2018 outlook: India Asia's tiger cub, but China to see start of long-lasting growth slowdown
, ETMarkets.com|
Updated: Dec 14, 2017, 11.24 AM IST
NEW DELHI: Asia’s sweet spot looks stretched and there's a rising risk of painful snapback, but among the region, India, Indonesia and the Philippines are the new rising stars. This is the observation of Nomura India in Asian markets outlook for 2018.
The brokerage calls these three countries 'tiger cubs' among the emerging market pack.
Stock market returns
The brokerage expects double-digit equity returns across China, Korea and India, primarily driven by strong earnings growth. India remains its preferred pick. It is expecting 10-15 per cent returns from Chinese equity indices, mid-double digit returns for Korea's Kospi and 17 per cent equity return for India.
For India, earnings momentum is seen picking up pace and sustain beyond 2018.
"We expect government reforms like the goods and services tax, the implementation of the bankruptcy code and a push on infrastructure buildout to have a positive impact on growth and valuation multiples," it said.
For India, the brokerage is overweight on sectors such as financials, auto, capital goods, construction and healthcare, while it largely remains underweight cement, IT and consumer staples.
Chinese & Indian economies
Nomura sees a greater risk of a spike in China credit defaults and capital flight in 2018 than in 2017. The brokerage noted that China has lowered its GDP growth target in 2018 and reformer Liu He is promoted to vice premier in charge of the financial sector, which supports its views that 2018 will see China focusing on reforms over growth.
"The implication of all this is that China finally starts to address its moral hazard problem, with banks and bondholders repricing credit and starting to demand a higher risk premium, causing a continued widening of spreads between high yield and high grade credit," the brokerage said.
On the other hand, the foreign brokerage said that Asian cubs, especially India, could be about to experience the same phenomena as China did over 2005-15. The brokerage believes FDI inflows into India and Asean-5 will surge to around $240 billion by 2025 from $100 billion per year now.
It is bullish on India both cyclically and structurally.
The economy, it said, is in the early stage of a cyclical recovery and will register 7.5-8 per cent growth in H1 2018 -- the start of a robust and enduring expansion.
China, on the other hand, is biting the bullet on the more painful reforms, leading to a long-lasting growth slowdown, the brokerage said. Yet inflation in China is set to rise and for this country the credit risk differentiation will be the big theme for 2018, Nomura said.
PM Modi and reforms
The brokerage said that the Prime Minister Narendra Modi has "turned his lieutenants into farsighted policymakers, building the foundations for higher, sustainable growth, not the old-style, policy-induced boom-bust cycles."
Together with prudent monetary and fiscal policies, and India’s rich endowment of a cheap, young and abundant labour, this makes the brokerage confident that it is on the verge of unlocking significantly more growth potential. Domestic politics and a surge in oil prices though remains key risk.
Snapback
The broking firm said that Asia’s high debt leaves it exposed to a global repricing of credit risk, possibly triggered by inflation surprises.
The brokerage believes that the recovery in Asian exports masks structurally weak private domestic demand in several economies, leaving the region more exposed than it may first appear to a number of downside risks that, on our count, outnumber the upside ones.
"It is notoriously difficult to pinpoint the timing of a snapback but if we were to venture our best guess we would say Q2 and Q3 are the high-risk quarters," it said.
The brokerage calls these three countries 'tiger cubs' among the emerging market pack.
Stock market returns
The brokerage expects double-digit equity returns across China, Korea and India, primarily driven by strong earnings growth. India remains its preferred pick. It is expecting 10-15 per cent returns from Chinese equity indices, mid-double digit returns for Korea's Kospi and 17 per cent equity return for India.
For India, earnings momentum is seen picking up pace and sustain beyond 2018.
"We expect government reforms like the goods and services tax, the implementation of the bankruptcy code and a push on infrastructure buildout to have a positive impact on growth and valuation multiples," it said.
For India, the brokerage is overweight on sectors such as financials, auto, capital goods, construction and healthcare, while it largely remains underweight cement, IT and consumer staples.
Chinese & Indian economies
Nomura sees a greater risk of a spike in China credit defaults and capital flight in 2018 than in 2017. The brokerage noted that China has lowered its GDP growth target in 2018 and reformer Liu He is promoted to vice premier in charge of the financial sector, which supports its views that 2018 will see China focusing on reforms over growth.
"The implication of all this is that China finally starts to address its moral hazard problem, with banks and bondholders repricing credit and starting to demand a higher risk premium, causing a continued widening of spreads between high yield and high grade credit," the brokerage said.
On the other hand, the foreign brokerage said that Asian cubs, especially India, could be about to experience the same phenomena as China did over 2005-15. The brokerage believes FDI inflows into India and Asean-5 will surge to around $240 billion by 2025 from $100 billion per year now.
It is bullish on India both cyclically and structurally.
The economy, it said, is in the early stage of a cyclical recovery and will register 7.5-8 per cent growth in H1 2018 -- the start of a robust and enduring expansion.
China, on the other hand, is biting the bullet on the more painful reforms, leading to a long-lasting growth slowdown, the brokerage said. Yet inflation in China is set to rise and for this country the credit risk differentiation will be the big theme for 2018, Nomura said.
PM Modi and reforms
The brokerage said that the Prime Minister Narendra Modi has "turned his lieutenants into farsighted policymakers, building the foundations for higher, sustainable growth, not the old-style, policy-induced boom-bust cycles."
Together with prudent monetary and fiscal policies, and India’s rich endowment of a cheap, young and abundant labour, this makes the brokerage confident that it is on the verge of unlocking significantly more growth potential. Domestic politics and a surge in oil prices though remains key risk.
Snapback
The broking firm said that Asia’s high debt leaves it exposed to a global repricing of credit risk, possibly triggered by inflation surprises.
The brokerage believes that the recovery in Asian exports masks structurally weak private domestic demand in several economies, leaving the region more exposed than it may first appear to a number of downside risks that, on our count, outnumber the upside ones.
"It is notoriously difficult to pinpoint the timing of a snapback but if we were to venture our best guess we would say Q2 and Q3 are the high-risk quarters," it said.
