2015 Q1 House Views Update
by Nikko Asset Management's Global Investment Committee

Much as we expected, China's economy has continued to slow faster than consensus, but does not appear to be in a hard landing. We expect it to achieve 6.9% HoH SAAR growth in the 2Q15-3Q15, equaling consensus. Inflation remains very low, as measured by the CPI, and pipeline inflation remains negative. Exports have rebounded a bit recently, while imports in value terms are suppressed mostly by lower commodity. Housing starts are declining rapidly, so construction will likely subtract from the economy this year. Top tier cities' property prices are quite firm, but middle and lower tier cities' prices are quite weak due to large oversupply. Auto sales, on the other hand, remain quite firm and it will be crucial to watch this trend going forward.

Despite much pain caused, the government continues its pressure to reform its economy, as it believes imbalances must be corrected and as it tries to shift to a modern economy. It also wants to centralize power and reduce local corruption and autonomy. Credit defaults are increasingly commonplace now, with many firms found to have over-pledged collateral.

The wealth management business of large banks remains strong, but the trust industry is struggling with some defaults, which is greatly reducing credit to risky borrowers. We still believe that the country's large hidden bad debts have yet to be fully disclosed and that the real estate market is overpriced. We also believe that a significant amount of unofficial borrowing is behind many apartment purchases and that many companies, in a wide array of industries, have improperly speculated in the market and will be flushed out by the current reforms. Indeed, there are large speculative holdings of vacant apartments, which will be severely tested as prices continue to decline in many regions. The wealth effect of such declines is negative, but so far there are no signs of panic and we expect continued government reforms to continue to excite equity investors in the coming quarters.

Lastly, industrial production will continue to be constrained so as to reduce pollution and we continue to expect (as we have for several years) that huge efforts will be made, even beyond current optimistic projections, on solving this problem, which will provide many good investment opportunities for global providers of pollution control equipment of all kinds.

Other Emerging economies have continued relatively stable in the past few months, but definitely on the soft side. A stronger USD due to a Fed seemingly determined to normalize, and the resulting decline in commodity prices have been major headwinds. Given our view of stronger G-3 and Chinese growth, coupled with dovish central banks and rising commodity prices, we are now more enthusiastic about EM economies overall. In particular, we continue to believe that Asian EMs' economies will remain firm, as domestic demand is sturdy and external imbalances are quite small.