
United States | More clarity, less uncertainty Canada | Steady as she goes: growth slightly above trend in 2013 Mexico | 2013: The year of reforms Brazil | Inflation storm on the horizon Rest of LatAm 27 33 34 35 36
EURO AREA
Euro Area | Spain and Italy to remain at the epicenter 37
UNITED KINGDOM
United Kingdom | Stagnant 41
EEMEA
EEMEA Outlook| Some silver linings to the external risks bearing down Hungary | Fun and games continue Poland | NBP in a limited cutting cycle - growth still outperforming South Africa | Status quo means the brakes are still applied Turkey | A healthy rebalancing Rest of EEMEA 42 46 47 48 49 50
See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures
13 November 2012
13 November 2012
subsequent 12 months, primarily due to the deterioration in financial stability and the Asian economic crisis. However, we are confident that history will not repeat and our economic research team is comfortable in assuming that positive growth can be maintained in 2014 after a tax hike in April is implemented.
13 November 2012
13 November 2012
Forecast Summary
Real GDP (% y-o-y) Global Developed Emerging Markets Americas United States* Canada Latin America Argentina Brazil Chile Colombia Mexico Venezuela Asia/Pacific Japan Australia New Zealand Asia ex Japan, Aust, NZ China Hong Kong*** India** Indonesia Malaysia Philippines Singapore*** South Korea Taiw an Thailand Western Europe Euro area Austria France Germany Greece Ireland Italy Netherlands Portugal Spain United Kingdom EEMEA Czech Republic Hungary Israel Poland Romania South Africa Turkey 2012 3.0 1.1 5.2 2.3 2.1 2.2 2.8 2.0 1.3 5.1 4.5 3.7 6.0 5.4 1.6 3.6 2.7 6.3 7.9 1.5 5.3 6.1 4.8 6.0 1.8 2.3 1.0 5.5 -0.4 -0.5 0.4 0.1 0.9 -6.5 -0.1 -2.4 -0.3 -3.2 -1.4 -0.2 2.0 -0.9 -1.1 2.8 2.4 0.2 2.4 3.0 2013 3.0 0.7 5.6 2.1 1.5 2.0 3.7 4.0 4.1 5.5 4.5 3.5 -1.0 5.4 0.5 2.4 3.2 6.4 7.7 2.5 6.1 6.1 4.0 6.0 3.4 2.5 3.0 4.5 -0.6 -0.8 0.2 -0.5 0.3 -4.7 0.4 -2.5 -0.3 -2.8 -3.0 0.4 2.6 0.7 0.1 3.0 2.0 0.8 2.6 4.5 2014 3.7 1.7 5.8 3.0 2.8 2.1 3.6 3.5 3.5 5.0 4.5 3.5 3.0 5.7 1.2 2.8 3.3 6.6 7.5 3.5 6.5 6.2 4.6 5.8 4.2 3.5 3.5 5.0 0.2 0.0 0.8 0.5 0.7 -1.8 1.3 -1.5 0.2 0.0 -1.5 1.0 3.6 1.4 0.8 3.5 3.5 1.8 3.2 5.5 Consum er Prices (% y-o-y) 2012 3.3 2.0 4.7 3.6 2.1 1.7 7.9 26.4 5.5 3.0 2.9 4.1 17.5 3.1 -0.1 1.6 1.7 3.7 2.6 4.0 7.6 4.4 1.7 3.2 4.8 2.2 2.0 3.0 2.6 2.5 2.5 2.2 2.2 0.9 2.0 3.3 2.8 2.8 2.5 2.8 5.7 3.3 5.9 2.1 3.8 3.8 5.6 9.1 2013 3.4 1.5 5.5 3.6 1.6 1.9 9.4 32.3 5.7 3.3 3.5 3.4 32.4 3.8 -0.3 2.6 2.4 4.6 4.2 4.3 7.2 5.2 2.4 4.4 3.9 2.7 2.3 3.0 1.8 1.7 2.2 1.4 1.8 -0.2 0.4 1.8 2.6 1.3 2.5 2.6 4.6 2.1 5.0 2.6 2.4 5.0 5.5 6.7 2014 3.4 1.7 5.3 3.4 1.4 2.0 8.9 29.7 5.5 3.0 3.5 3.5 24.7 4.0 1.8 2.5 2.8 4.5 4.0 4.3 6.9 5.1 2.5 4.5 3.6 3.0 2.3 3.1 1.7 1.6 2.0 2.0 1.8 -0.3 0.5 1.4 1.9 0.7 1.4 2.3 4.5 1.5 4.3 2.7 3.0 4.2 5.7 6.3 Policy Rate (% end period) 2012 2.96 0.38 5.99 2.08 0.13 1.00 7.49 15.00 7.25 5.00 4.50 4.50 15.00 4.66 0.05 3.00 2.75 5.65 6.00 0.40 8.00 5.75 3.00 3.50 0.38 2.75 1.88 2.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 4.54 0.05 5.75 2.00 4.50 5.00 5.00 5.75 2013 3.21 0.42 6.34 2.42 0.13 1.75 8.54 17.00 9.00 5.50 4.50 4.50 17.00 4.92 0.05 3.50 3.50 5.90 6.50 0.40 7.50 6.25 3.50 4.00 0.48 2.75 2.13 2.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 4.41 0.05 5.00 2.50 4.00 6.00 4.50 5.75 2014 3.36 0.49 6.40 2.53 0.13 3.00 8.39 14.00 8.50 5.25 5.50 5.50 16.00 4.99 0.05 4.00 4.25 5.90 6.50 0.40 7.00 6.75 4.00 4.50 0.50 3.25 2.13 3.25 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 5.31 1.00 6.00 3.00 5.00 9.00 6.00 5.75
Note: Aggregates calculated using purchasing power parity (PPP) adjusted shares of world GDP (table covers about 84% of world GDP on a PPP basis); our forecasts incorporate assumptions on the future path of oil prices based on oil price futures, consensus forecasts and Nomura in-house analysis. Currently assumed average Brent oil prices for 2012, 2013 and 2014 are $112, $109 and $104, respectively. *2012, 2013 and 2014 policy rate forecasts are midpoints of 0-0.25% target federal funds rate range. **Inflation refers to wholesale prices. ***For Hong Kong and Singapore, the policy rate refers to 3M Hibor and 3M Sibor, respectively. Policy rate forecasts in 2012, 2013 and 2014 are midpoints of BOJs 0-0.10% target unsecured overnight call rate range. CPI forecasts for Latin America are year-onk Monthly. Source: Nomura Global Economics.
13 November 2012
Europe
Fiscal tightening, financial deleveraging and sovereign debt market tensions should lead to a deeper-than-expected recession. Spain risks delaying call for ECCL due to market stability and ESM bank recap delays. Our baseline is an ECCL will be called. After a phase of relative calm, markets will likely test the backstop and pressure should rebuild in Q1 on weak sovereigns. GDP contractions, higher non-performing loans and rising debt trajectories remain the key euro area challenges. The likelihood of a December ECB rate cut is finely balanced, but is increasingly likely that the next will not be before Q1 2013. We expect inflation to be sticky in the UK, albeit back in the right ballpark, but in the euro area to slip below target during 2013. The BoE aggressively announced QE, liquidity and funding support in 2012. We forecast more, with 50bn of QE in February.
Japan
We expect an export recovery, driven by China's economic recovery to deliver positive growth in Q1 2013. The export recovery should stimulate domestic demand and push the overall economy into a stable growth phase in 2013. Our main scenario is that the BOJ will apply additional easing measures in January 2013, with the risk earlier than our call. The main risks are yen appreciation, a worsening European debt problem and the US and China slowing.
Asia
The export slump calls for policy stimulus, but raises the risk next year of a build-up in debt, inflation and asset price bubbles. China: GDP growth will likely stay strong in H1 2013 supported by investment, but slow in H2 due to policy tightening. Korea: We expect the BOK to stay on hold at 2.75% through 2013 as growth and inflation should rise modestly from a low base. India: With macro imbalances slow to correct and binding supply-side constraints, we expect only a shallow recovery. Australia: With global growth stabilising, the RBA is comfortable with the current level of monetary stimulus in the economy. Indonesia: An increasingly uncertain policy environment may lead to delays in reforms and sustained current account deficits.
EEMEA (Emerging Europe, Middle East and Africa) and Latin America
South Africa: A continuing political status quo will continue to hold the economy back, the SARB may cut again. Hungary: A market blow-up is needed for an IMF deal, rate cuts and a new MNB Governor in March could be the trigger. Poland continues to outperform and a recession is difficult to envisage, so we see a limited cutting cycle. Turkey: Rebalancing continues and is likely to pave the way for further upgrades. Brazil: Inflation is set to rise towards 6% in H1 2013, forcing the BCB to start a new hiking cycle. Mexico: The new government will embark on a series of important reforms in 2013. Argentinas growth is set to recover modestly in 2013. Inflation and REER overvaluation to remain problematic.
13 November 2012
Rob Subbaraman
+852 2536 7435 rob.subbaraman@nomura.com
Jun-00
Jun-04
Jun-08
Jun-12
Source: CEIC.
Note: Year to Q3 GDP for China, Korea and Indonesia; others are H1 GDP. Source: CEIC.
13 November 2012
2012 is the crossover year when the annual increase in nominal personal consumption in China (USD478bn) surpasses the US (USD403bn). Loose policies. The central banks in China, India, Indonesia, Korea, Thailand and the Philippines have all cut policy rates this year and, adjusted for inflation, real policy rates are historically low across Asia. But what is less appreciated is that many other Asian governments are mimicking China, taking advantage of low public debt levels and shifting to more expansionary fiscal policies. Hong Kong, Malaysia, Thailand and the Philippines release timely monthly fiscal data, which show that their combined central budget deficit in the 12 months to September is almost as large as after the global financial crisis (Figure 3). In the advanced world, loose monetary policies are being offset by fiscal austerity; in emerging Asia, both policies work together and are more effective. Low unemployment, solid credit growth and positive wealth effects from buoyant property markets are conspiring with these loose macro policies to bolster domestic demand. There are, however, some exceptions: India has limited room to use countercyclical policies due to high inflation and poor fiscal finances; Koreas loose policies are being dampened by a household sector overburdened with debt; and Singapore has refrained from fiscal easing as it focuses on raising productivity. Capital inflows. Net foreign capital inflows to Asia have significant scope to intensify in 2013. The most comprehensive gauge, which captures FDI, portfolio debt and equity flows as well as cross-border foreign bank claims, is the financial account of the balance of payments. Using this measure (Figure 4), we see that, in the space of just two and a half years since the crisis (Q1 2009 to Q2 2011), net capital inflows to Asia ex-Japan totalled a massive USD783bn, more than the USD573bn in the five years prior, pulled by Asias relatively higher growth prospects and pushed by central bank quantitative easing in advanced economies (which, through portfolio rebalancing, has spill-over effects on emerging markets by pushing investors into riskier assets). While volatile in recent quarters, we expect another large bout of net inflows, buoyed by Chinas economic recovery, QE3 and the fading of US fiscal cliff fears. There certainly seems to be room for more inflows. A glaring example is the widening gap between the shares of emerging Asia in world GDP and in the MSCI world equity index (Figure 5). Another large bout of net capital inflows would accelerate Asias rebalancing via 1) currency appreciation, which crimps exports;or 2) FX intervention and central banks keep interest rates lower than they would otherwise, easing liquidity conditions and buoyed asset markets.
Fig. 3: Central government budget positions
USD bn, 12-month rolling sum 100 USD bn, 12-month rolling sum 20
50 0 -50
10 0
-10
-30
-60 QE2 announced -90 Jun-03 Dec-04 Jun-06 Dec-07 Jun-09 Dec-10 Jun-12
-30
Note: Rest of Asia is the aggregate fiscal balances of Hong Kong, Malaysia, Thailand and the Philippines. Source: CEIC.
Note: Countries are China, HK, India, Indonesia, Korea, Taiwan, Malaysia, Philippines, Singapore, and Thailand. Source: CEIC.
Four risks
The one we are most concerned with is some Asian economies overheating. Overheating. In our view, there is too much reliance on countercyclical policies to counter weak exports, and not enough on structural reforms to boost the supply-side of the economies. In October, the real interest rate on 1yr bank deposits in China was 1.1%, while in the rest of Asia the average real policy rate, weighted by GDP, was just 0.1% and this is during a period of low inflation in the region (Figure 6). Asias real policy rate is likely to turn negative again as inflation rises. These persistent negative real rates sow the seeds of overheating. From 1999 to 2005, the real interest rate was negative 19% of the time in China and 10% of the time elsewhere in Asia, while from 2006 to 2012, the share of time with negative real rates increased
13 November 2012
to 57% and 43%, respectively. Central banks justify erring on the side of laxity as insurance against the downside risks to global growth and to avoid provoking too-strong capital inflows, but as a result credit is growing faster than nominal GDP in all Asian countries, and property markets are frothy in many of Asias capital cities. We see a danger in the increased use of macro-prudential measures in an attempt to cool property markets and credit growth; these measures may work for a while but overtime as loopholes are found, they turn out to be a poor substitute for higher interest rates. Central banks ultimately find themselves behind the curve in tackling credit booms, asset price bubbles and inflation. Hong Kong seems most at risk, but we cannot rule out overheating in other countries, including China, India, Indonesia and Singapore. Commodity price surge. Despite lackluster growth in the advanced economies, very loose monetary policies around the world and strengthening demand in emerging economies, especially Asia, could fuel another surge in global commodity prices, particularly food prices. The global supply-demand equation for food remains tight, and the size of the annual increase in Chinas personal consumption is about to overtake the US to be the worlds largest. This is important. For unlike other commodities, the sensitivity of the demand for food to an increase in personal income is much greater for lower-income countries, as is the changing of diets toward a higher calorie intake. A surge in global food prices could lift Asian inflation sharply and ultimately restrict growth, notably in India, Indonesia, and the Philippines. Recoupling. Trend GDP growth in Asia ex-Japan is around 7%, a full five percentage points higher than in advanced economies, or put more starkly: real GDP is above its pre-global financial crisis peak by 41% in China, 31% in India, 25% in Indonesia and 11% in Korea compared with 2.3% in the US and still 2.4% below in the euro area. However, the 2008-09 experience has debunked any notion that Asia can decouple from advanced economies at times of extreme dislocation. While relatively strong economic and policy fundamentals have helped buffer Asian economies against sub-par growth in the US and euro area, another deep recession in the advanced world would be a completely different story, as Asia would hit a tipping point where non-linear effects kick in from a collapse in exports and foreign capital flight. Those economies that are very open to trade (Hong Kong, Singapore, Malaysia), have current account deficits (India and Indonesia) or weak domestic economies (Korea) are most vulnerable. China hard landing. In November 2011, we published an Anchor Report, China risks, in which we analyzed Chinas structural economic problems and concluded that they had become too big to ignore. We assigned a one-in-three likelihood of China experiencing a hard economic landing before the end of 2014, which we defined as GDP growth averaging 5% y-o-y or less over four consecutive quarters. To quantify the macro risks on an ongoing basis we developed the Nomura China Stress Index (CSI), which is near its all-time high. We maintain a one-in-three likelihood of a hard landing, as recent policy easing has increased shadow banking activities, which caused the CSI to rise in Q3 2012. A China hard landing would have a significant impact on Asia. A recent IMF study estimated that each percentage point (pp) decline of investment growth in China would lower GDP growth by more than 0.5pp in Korea, Taiwan and Malaysia.
Fig. 5: Asia emerging market share in world GDP and MSCI Fig. 6: Real policy interest rates (deflated by headline CPI)
% p.a. 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 Oct-00
% share
25
21 Asia EM share in world MSCI equity index Asia EM share in world GDP (at market exchange rates)
IMF forecasts
China's real bank deposit rate Rest of Asia's real policy rate
17
13
9
5
1 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Oct-02
Oct-04
Oct-06
Oct-08
Oct-10
Oct-12
Note: Asia EM is China, India, Indonesia, Malaysia, Korea, Philippines, Taiwan and Thailand. Source: MSCI and IMF.
Note: For the rest of Asia, the real policy rate is GDP weighted. Source: Bloomberg and CEIC.
13 November 2012
10
13 November 2012
Charles St-Arnaud
+1 212 667 1986 charles.starnaud@nomura.com
Martin Whetton
+61 2 8062 8611 martin.whetton@nomura.com
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. CPI inflation includes the impact from, the carbon tax, but not the underlying measures. Interest rate and exchange rate forecasts are end of period. Numbers in bold are actual values. Table reflects data available as of 12 November 2012. Source: Australian Bureau of Statistics, Reserve Bank of Australia, Nomura Global Economics.
11
13 November 2012
Wendy Chen
+86 21 6193 7237 wendy.chen@nomura.com
% y-o-y, ytd
Consensus f orecast
Nomura
100 80
60
34
28
8.0
7.5
40 20
0
22 16
10
7.0
6.5 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Source: Bloomberg and Nomura Global Economics
-20
-40 Oct-08
4
-2 Oct-12
Oct-09
Oct-10
Oct-11
12
13 November 2012
13
13 November 2012
Ratio
1.1 1.0
% y-o-y 16 14
Sqare meter mn 180 Floor space started (12mma) 160 Floor space sold (12mma) 140
120
0.9 0.8
0.7 0.6 Sep-03
12 10
8 6 Sep-12
100
80
60
40
20
Sep-06
Sep-09
0 Sep-00
Sep-04
Sep-08
Sep-12
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. The CNY/USD forecast is for the fixing rate, not the spot rate. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics
14
13 November 2012
Aman Mohunta
+91 22 6617 5595 aman.mohunta@nomura.com
0.40 7.76
0.40 7.76
0.40 7.75
0.40 7.75
0.40 7.75
0.40 7.75
0.40 7.75
0.40 7.75
Source: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
15
13 November 2012
Sonal Varma
+91 22 403 74087 sonal.varma@nomura.com
Aman Mohunta
+91 22 6617 5595 aman.mohunta@nomura.com
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. CPI is for industrial workers. Fiscal deficit is for the central government and for fiscal year, e.g, 2012 is for the year ending March 2013. Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
16
13 November 2012
Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com
Lavanya Venkateswaran
+91 22 3053 3053 lavanya.venkateswaran@nomura.com
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
17
13 November 2012
Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com
Lavanya Venkateswaran
+91 22 3053 3053 lavanya.venkateswaran@nomura.com
Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as 12 November 2012. Source: CEIC and Nomura Global Economics.
18
13 November 2012
Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com
Lavanya Venkateswaran
+91 22 3053 3053 lavanya.venkateswaran@nomura.com
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
19
13 November 2012
Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com
Lavanya Venkateswaran
+91 22 3053 3053 lavanya.venkateswaran@nomura.com
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
20
13 November 2012
2.3 1.9 3.9 -0.2 -1.2 3.9 3.0 1.5 0.1 0.7 3.3 2.2 3.3 1.3 -1.2 2.75 2.80 2.90 1090
2.5 2.1 3.7 -0.4 3.1 3.0 2.2 1.8 0.2 0.6 3.2 2.7 2.3 1.0 -1.3 2.75 3.00 3.10 1070
3.5 2.3 4.1 7.7 4.1 4.8 5.2 3.0 0.2 0.3 3.2 3.0 2.0 1.0 -1.0 3.25 3.30 3.50 1070
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data as of 12 November 2012. Source: Bank of Korea, CEIC and Nomura Global Economics.
21
13 November 2012
Aman Mohunta
+91 22 6617 5595 aman.mohunta@nomura.com
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
22
13 November 2012
Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com
Nuchjarin Panarode
+662 638 5791 nuchjarin.panarode@nomura.com
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
23
13 November 2012
Shuichi Obata
+81 3 6703 1295 shuichi.obata@nomura.com
Kohei Okazaki
+81 3 6703 1291 kohei.okazaki@nomura.com
Asuka Tsuchida
+81 3 6703 1297 asuka.tsuchida@nomura.com
24
13 November 2012
publics daily life were continued, as special cases are exempt from a government shutdown, we estimate that the dent to real GDP growth would still be 5.7pp in Q4 2012 and 3.1pp in 2013. As the cost of non-passage of this bill is too big to accept, we expect a compromise to be reached by the two parties.
Fig. 1: Non-manufacturing investment growth and Tankan survey's DI on excessive capacity
y-y, % DI:"excess" - "shortage": inverse scale
-4 -2
Capex DI (rhs)
0
10 2 0 4 -10 6 -20 8 10 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
-30
Notes: Capex is in real terms using the 2005 base year deflator. Source: Nomura, the Bank of Japan and Ministry of Finance and Cabinet Office
Faced with a recession in H2 2012, we expect the Diet to enact a supplementary budget by January 2013. Although the consumption tax rate hike from 5% to 8% is scheduled for April 2014, the government can choose not to implement under the law based on its assessment of the state of the economy. As the decision will be made around autumn 2013, growth in Q2 2013 will be critically important as this is the last quarterly GDP data published before the decision is made. As there is a risk that Japans recovery will be halted by a delay in inventory de-stocking in China or worsening relations between Japan and China, we expect the two major parties, the DPJ and the LDP, to agree on the supplementary budget. Although government spending including social welfare is capped at JPY71trn, as self-imposed by the government, it can still utilize its surplus fund amounting to JPY2trn, which the government earned during FY11. We expect the government to set aside JPY700bn for public construction spending for a quick disbursement during H1 2013, which is likely to raise real GDP growth by 0.16pp in 2013.
Fig. 2: Schedule of major political events in Japan
2012 Nov Dec 30 End of the Extraordinary Diet session
Beginning of Deadline to pass the bill to allow government to issue deficit bonds, whithout which the national the month government would stop spending 16 Election of the Tokyo Metropolitan Governor
By month-end Determine the framework for tax reform and FY13 budget 2013 Jan During the month Ordinary Diet session begins Discuss supplementary budget for FY12 Debate FY13 budget Discuss contents of growth strategy Mar Apr Jul Aug Summer Fall 2014 Apr 1 19 8 28 29 End of terms of BOJ two deputy governors simultaneously End of terms of BOJ governor Shirakawa End of current terms of members of Upper House End of terms of members of Lower House (assuming no early dissolution/holding of general election) Election of the Tokyo Metropolitan Assembly Final decision on consumption tax hike Consumption tax rate hike from 5% to 8%
25
13 November 2012
Risks
External factors continue to be the main risks for the Japanese economy. Delays in inventory de-stocking in China pose a significant risk to growth as this delays Asias recovery process. The relationship between Japan and China poses another downside risk to an economic recovery if it does not improve in H1 2013 as we expect. Weaker exports from Japan to China, as well as less Chinese tourists to Japan may reduce Japans real GDP growth by 0.35 percentage points if current political tensions persist throughout 2013. Other external risks include an expansion and the prolonging of risks associated with European government debt, a decline in confidence in US economic policy, and concerns about a global economic slowdown.
% Real GDP Private consumption Private non res fixed invest Residential fixed invest Government consumption Public investment Exports Imports Contributions to GDP: Domestic final sales Inventories Net trade Unemployment rate Consumer prices Core CPI Fiscal balance (fiscal yr, % GDP) Current account balance (% GDP) Unsecured overnight call rate JGB 5-year yield JGB 10-year yield JPY/USD
1Q12 5.2 4.9 -7.4 -4.4 4.3 17.7 14.1 9.2 3.6 1.2 0.4 4.6 0.3 0.1
2Q12 0.3 -0.4 3.8 6.0 1.9 11.0 5.3 7.3 1.5 -0.8 -0.4 4.4 0.2 0.0
3Q12 -3.5 -1.8 -12.1 3.8 1.4 16.8 -18.7 -1.4 -1.5 0.8 -2.8 4.2 -0.4 -0.2
4Q12 -1.5 -1.4 -3.4 2.8 0.9 11.3 -4.1 -4.2 -1.0 -0.5 0.0 4.4 -0.3 0.0
1Q13 2.0 1.6 1.6 6.6 1.4 4.6 2.0 2.9 1.8 0.3 -0.1 4.5 -0.7 -0.2
2Q13 1.9 1.4 3.9 8.6 1.4 -7.5 3.9 5.3 1.5 0.5 -0.1 4.5 -0.5 -0.1
3Q13 1.8 1.5 5.9 7.0 1.2 -14.1 5.1 3.6 1.3 0.2 0.3 4.4 -0.1 0.1
4Q13 2.0 1.9 6.1 3.6 1.2 -12.2 5.5 6.1 1.7 0.3 0.0 4.3 0.1 0.1
2012 1.6 2.1 1.0 1.9 2.2 9.9 0.7 5.7 2.2 0.1 -0.7 4.4 -0.1 -0.1 -9.6 1.2
2013 0.5 0.4 0.1 5.7 1.3 1.5 -0.9 2.0 0.7 0.2 -0.4 4.4 -0.3 0.0 -10.4 1.6
2014 1.2 1.2 5.8 -2.9 1.2 -11.2 6.2 5.9 1.1 0.0 0.1 3.9 1.8 1.9 -9.5 2.1
0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0.32 0.22 0.19 0.20 0.22 0.20 0.22 0.23 0.99 0.83 0.77 0.80 0.82 0.82 0.85 0.88 82.9 79.8 78.0 82.0 83.0 85.0 86.0 88.0
0-0.10 0-0.10 0-0.10 0.20 0.23 0.37 0.80 0.88 1.10 82.0 88.0 90.0
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. The unemployment rate is as a percentage of the labor force. Inflation measures and CY GDP are year-on-year percent changes. Interest rate forecasts are end of period. Fiscal balances are for fiscal year and based on general account. Table last revised 12 November. All forecasts are modal forecasts (i.e., the single most likely outcome). Numbers in bold are actual values, others forecast. Source: Cabinet Office, Ministry of Finance, Statistics Bureau, BOJ, and Nomura Global Economics.
26
13 November 2012
Overview
In the three years since the Great Recession ended, real GDP has grown at a lackluster 2.2% pace, mired in what we judge to be a Rogoff-Reinhart world, characterized by sub-normal growth for an extended period. While the adjustment to household balance sheets is largely complete, our forecast for personal consumption reflects our view that borrowing is not likely to drive the economy forward and spending will broadly track growth in income. Business investment is depressed, relative to previous cyclical norms. The root cause of uncertainty, the on-going sovereign debt crisis in Europe and US fiscal challenges, is likely to hold back growth in the economy a bit longer. Looking ahead to 2013, we expect the pace of recovery to begin to accelerate in the second half of the year, led by a rebound in capital expenditures, once Washington policymakers resolve the near-term fiscal and other policy challenges that have undermined business confidence. Higher capital expenditures should support job creation. Moreover, a strengthening recovery in the nations housing market should lift that sectors contribution to economic growth through investment, job creation and the wealth effect from stabilizing home values. Nevertheless, as more workers are encouraged to enter the labor market to look for work, we expect the labor force participation rate to rise and the unemployment rate to remain stubbornly high throughout the forecast horizon. We expect the lack of a substantial improvement in the labor market to lead the Federal Open Market Committee (FOMC) to embark on further long-term asset purchases at the start of the year. Lewis Alexander
+1 212 667 9665 Lewis.Alexander@nomura.com
Ellen Zentner
+1 212 667 9668 ellen.zentner@nomura.com
Aichi Amemiya
+1 212 667 9347 aichi.amemiya@nomura.com
Roiana Reid
+1 212 298 4221 Roiana.Reid@nomura.com
2.61 2.72 3.58 3.57 0-0.25 0-0.25 0-0.25 0-0.25 0.58 0.40 0.50 0.70 0.24 0.20 0.70 1.10 0.83 0.60 1.30 1.80 1.87 1.65 2.50 2.85 3.95 2.75 3.70 4.10
* The forecast range for 10y UST is as follows: 4Q12 = 1.25-2.0, 1Q13 = 1.7-2.3. Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. The unemployment rate is a quarterly average as a percentage of the labor force. Nonfarm payrolls are average monthly changes during the period. Inflation measures and calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Housing starts are period averages. Numbers in bold are actual values. Table reflects data available as of 9 November 2012. Source: Nomura
27
13 November 2012
Fiscal policy
The evolution of fiscal policy will have a major impact on economic activity over the next two years. In the near term we expect an acrimonious debate between President Obama and Republicans in Congress over the trajectory of fiscal policy. That debate is likely to weigh on the US economy and financial markets over the next six months. However, we expect that, in the end, an agreement will be reached. Moreover, we expect that other important policy reforms, such as fundamental tax reform, will support growth in the second half of next year and into 2014. Greater clarity over the course of economic policy in general, and fiscal policy in particular, as well as positive fundamental reforms elsewhere, should generate faster economic growth starting in the second quarter of next year.
28
13 November 2012
pp 8 6 4
-1
-1
Temporary (1 qrt.) Permanent -2 -3 -4 -5 Q1 Q2 2013 Q3 Q4 Q1 Q2 2014 Q3 Q4
2
0
-2 -3 -4 -5
-2
-4
-6
-8
** Estimated impact of the expiration of fiscal cliff policies excluding the payroll tax cut and the Doc fix under the assumption that changes are shocks are imposed in Q1 2013 only or permanently. Effects on GDP are estimated using the Fair Model. Source: Nomura
29
13 November 2012
2
63.5
63.0 1995
Monetary policy
At the September meeting, the FOMC said it expects a very low federal funds rate to be warranted until at least mid-2015 and initiated an open-ended, long-term asset purchase program targeting mortgage-backed securities (MBS) at a monthly pace of $40 billion. Moreover, the Committee vowed to continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriateif the outlook for the labor market does not improve substantially. In discussing how long these purchases might last the Chairman suggested that these measures would likely continue until the economy was growing fast enough to sustain an employment rate that is declining gradually. In the spring the Chairman argued that the US needs growth beyond the rate of the economys potential for the unemployment rate to decline (see Recent Developments in the Labor Market, 26 March 2012, see What labor markets mean for monetary policy, Special Report, 9 April 2012). In the latest summary of economic projections table, the FOMCs central tendency of potential growth in output is between 2.3% and 2.5%. The Chairman has also noted that sustained declines in the participation rate could be reversed if the recovery accelerates. For example, in October the unemployment rate ticked up to 7.9% even though US households reported having gained more than 400k net new jobs because more workers flooded back into the labor market to seek employment. Figure 4 provides an historical look at labor force participation. Adjusting for demographic trends suggests the current rate of participation is roughly a full percentage point too low. An increase in the participation rate would likely lead to a higher unemployment rate. An economy growing at its potential would be just fast enough to accommodate new entrants into the labor market, but would need to grow beyond potential to additionally accommodate unemployed workers as they re-enter the labor market. Taken together this implies that the FOMC would need to see the prospect of GDP growth of at least 3.0% for several quarters to expect a sustained decline in the unemployment rate. Given the headwinds facing the US economy, including problems relating to US fiscal policy, it is hard to imagine a sustained acceleration in growth before the middle of 2013. That means that MBS purchases will likely go on until the third quarter of 2013. Furthermore, we expect the FOMC to replace the current maturity extension program (MEP, or Operation Twist) scheduled to expire at the end of the year with a program of outright Treasury purchases similar in size and pace (roughly $40bn monthly) at the beginning of the year. Our forecast for consumer prices to remain below 2% for the forecast horizon reflects the effects of a substantial output gap that has emerged from three years of sub-par growth in the economy. There is a risk, however, that inflation expectations are too optimistic with respect to
30
13 November 2012
the supply-side of the US economy. Were core inflation to accelerate and/or inflation expectations begin to rise, the FOMC may be forced to tighten monetary policy sooner than expected. Recent press reports suggest that Chairman Bernanke may not seek a third term when his current term expires at the end of 2013. Nevertheless, President Obama will likely seek continuity in Federal Reserve policy.
Housing
Housing, which often kick-starts US recoveries, has largely been missing this time around, but is poised to contribute to growth in 2012 for the first time since 2005. Though this important sector is making headway toward normalization, lingering problems with mortgage financing and an overhang of inventories remain a constraint on the pace of the recovery. More than 20% of all outstanding mortgages are underwater and we estimate there are more than 3 million so-called shadow inventories (mortgages that are seriously delinquent or are in the foreclosure process but have not been put on the market). Nevertheless, the strengthening recovery in housing provides a key underpinning for our forecasts for job growth and aggregate demand over the forecast horizon.
Pent-up demand
Household formation, arguably one of the most important determinants of demand for housing, has accelerated in 2011 and 2012. The centered 3-year moving average of the net increase in US households has now moved back in line with the underlying pace implied by demographic trends (Figure 5). This may indicate that potential home buyers and renters are becoming more confident about the economic outlook. For several years following the financial crisis household formation remained lower than demographics suggested, implying a sizable build-up of pent-up demand for housing. Against this backdrop, we forecast that housing starts will reach an annual rate of one million units in Q4 2013, growing by nearly 25% in 2013. Furthermore, reconstruction efforts after Hurricane Sandy likely point to upside risk to housings contribution to the economy in 2013 as replacement demand will add to the natural rate of loss in annual housing stock.
31
13 November 2012
Prices
Despite the strengthening recovery, an overhang of supply and lingering problems in mortgage financing remain obstacles to a more robust housing market. Adding some 2.6 million units in traditional, visible inventories to our shadow inventory estimate of roughly 3.3 million units suggests the housing market remains constrained by a substantial inventory overhang. Should a faster pace of shadow inventories move into visible inventories, price growth is likely to be tempered for some time to come (Figure 6). Nevertheless, home prices, as measured by the S&P/Case-Shiller home price index are poised for growth of 1 to 3% in 2013 and we would expect similar price gains over our forecast horizon.
1,000 0 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 invisible inventories in foreclosure process 90 days + delinquent mortgages New home inventories visible inventories of distressed assets existing home inventories ex-distressed assets
Note: 1.REOs are excluded. 2. New home inventories are 1-family house only. 3. Visible inventories of distressed assets are estimated based on the share of distressed assets in existing home sales. Source: National Association of Realtors, Department of Commerce, Nomura
Jan-90
Jan-00
Jan-10
Jan-20
Actual household formation (centered 3-yr moving average) Housing starts (actual and forecast) Household formation implied by demographics
Note: "Household formation implied by demographics" is the hypothetical pace of household formation assuming constant headship rate by age cohort. We calculated three different population projections depending on immigrants which are laid out by the Census Bureau. Source: Census Bureau, Nomura
32
13 November 2012
Charles St-Arnaud
+1 212 667 1986 charles.starnaud@nomura.com
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates (saar). Inflation measures and calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Numbers in bold are actual values. Table reflects data available as of 13 November 2012. Source: Bank of Canada, Statistics Canada, Nomura Global Economics.
33
13 November 2012
Benito Berber
+1 212 667 9503 Benito.Berber@nomura.com
% y-o-y change unless noted Real GDP Personal consumption Fixed investment Government expenditure Exports Imports Contributions to GDP (pp): Industry Agriculture Services CPI Trade balance (US$ billion) Current account (% GDP) Fiscal balance (% GDP) Gross public debt (% GDP) Overnight Rate % USD/MXN
1Q12 4.6 4.3 8.6 2.9 5.1 7.1 1.4 0.2 2.9 3.73 1.8
2Q12 4.1 3.3 6.2 1.7 6.3 4.0 1.2 0.2 2.6 4.34 1.5
3Q12 3.5 3.4 2.4 5.3 4.9 2.7 0.8 0.1 1.7 4.60 -4.1
4Q12 3.5 4.7 3.2 0.4 7.2 6.3 1.0 0.1 2.2 4.00 -3.9
1Q13 3.7 4.3 3.2 1.3 5.1 4.7 1.1 0.1 2.4 3.55 -3.8
2Q13 3.4 3.1 3.2 0.4 4.4 3.6 1.0 0.1 2.2 3.50 -3.8
3Q13 3.2 3.3 3.2 2.2 3.6 3.6 0.9 0.1 2.0 3.45 -3.8
4Q13 3.1 3.4 3.2 2.0 2.8 3.9 0.9 0.1 2.0 3.40 -3.8
2012 3.7 4.5 3.0 3.9 4.1 4.3 1.1 0.2 2.4 4.10 -4.7 -1.5 -2.2 37.3
2013 3.5 3.5 3.2 3.1 4.0 3.9 1.0 0.1 2.2 3.40 -15.2 -1.5 -2.2 35.0 4.50 12.00
2014 3.5 3.6 3.9 2.8 3.9 3.5 1.0 0.1 2.2 3.50 -15.0 -1.5 -2.2 34.0 5.50 12.00
4.50 12.81
4.50 13.36
4.50 12.86
4.50 12.70
4.50 12.70
4.50 12.50
4.50 12.70
Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-over-year changes for Q4. Trade data are period sums. Interest rate and currency forecasts are end of period. Contributions to GDP do not include taxes. Numbers in bold are actual values, others forecast. Table reflects data available as of 13 November 2012. Source: Nomura Global Economics.
34
13 November 2012
Tony Volpon
+1 212 667 2182 tony.volpon@nomura.com
Contributions to GDP growth (pp) Industry -0.4 Agriculture 0.0 Services 0.9 IPCA (consumer prices) IGPM (wholesale prices) Trade balance (US$ billion) Current account (% GDP) Fiscal balance (% GDP) Net public debt (% GDP) Selic % BRL/USD 9.75 1.83 5.2 3.2 29
1.0 0.2 2.3 5.7 6.5 25 -2.5 -2.0 35.0 9.00 1.90
0.8 0.2 2.0 5.5 5.5 22 -2.5 -2.0 34.0 8.50 1.85
8.50 2.01
7.50 2.03
7.25 2.00
7.25 2.00
8.25 1.93
9.00 1.90
9.00 1.90
7.25 2.00
Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-on-year changes for Q4. Trade data are a 12-month sum. Interest rate and currency forecasts are end of period. Contributions to GDP growth do not include taxes. Numbers in bold are actual values, others forecast. Table reflects data available as of 12 October 2012. Source: Nomura Global Economics.
35
13 November 2012
Boris Segura
+1 212 667 1375 Boris.Segura@nomura.com
Real GDP % y-o-y Consumption % y-o-y Gross Investment % y-o-y Exports % y-o-y Imports % y-o-y CPI % y-o-y * CPI % y-o-y ** Budget balance % GDP *** Current account % GDP Policy Rate % USDARS
We expect the authorities to keep financing their growing fiscal deficits with monetary financing from the central bank. This is to increase inflationary pressures. Despite more supportive trade flows, we do not expect a relaxation of draconian exchange controls. Argentinas economic recovery in 2013, a key electoral year, is likely to be lacklustre. As such, the authorities are likely to resort to their usual recipe: Expansionary fiscal and monetary policies. Increasing RER overvaluation to put further strain on output ex commodities and automobile production to Brazil.
* Official data, ** Private estimate, ***Primary budget balance, Bold is actual data Source: BCRA, Indec, MECON, Nomura
Benito Berber
+1 212 667 9503 Benito.Berber@nomura.com
Real GDP % y-o-y Consumption % y-o-y Gross Investment % y-o-y Exports % y-o-y Imports % y-o-y CPI % y-o-y * CPI % y-o-y ** Budget balance % GDP Current account % GDP Policy Rate % * USDCOP *
After a strong first half supported by strong domestic consumption and resilient exports, we expect the economy to grow at 4.5% in 2012. Both headline inflation and inflation expectations remain well anchored around 3.0%. We expect an additional 25bp interest rate cut to 4.50% by 2012 year end and for authorities to continue intervening in the FX market to curb COP appreciation. Given around-trend growth, inflation within target band and improving external scenarios, we expect the BanRep to remain in wait-and-see mode in 2013 and keep the policy rate on hold at 4.50%.
Tony Volpon
+1 212 667 2182 Tony.Volpon@nomura.com
2011 Real GDP % y-o-y 6.0 Consumption % y-o-y 8.8 Gross Investment % y-o-y 17.6 Exports % y-o-y 4.6 Imports % y-o-y 14.4 CPI % y-o-y * 4.4 CPI % y-o-y ** 3.3 Budget balance % GDP 1.5 Current account % GDP -1.3 Policy Rate % * 5.25 USDCLP * 519.55
2012 5.1 5.5 7.5 3.8 4.6 3.0 3.3 1.0 -3.0 5.00 475.00
2013 5.5 6.0 10.0 5.0 9.0 3.3 3.2 1.0 -3.0 5.50 460.00
2014 5.0 5.5 7.0 5.0 8.0 3.0 3.0 1.0 -2.0 5.25 450.00
Chile has been growing robustly in 2012, with retail and construction sectors propping up internal demand. As external growth gradually improves, we expect the Chilean economy to expand even faster in 2013. Inflation is currently below target (3%) and expectations are well-anchored. Yet upside risks are notable in the mediumterm, given the tight labor market, strong wage hikes and Chiles high exposure to oil price shocks. As global uncertainties clear up, the central bank will increasingly focus on the domestic front to determine the next move, as the monetary policy rate (TPM) is currently around neutrality. We expect a small hiking cycle in H2 2013, taking TPM to 5.5% by year-end. The presidential election on November 17 will be the most important political event next year. Incumbent Piera is constitutionally barred from seeking immediate reelection and no firm candidate has emerged yet.
36
13 November 2012
Jacques Cailloux
+44 (0) 20 710 22734 Jacques.Cailloux@nomura.com
Nick Matthews
+44 (0) 20 710 25126 Nick.Matthews@nomura.com
Real GDP (% y-o-y) 2012 Euro area Austria France Germany Greece Ireland Italy Netherlands Portugal Spain -0.5 0.4 0.1 0.9 -6.5 -0.1 -2.4 -0.3 -3.2 -1.4 2013 -0.8 0.2 -0.5 0.3 -4.7 0.4 -2.5 -0.3 -2.8 -3.0 2014 0.0 0.8 0.5 0.7 -1.8 1.3 -1.5 0.2 0.0 -1.5
Consumer prices (% y-o-y) 2012 2.5 2.5 2.2 2.2 0.9 2.0 3.3 2.8 2.9 2.5 2013 1.7 2.2 1.4 1.8 -0.2 0.5 1.8 2.6 1.3 2.5 2014 1.6 2.0 2.0 1.7 -0.3 0.5 1.4 1.8 0.7 1.4
Budget balance (as % of GDP) 2012 -3.3 -2.7 -4.5 -0.1 -6.9 -8.5 -2.9 -3.6 -5.2 -8.0 2013 -3.2 -2.6 -3.9 -0.2 -5.9 -8.1 -3.1 -3.1 -5.0 -7.0 2014 -3.0 -2.9 -3.6 -2.0 -3.8 -0.5 -5.2 -5.9 -2.8 -3.1
Debt level (as % of GDP) 2012 93.7 74.1 90.0 81.9 176.6 117.6 126.3 68.7 119.1 85.0 2013 98.1 75.2 93.7 81.5 188.3 123.4 131.1 69.9 127.6 95.5 2014 100.9 76.3 95.6 80.3 198.2 125.1 133.8 71.9 129.6 101.1
37
13 November 2012
1. Rating downgrade A single notch of downgrade from DBRS would have an immediate knock on effect on haircuts (additional 5%) which could prove destabilizing. More importantly, a downgrade to below investment grade by one of the rating agencies could be more significant. An absence of a call for help in the short term and further disappointments on the economic front would most likely lead to such an outcome. 2. Investors losing patience with Spain There is little doubt that spreads have tightened on the back of the so called Draghi put rather than on improving fundamentals. In that context, a lack of expediency on that front could test the markets patience. To be fair, we had expected markets to be less patient than they have been, a sign perhaps that this channel might not work for quite some time. What could accelerate investors willingness to lighten their exposure to Spain could be the fear of an illiquid end year holding significant exposure to Spain without any clarity regarding the timing for help. 3. The revelation that Spain might never call for help The unwillingness of market participants to sell Spain up to now is the result of the credibility of the Draghi put making the risk-reward of selling not an attractive proposition. However, the Draghi put would lose all credibility if it became clear that Spain was in no position to call for help as it saw no benefit from it. The past few weeks have clearly increased the likelihood of that scenario, with Prime Minister Rajoy explicitly stating in a radio interview (see NEMO, 7 November 2012) that the spread on the 10-year should narrow by 200bp to make it an interesting proposition, something the ECB will not be able to deliver with its OMT programme as suggested by Mr Draghi at Novembers press conference. (The OMT is designed to address tail risk events.) 4. The ECB loses patience Since the beginning of the crisis, the ECB has been instrumental in pushing countries into bailout. This was the case for all bailed-out countries and could thus be repeated in the case of Spain should the ECB grow increasingly worried about the danger of postponing the help. In all, this suggests to us that Spain will not escape a sovereign bailout. We think this will most likely happen after renewed market stress, although conditions 1 and 4 might bring Spain directly into a bailout without necessarily much market deterioration.
Fig. 2: Euro area macroeconomic forecast
% Real GDP Household consumption Fixed investment Government consumption Exports of goods and services Imports of goods and services Contributions to GDP: Domestic final sales Inventories Net trade Unemployment rate Compensation per employee Labour productivity Unit labour costs Fiscal balance (% GDP) Current account balance (% GDP) Consumer prices ECB main refi. rate 3-month rates 10-yr bund yields $/euro 2.7 1.00 0.78 1.81 1.32 2.5 1.00 0.65 1.60 1.25 2.5 0.75 0.22 1.41 1.29 2.4 0.50 0.18 1.25 1.28 1.9 0.50 0.21 1.31 1.25 1.8 0.50 0.21 1.38 1.20 1.5 0.50 0.21 1.44 1.18 1.4 0.50 0.21 1.50 1.18 1Q12 -0.1 -0.7 -5.1 0.7 2.6 -1.2 -1.3 -0.6 1.8 10.9 1.9 0.4 1.5 2Q12 -0.7 -1.0 -3.5 0.4 5.3 3.7 -1.1 -0.4 0.9 11.1 1.7 0.2 1.4 3Q12 -0.6 -1.7 -7.0 -0.8 0.9 -4.7 -2.5 -0.7 2.6 11.4 1.8 -0.2 2.0 4Q12 -1.6 -1.7 -6.6 -0.8 -3.1 -7.0 -2.3 -0.9 1.7 11.7 1.4 -0.4 1.8 1Q13 -0.8 -1.7 -5.6 -0.8 0.6 -2.8 -2.2 -0.2 1.5 11.9 0.9 -0.7 1.6 2Q13 -0.6 -1.5 -4.5 -0.8 1.6 -2.1 -1.9 -0.5 1.7 12.0 0.7 -0.5 1.2 3Q13 -0.2 -1.5 -3.9 -0.8 2.6 -0.8 -1.7 -0.1 1.6 12.1 0.4 -0.3 0.7 4Q13 -0.1 -1.5 -3.6 -0.8 2.6 -0.4 -1.6 0.1 1.4 12.2 0.3 0.1 0.2 2012 -0.5 -1.1 -3.9 0.0 2.3 -1.4 -1.3 -0.9 1.7 11.3 1.7 0.0 1.7 -3.3 -0.3 2.5 0.50 0.18 1.25 1.28 2013 -0.8 -1.6 -5.3 -0.7 0.8 -2.9 -1.9 -0.5 1.7 12.1 0.6 -0.4 0.9 -3.2 0.1 1.7 0.50 0.21 1.50 1.15 2014 0.0 -1.4 -3.2 -0.5 2.7 0.2 -1.4 0.2 1.3 12.3 0.6 0.5 0.1 -3.0 0.5 1.6 0.50 0.21 1.75 tbc
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualised rates. Unemployment rate is a quarterly average as a percentage of the labour force. Compensation per employee, labour productivity, unit labour costs and inflation are y-o-y percent changes. Interest rate and exchange rate forecasts are end of period levels. Numbers in bold are actual values, others forecast. Table reflects data available as of 9 November 2012. Source: Eurostat, ECB, DataStream, Nomura Global Economics.
38
13 November 2012
5
4 3
14
12 10 8 6
2
1 0
-1
-2 -3
4
2 0 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
Note: The Taylor rule we employed is , where t is the inflation and yt is the output gap. Core stands for Germany, France, Netherlands, and Austria and periphery includes Italy, Spain, Ireland, Portugal and Greece. Source: EC and Nomura Global Economics
Note: Core refers to Germany, France, Austria, Finland, Belgium, Luxembourg and Netherlands. Periphery refers to Italy, Spain, Ireland, Portugal and Greece. Source: Eurostat, Datastream and Nomura Global Economics
39
13 November 2012
40
13 November 2012
Philip Rush
+44 20 7102 9595 philip.rush@nomura.com
Notes: Quarterly figures are % q-o-q changes. Annual figures are % y-o-y changes. Inventories include statistical discrepancy. Inflation is % y-o-y. Interest rates and currencies are end-of-period levels. Numbers in bold are actual values; others forecast. Table reflects data available as of 6 November 2012. Source: ONS, Bank of England, Bloomberg, DataStream, Nomura Global Economics.
41
13 November 2012
EEMEA Outlook
Some silver linings to the external risks bearing down
The region is not homogeneous, but tighter fiscal policy and broadly orthodox monetary policy are a common theme, along with a lower beta to the eurozone.
The same shocks that we commented on in our outlook last year are affecting EEMEA currently: eurozone bank deleveraging, export demand shocks from the eurozone, the global growth slump and a range of domestic idiosyncratic risks (mainly surrounding politics and their interaction with fiscal policy). Those shocks are all still very much present across the region. Deleveraging has, if anything, been faster and more aggressive in a number of countries than we first thought. Sentiment has been a big catalyst for a slower EEMEA in 2012. The weakening of export growth has been slower than that of domestic demand in CEE in general (and so trade deficits have narrowed markedly). While tighter credit and lending standards did not exceed our expectations, sharply deteriorating sentiment across the region has played a key role in damping investment, inventory building and labour market dynamics in particular. That said, if we consider our eurozone growth forecast is -0.8% in 2013 and -0.5% in 2012 and then +0.8% in 2014, our own region growth forecast of 3.2% next year after 2.7% this year and 3.8% in 2014 compares very favourably with what happened in 2009 when GDP growth slowed to 4.8%. The growth dynamic and contagion through the domestic economy was much weaker in 2008-09. The region does, therefore to some extent, seem to be establishing itself as having a lower beta to the eurozone crisis, even though specific contagion channels are still very much present. We believe there are several reasons for this. First, there is a lot of pent-up demand from the more region-centric crisis than there was in 2008-09. Second, fiscal drag, while still present in most economies, has much less of an impact now than back then. Furthermore, the nominal and real policy rates went lower for longer (i.e. the transmission lags have had time to work through) and households, governments and corporates all have cleaner, deleveraged (or partially so) balance sheets. This is evident in the level of current accounts alone. Add to that a global shock that is probably more limited, combined with easier liquidity internationally than under the previous shock and a certain degree of export partner diversification into Asia, Africa, LatAm and the picture while certainly not rosy has some more underlying supports.
Olgay Buyukkayali
+44 (0) 20 710 23242 olgay.buyukkayali@nomura.com
James Burton
+44 20 710 24927 James.Burton@nomura.com
The risks
Upside risks to our forecast stem from a softer landing in Asia rather than core and northern eurozone growth remaining very robust through next year. However, the risks of further central
Fig. 1: Growth comparisons
10 8 6 4 2 % y-o-y Nomura forecasts
2008/2009 Core
Oct 2010 to present Headline CPI Oct 2010 to present Core CPI
9 8
7
0 -2 -4 -6 -8
GDP growth for Strong countries GDP growth for Weak countries
6 5
4 3
2 1 3 5 7 9
Source: Nomura, Bloomberg. Note: Strong countries include Russia, Poland and Turkey. Weak countries include Czech Republic, Hungary, Romania and South Africa.
Source: Nomura, Bloomberg. Note: GDP-weighted country sample for Czech, Hungary, Poland, Romania, Russia, Turkey and South Africa.
42
13 November 2012
bank printing are probably one of the most complex areas of contention on risk because they can sweep all manner of ills under the carpet in EEMEA, yet at the same time do little to provoke structural reforms. To the downside the most severe risk is probably an untimely, early end to central bank printing perhaps on global inflation picking up. Equally, core eurozone growth surprising to the downside could drag some of the less affected consumption-related exports in the region lower at a faster pace. Banking contagion from a more meaningful shock from the eurozone is still there, but as difficult to quantify as ever, and we have written significantly on that risk and the use of backstops and exchange controls to offset in the past.
The good
While these factors apply across the region there is one group of countries that they apply specifically to Russia, Turkey and Poland. This strong group has seen more orthodox policy of late, has strong fiscal balance sheets and good funding, and more closed economies than the rest of the region. Turkey has recently been upgraded and Poland should follow suit next year. All three have more solid domestic demand. Interestingly, deleveraging in Turkey and Poland has, gross, been the highest in the region, but because liquid banking asset markets and deleveraging by eurozone banks have been too eager sellers wanting to expand in the region and provide credit, the impact on the economies has been minimal if any. Here are some specifics in each case: Turkey: Turkeys rebalancing is likely to continue, but at a lower pace. We have a reasonably confident view on Turkeys recovery from the current soft patch driven by investments. Net exports are unlikely to deteriorate very sharply similar to previous recoveries. Export market share differentiation, thanks to a sharp rise in Middle East exports, helps external balances to improve even further. Monetary policy has taken a dovish turn especially after Turkeys rating upgrade as the TCMB does not want TRY to have a disorderly appreciation. We do not believe inflation priorities are thrown out of the window completely and expect to see a hike in disguise if we are right about the recovery in the activity. Fiscal policy appears very tight on a cyclically adjusted perspective and the government is trying to put debt-to-GDP sub-30% of GDP helping crowding in private investments.
Fig. 3: Strong vs weak in retail sales and IP
%, y-o-y 15
Strong countries Retail sales Weak countries Retail sales Strong countries IP Weak countries IP
45
35 25
10
5 0
15
5 -5
-5 -10
-15 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
-15
-25 -35 Jan-06 Mar-07 May-08
Jul-09
Sep-10 Nov-11
Source: Nomura, Bloomberg. Note: Strong countries include Russia, Poland and Turkey. Weak countries include Czech, Hungary, Romania and South Africa.
Source: Nomura, Bloomberg. Note: Strong countries include Russia, Poland and Turkey. Weak countries include Czech, Hungary, Romania and South Africa.
Russia: Russia has gone through its deleveraging much earlier than other countries and hence balance sheets are at a healthier point, as well as domestic demand. The economy is still very leveraged with oil and oil prices (higher than 2008 probably), but that may not be a bad thing for 2013. Economic growth should remain above 3.5% and inflation pressures should result in the Central Bank of Russia acting more like an inflation targeter than countries formally implementing an inflation-targeting framework. Poland: We are actually quite optimistic on growth for next year vs the central bank (we forecast 2.0%, the NBP is projecting 1.5%), though we see a minimal risk of a recession. Poland
43
13 November 2012
has exhibited a significant capacity to prefund itself, combined with probably the most orthodox monetary policy in the region. That said, growth should slow sharply vs potential to around 4.0% (long run) thanks to slowing public sector infrastructure spending at the end of the current EU funding window, combined with a stagnant labour market. In 2012 consumption has been helped by declining savings, but the boon from that in 2013 should become less readily available. We, however, see continuing acceptable real credit growth and low inflation helping real incomes, while the important re-export cycle to Asia remains key. The test of the conservative nature of the MPC comes of course in how much it cuts rates, but with a desire to keep real deposit rates positive and the likely MPC view of longrun inflation being higher than the NBP economists expect we see only a limited cycle. That should continue to support Polands credibility. While fiscal consolidation has slowed in response to slower growth, off-balance-sheet measures add significant upside risks to our forecast for growth, even if they cannot be totally factored in at this stage. Polands strength however means that large foreigner holdings of onshore treasury debt have been built up, which is a risk albeit not unique to it. That said, Poland, perhaps, is at higher risk of undershooting expectations because of the high base it starts from.
The OK
We would place Israel and Czech Republic in the category of countries that have decent fundamentals, but monetary policy has shifted in each to be less inflation-targeting and more currency or global growth targeting. Czech: We expect the further slump in the eurozone next year and possibly a further crunch in the eurozone banking system flowing over into the Czech Republic to reinforce the deflationary (core inflation) dynamic there, and hence for the CNB to be ready to undertake some form of currency intervention. We think that will be a soft-floor type arrangement with 25.0 or 25.5 in EURCZK as its base. The CNB has started to abandon its traditional mantra of conservative notouch policy on the currency because of the internal view that rates will need to be negative, in effect, to stimulate the economy sufficiently. Thus, because of the impossibility of this, FX policy is the other way to ease monetary conditions. The Czech Republic is also an interesting example, and probably the most dramatic, where the external slowdown has not matched the domestic slowdown and hence net trade remains supportive. In this category we would also include the highly exposed but still structurally sound Baltic economies that had done their homework during the 2008-09 crisis, but nevertheless will suffer again with austerity maintained. The fruits of an export and labour-intensive FDI boom in the past few years however should start to pay off from next year to a greater degree and with it act to support growth. Israel: Israel has a modestly deteriorating current account and an economy that is reasonably highly correlated with global activity. An activist monetary policy and fiscal policy have never resulted in the Israeli economy falling into a recession, but in the face of weak global growth monetary policy gets very dovish.
44
13 November 2012
problems through a continual shifting forward of required fiscal consolidation but not a blow up in the budget. Potential growth remains very low and is probably falling in both countries. In Hungary we estimate potential growth (over medium run) to now be around 1.0% vs 4.0% before 2007, and in South Africa to be around 3.50% currently vs 3.85-4.00% pre crisis. In both cases we think this means the risk of further downgrades. There are some specifics to highlight here: Hungary: The story here shows a marked disconnect between market pricing and reality, but we find it hard to see how the shocks that might change this any time soon. Of course external shocks like Spain or US fiscal cliff could be one source, but the additional global liquidity that would lead to that would make the shock filtering through to Hungry only temporary. Domestically fiscal underperformance through next year combined with a new Governor of the MNB and an attempt to issue FX debt before an IMF plan is in place could all be sufficient a shock to provoke market reassessment. We are very concerned that a new Governor and widely replaced management of the MNB will combine with the governments attempts to increase its role in the banking sector through state-owned banks and unorthodox policy; a carefree attitude toward inflation (with the level of the currency and the volume of loan growth proving more important); and postmodern policy measures, will all lead to eventual instability in the currency. Like Poland the risks of a self-sustaining crisis from large foreign holdings of onshore debt are significant. Further downgrades could play a role here as well. Overall, though, the backstop of an IMF is not and is unlikely to be present until a severe market blowup provokes a change in the governments mindset and it accepts IMF conditionality. South Africa: While current policy in South Africa is pretty orthodox, the risks are mounting on the fiscal side in particular. Furthermore, the political risks of an ANC in the throes of a leadership election, where payoffs to get votes and attempts to solve recent labour market unrest are dealt with through extra spending should also exert pressure. Equally, with rates falling lower and a current account totally financed by credit and portfolio flows, the moves lower in real rates is starting to look unorthodox for the normally conservative SARB. With a record level of bond inflows by foreigners there is, therefore, a small window of credibility and funding to maintain stability through next year. Hence, fiscal rectitude is required. As ever we dont see South Africa blowing up. Instead, we expect the market to probably start to realise that the status quo of a President Zuma maintaining control of the ANC will be the problem. Therefore, with an unchanged policy or even a new policy further damaging competitiveness we will see potential growth remaining at a record low. All this should lead to additional downgrades.
45
13 November 2012
6.5
5.5 4.5
3.5
2.5
*End of period, **Period average, Bold is actual data ***Includes IMF/EU funds
Jul-2013
May-2014
Notes: * End of period. ** Period average. Bold is actual data. *** Includes IMF/EU funds.
46
13 November 2012
5.0 4.5
4.0 3.5
3.0
2.5 2.0 1.5
Notes: *End of period, **Period average, bold are actual data. Source: Nomura Global Economics
47
13 November 2012
6.0 5.5
5.0 4.5 4.0
Headline - old
Headline - new
Notes: PSCE Private sector credit extensions. * End of period. ** Period average. Bold is actual data. Source: Nomura Global Economics
48
13 November 2012
Olgay Buyukkayali
+44 (0) 20 710 23242 olgay.buyukkayali@nomura.com
40
Cyc. adj. primary balance (% GDP) 1.2 1.3 1.4 1.5 1.6 1.7 1.8
1.1
Notes:* End of period. ** Period average. Bold is actual data. Source: Nomura Global Economics
49
13 November 2012
1.4 208.9 -3.2 -3.8 1.5 1.5 1.1 10.3 8.5 32.5 47.7 46.6 1.00 25.00
Growth should start to recover from Q2, led principally by consumption given a still healthy labour market and then slowly through to domestic investments. The external shock to the economy has so far been surprisingly muted and so it is more the oscillations of imports on net trade that have been the issue. Fiscal drag will still be an issue shaving some 0.2pp from GDP. Much of the shock, however, is sentiment driven. An increasingly fractious and unstable coalition will mean any stronger fiscal action or structural reforms are unlikely. However, with steady access to domestic funding and low debt, it is questionable how much additional fiscal consolidation is needed for the medium-run path to remain credible. Overall we expect a largely lame duck government to keep things ticking over but its ability to survive through to the 2014 election remains very much in doubt. Underlying CPI should stay soft till the middle of H2 when it should start to normalise though headline CPI should fall back through next year. The risks to both growth and CPI in the next six months as well as the fact that interest rates are at the lower bound means that if enough of an external shock is delivered from the Eurozone we can see the CNB institute postmodern measures via some form of currency floor around 25.0-25.5.
Markets are becoming concerned with the confluence of negative factors in Romania, such as the downgrade of the rating outlook to negative by Moodys, IMF concerns over the elections in December moving them off-programme and fire sales of assets to support increased public sector wages. Romania is vulnerable to deleveraging forces, which could pose a serious risk to the balance of payments. While the BNR has a contingency plan that may involve capital controls, tapping of the precautionary SBA with the IMF may be necessary if the situation deteriorates. Rate hikes are becoming increasingly probable, reversing the recent 100bp of cuts, potentially taking rates up to 7.00% on a marked currency sell-off. There are questions whether the new Victor Ponta-led coalition will stick to the IMF-backed austerity programme, which would likely see the party lose the next election.
Olgay Buyukkayali
+44 (0) 20 710 23242 olgay.buyukkayali@nomura.com
Israels export-driven economy outperformed the region in the post-crisis environment thanks to an aggressive monetary policy response resulting in healthy domestic demand. The economy is currently slowing in line with the global backdrop. Inflationary pressures appear to have subsided and inflation expectations are well anchored. This years electricity price hikes, however, may limit the extent of policy easing. With the policy rate at 2.00%, we see no further cuts unless the global economy deteriorates further. Underlying final demand should not weaken greatly and the recovery in 2013 should result in measured rate hikes (50bp to 2.50% by year end).
50
13 November 2012
ANALYST CERTIFICATIONS
Each research analyst identified herein certifies that all of the views expressed in this report by such analyst accurately reflect his or her personal views about the subject securities and issuers. In addition, each research analyst identified on the cover page hereof hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Important Disclosures
Online availability of research and conflict-of-interest disclosures
Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupporteu@nomura.com for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. ADDITIONAL DISCLOSURES REQUIRED IN THE U.S. Principal Trading: Nomura Securities International, Inc and its affiliates will usually trade as principal in the fixed income securities (or in related derivatives) that are the subject of this research report. Analyst Interactions with other Nomura Securities International, Inc. Personnel: The fixed income research analysts of Nomura Securities International, Inc and its affiliates regularly interact with sales and trading desk personnel in connection with obtaining liquidity and pricing information for their respective coverage universe . Valuation Methodology - Global Strategy A Relative Value based recommendation is the principal approach used by Nomuras Fixed Income Strategists / Analysts when they make Buy (Long) Hold and Sell(Short) recommendations to clients. These recommendations use a valuation methodology that identifies relative value based on: a) Opportunistic spread differences between the appropriate benchmark and the security or the financial instrument, b) Divergence between a countrys underlying macro or micro-economic fundamentals and its currencys value and c) Technical factors such as supply and demand flows in the market that may temporarily distort valuations when compared to an equilibrium priced solely on fundamental factors. In addition, a Buy (Long) or Sell (Short) recommendation on an individual security or financial instrument is intended to convey Nomuras belief that the price/spread on the security in question is expected to outperform (underperform) similarly structured securities over a three to twelvemonth time period. This outperformance (underperformance) can be the result of several factors, including but not limited to: credit fundamentals, macro/micro economic factors, unexpected trading activity or an unexpected upgrade (downgrade) by a major rating agency.
Disclaimers
This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or identified elsewhere in the document. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (NIHK), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (NFIK), Korea (Information o n Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (NSL), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. (NAL), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (PTNI), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (NSM), Malaysia; Nomura International (Hong Kong) Ltd., Taipei Branch (NITB), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (NFASL), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Bes ant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034); NIplc, Madrid Branch (NIplc, Madrid) and NIplc, Italian Branch (NIplc, Italy). CNS Thailand next to an analysts name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited (CNS) to provide research assistance services to NSL under a Research Assistance Agree ment. CNS is not a Nomura entity. THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP. Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice. Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative
51
13 November 2012
instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (as defined within Financial Services Authority (FSA) rules in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Sta ndard & Poors. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (MSCI). Without prior written pe rmission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates. Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a number of different types of research product including, among others, fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and services from the research department depending on their individual requirements. Clients outside of the US may access the Nomura Research Trading Ideas platform (Retina) at http://go.nomuranow.com/equities/tradingideas/retina/ Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. The securities described herein may not have been registered under the US Securities Act of 1933 (the 1933 Act), and, in su ch case, may not be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura entity in your home jurisdiction. This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc, which is authorized and regulated by the FSA and is a member of the London Stock Exchange. It does not constitute a personal recommendation, as defined by the FSA, or take into account the particular investment objectives, financial situations, or needs of individual investors. It is intended only for investors who are 'eligible counterparties' or 'professional clients' as defined by the FSA, and may not, therefore, be redistributed to retail clients as defined by the FSA. This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. This document has not been approved for distribution in the Kingdom of Saudi Arabia (Saudi Arabia) or to clients other than 'professional clients' in the United Arab Emirates (UAE) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or to any person located in Saudi Arabia or to clients other than 'professional clients' in the UAE. By accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are a 'professional client' in the UAE and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia. NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version.
52
13 November 2012
separate fee for OTC transactions, as agreed with the customer. Foreign equities carry the risk of losses owing to factors such as price fluctuations and foreign exchange rate fluctuations. Margin transactions are subject to a sales commission of up to 1.365% (tax included) of the transaction amount (or a commission of 2,730 (tax included) for transactions of 200,000 or less), as well as management fees and rights handling fees. In addition, long margin transactions are subject to interest on the purchase amount, while short margin transactions are subject to fees for the lending of the shares borrowed. A margin equal to at least 30% of the transaction amount and at least 300,000 is required. With margin transactions, an amount up to roughly 3.3x the margin may be traded. Margin transactions therefore carry the risk of losses in excess of the margin owing to share price fluctuations. For details, please thoroughly read the written materials provided, such as listed securities documents or documents delivered before making a contract. Transactions involving convertible bonds are subject to a sales commission of up to 1.05% (tax included) of the transaction amount (or a commission of 4,200 (tax included) if this would be less than 4,200). When convertible bonds are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Convertible bonds carry the risk of losses owing to factors such as interest rate fluctuations and price fluctuations in the underlying stock. In addition, convertible bonds denominated in foreign currencies also carry the risk of losses owing to factors such as foreign exchange rate fluctuations. When bonds are purchased via public offerings, secondary distributions, or other OTC transactions with Nomura Securities, only the purchase price shall be paid, with no sales commission charged. Bonds carry the risk of losses, as prices fluctuate in line with changes in market interest rates. Bond prices may also fall below the invested principal as a result of such factors as changes in the management and financial circumstances of the issuer, or changes in third-party valuations of the bond in question. In addition, foreign currency-denominated bonds also carry the risk of losses owing to factors such as foreign exchange rate fluctuations. When Japanese government bonds (JGBs) for individual investors are purchased via public offerings, only the purchase price shall be paid, with no sales commission charged. As a rule, JGBs for individual investors may not be sold in the first 12 months after issuance. When JGBs for individual investors are sold before maturity, an amount calculated via the following formula will be subtracted from the par value of the bond plus accrued interest: (1) for 10-year variable rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.8 will be used through 9 January 2013, and an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used starting on 10 January 2013, (2) for 5-year and 3-year fixed rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.8 will be used through 9 January 2013, and an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used starting on 10 January 2013. Purchases of investment trusts (and sales of some investment trusts) are subject to a purchase or sales fee of up to 5.25% (tax included) of the transaction amount. Also, a direct cost that may be incurred when selling investment trusts is a fee of up to 2.0% of the unit price at the time of redemption. Indirect costs that may be incurred during the course of holding investment trusts include, for domestic investment trusts, an asset management fee (trust fee) of up to 5.25% (tax included, annualized basis) of the net assets in trust, as well as fees based on investment performance. Other indirect costs may also be incurred. For foreign investment trusts, indirect fees may be incurred during the course of holding such as investment company compensation. Investment trusts invest mainly in securities such as Japanese and foreign equities and bonds, whose prices fluctuate. Investment trust unit prices fluctuate owing to price fluctuations in the underlying assets and to foreign exchange rate fluctuations. As such, investment trusts carry the risk of losses. Fees and risks vary by investment trust. Maximum applicable fees are subject to change; please thoroughly read the written materials provided, such as prospectuses or documents delivered before making a contract. An annual account maintenance fee of up to 1,575 (tax included) is charged for any account held with Nomura Securities containing equities or investment securities. An additional annual account maintenance fee of up to 3,150 (tax included) is charged for any account containing foreign securities. No account fee will be charged for other marketable securities or monies deposited. Transfers of equities to another securities company via the Japan Securities Depository Center are subject to a transfer fee of up to 10,500 (tax included) per issue transferred depending on volume.
53
13 November 2012
Global Economics
Economists
Global-Economics Research Lewis Alexander Olgay Buyukkayali Tony Volpon Peter Attard Montalto Benito Berber Boris Segura North America-Economics Research Aichi Amemiya Roiana Reid Charles St-Arnaud Ellen Zentner EMEA-Economics Research Desmond Supple Jacques Cailloux Nick Matthews Silvio Peruzzo Dimitris Drakopoulos Lefteris Farmakis Takuma Ikeda Philip Rush Stella Wang Japan-Economics Research Tomo Kinoshita Mika Ikeda Shuichi Obata Kohei Okazaki Asuka Tsuchida Asia Ex-Japan-Economics Research Rob Subbaraman Young Sun Kwon Euben Paracuelles Sonal Varma Zhiwei Zhang Chief Economist Asia Hong Kong, South Korea and Taiwan Economist Southeast Asia Economist India Economist China Economist rob.subbaraman@nomura.com youngsun.kwon@nomura.com euben.paracuelles@nomura.com sonal.varma@nomura.com zhiwei.zhang@nomura.com +852 2536 7435 +852 2536 7430 +65 6433 6956 +91 22 403 74087 +852 2536 7433 Chief Japan Economist Economist Senior Economist Economist Economist tomo.kinoshita@nomura.com mika.ikeda@nomura.com shuichi.obata@nomura.com kohei.okazaki@nomura.com asuka.tsuchida@nomura.com +81 3 6703 1280 +81 3 6703 1287 +81 3 6703 1295 +81 3 6703 1291 +81 3 6703 1297 Global Head of Fixed Income Research Chief European Economist Senior Economist Senior Economist Economist Economist Senior Economist Economist Economist desmond.supple@nomura.com Jacques.Cailloux@nomura.com Nick.Matthews@nomura.com silvio.peruzzo@nomura.com dimitris.drakopoulos@nomura.com lefteris.farmakis@nomura.com takuma.ikeda@nomura.com philip.rush@nomura.com stella.wang@nomura.com +44 (0) 20 710 22125 +44 (0) 20 710 22734 +44 (0) 20 710 25126 +44 (0) 20 710 23205 +44 20 710 25846 +44 (0) 20 710 39242 +1 212 667 1153 +44 20 7102 9595 +44 (0) 20 710 20599 US Economist Economist G10 FX Research Senior US Economist aichi.amemiya@nomura.com Roiana.Reid@nomura.com charles.starnaud@nomura.com ellen.zentner@nomura.com +1 212 667 9347 +1 212 298 4221 +1 212 667 1986 +1 212 667 9668 US Chief Economist Head of EM Strategy, EMEA Head of Emerging Markets Research - Americas Economist Senior Latin America Strategist Senior Latin America Strategist Lewis.Alexander@nomura.com olgay.buyukkayali@nomura.com tony.volpon@nomura.com peter.am@nomura.com Benito.Berber@nomura.com Boris.Segura@nomura.com +1 212 667 9665 +44 (0) 20 710 23242 +1 212 667 2182 +44 (0) 20 710 28440 +1 212 667 9503 +1 212 667 1375
54