Nomura Asset Management

Investment Outlook
Spring 2024

Spring 2024

Contents
I. Investment Strategy
02┃ Quarterly Market Recap
03┃ Investment Environment Outlook
Rumi Kurumizawa, Chief Economist
Yuichi Murao, CIO, Senior Corporate Managing Director
Amid the onset of rate cuts in the U.S. and Europe, interest rates are expected to trend
downwards, while stock prices are anticipated to show an upward trend with fluctuations.

05┃ Japan Equity Market Outlook
Yasuyuki Fukuda, Chief Portfolio Manager, Active Japanese Equity
Expect a transition to a period of consolidation with some adjustments.

08┃ Natural Capital Trends and Outlook
Dai Yamawaki, ESG Investment Manager
Assessment of theories and practices regarding natural capital.

11┃ Generative AI/Semiconductor Trends and Outlook
Akira Kato, Senior Portfolio Manager, Active Global Equity
Takuya Oguchi, Senior Portfolio Manager, Active Gobal Equity
With the emergence of AI, the semiconductor market is also entering a period of
expansion.

14┃ U.S. High Yield Bond Market Outlook
Brett Collins, CFA, Executive Director, Chief Portfolio Manager, NCRAM
NCRAM maintains a constructive outlook for the high yield asset class based on
expectations of Fed policy easing, resilient issuer fundamentals, and supportive market
technicals.

II. Macroeconomic Environment Outlook
Global17┃ Global Economic Outlook 1 - Base Case Scenario
18┃ Global Economic Outlook 2 - Risk Scenario
19┃ Global Economic Outlook 3 - Economic Cycle
Regional/Country Based
20┃ U.S.
21┃ Eurozone
22┃ Japan

23┃China
24┃Emerging Market
25┃Economic and Market Forecast

Note: In Nomura Asset Management (NAM) Investment Strategy Spring 2024, NAM’s senior investment professionals offer their views of theinvestment strategy and market prospects – commentaries are as of middle to late March 2024, and reflect each professional’s personal views,
and do not entirely match NAM’s house view. except for Investment Environment Outlook and Global Financial Market Forecast that are basedon NAM’s house view.

1

NAM Investment Outlook Spring 2024

Quarterly Financial Market Recap
Financial markets in the January-March period of 2024 reflected the resilience of the U.S. economy, while
concerns about persistent inflation led to a retreat in expectations of policy interest rate cuts by the Federal
Reserve (FED), causing U.S. market interest rates to rise. Despite the increase in bond yields, strong
corporate earnings and growth expectations for AI-related companies led to record-high stock prices in theequity markets of Japan, the U.S., and Europe. In the foreign exchange market, there were moments when
the yen appreciated temporarily due to speculation about a policy change by the Bank of Japan, but with U.S.
interest rates rising, the yen depreciated again.
10 Year Bond Yields in Major Countries

Major Equity Markets(January 2, 2019 - March 29, 2024, daily)(January 2, 2019 - March 29, 2024, daily)(Points)

(%)

6,000

5.0

S&P500USEuro300

5,000

4.0

TOPIX
3.0

Germany
Japan

4,000
2.0
3,000

1.0

2,000

0.0

1,000
Jan-19Jan-20Jan-21

Jan-22-1.0
Jan-19Jan-24Jan-23

Source: Nomura Asset Management based on Bloomberg data

Jan-20Jan-21

Jan-22

Jan-23

Source: Nomura Asset Management based on Bloomberg data

Yen and Euro against the U.S. dollar

Trends in VIX and MOVE

(January 2, 2019 - March 29, 2024, daily)(January 2, 2019 - March 29, 2024, daily)(USD/EUR)
1.25
1.20

(JPY/USD)
160
USD/EUR (LHS)
JPY/USD (RHS)
150

1.15

140

1.10

130

1.05

120

1.00

110

0.95
Jan-19Jan-20Jan-21

Jan-22

Jan-23Jan-24Jan-24(Points)
250

VIX
MOVE

200
150
100
50

100

0
Jan-19Jan-20Jan-21

Jan-22

Jan-23Jan-24

Note: The VIX and the MOVE are indexes that show the risk of future
volatilities of U.S. stocks and US bonds, respectively.
Source: Nomura Asset Management based on Bloomberg data

Source: Nomura Asset Management based on Bloomberg data2

Investment Strategy

NAM Investment Outlook Spring 2024

Investment Environment Outlook
Amid the onset of rate cuts in the U.S. and Europe, market interest
rates are expected to trend downwards, while stock prices are
forecast to show an upward trend with fluctuations.

Rumi Kurumizawa
Yuichi Murao
Chief Economist Chief Investment Officer,
Senior Corporate
Management Director

Sustainability of robust U.S. economic growth is crucial for the financial markets
We had previously anticipated a slowdown in the U.S.
economy towards the summer as the cumulative
pressure of past monetary tightening took effect.
However, many of the economic indicators announced
in 2024 have suggested continued robust growth,
indicating a strong possibility that the economy could
maintain its "virtuous cycle" of strong employment,
income, and consumption for a while longer. As theeffects of excess savings from fiscal transfers during
the Covid-19 pandemic diminish and inflation softens
due to supply factors, leading to an improvement in
the real income environment, there is some possibilityof a smooth transition in the factors underpinningsupport for consumer spending.

and the high cost of debt refinancing that corporate
borrowers will face in a high-interest rate environment,
lead us to anticipate a slight weakening in theeconomy’s "virtuous cycle." In other words, while there
is a reasonable possibility of maintaining a growth rateof around 2%, we do not see a high probability of anautonomous acceleration in the growth rate.
Moreover, judging from the balance between theeconomy and prices, it seems that the potential growthrate is higher than expected. If so, even under a 2%
growth trajectory, inflation rates are likely to soften
gradually, allowing the Federal Reserve to make ratecuts for the purpose of adjusting or fine-tuning thedegree of monetary tightening.

On the other hand, factors such as an increasing trend
in credit card delinquency rates, suggesting that
consumption is to some extent reliant on borrowing,

Bond yields are on a downward trend
Control to a more conventional monetary policy
framework where short-term interest rates serve as
the primary policy tool.

In the commentary released in January, we stated thatthe market's pricing in of rate cuts was excessive andthere could be a rebound in interest rates. Indeed, as
market participants’ expectations regarding monetary
policy shifted through March, the yield on the U.S. 10year Treasury note rose from below 3.8% in late
December 2023 to around 4.3% recently.

Regarding yen bond yields, these have been relatively
stable, as the Bank of Japan's policy changes were
within market expectations and the pace of long-term
government bonds purchases is expected to be
maintained for the time being. In addition, there issome possibility that limit orders and other operations
could be triggered in the event of sharp interest rateincreases. While we anticipate an additional increaseof around 0.25% later in the year along with central
bank balance sheet reduction, we believe that thepotential for a significant rise only in yen bond yields islimited, as interest rates in Europe and the UnitedStates are expected to remain stable.

Looking ahead, towards the middle of 2024 when we
see a greater likelihood of rate cuts, we can expect
long-term interest rates to decline. Even if interest ratecuts proceed at a very gradual pace while theeconomy stabilizes, long-term interest rates are likely
to move within a sideways range.
We anticipate that the yields on German andJapanese government bonds will be somewhat
correlated with U.S. bond yields. In March, the Bank ofJapan reverted from its policy of Quantitative andQualitative Monetary Easing (QQE) with Yield Curve

3

NAM Investment Outlook Spring 2024

While expecting a weakening trend in the U.S. dollar, it is anticipated that the movement against theJapanese yen will remain relatively stable with only minor fluctuations.
Amidst the changing expectations for U.S. monetary
policy, U.S. Treasury bond yields have been on an
upward trend recently. In mid-February, the U.S. dollar
strengthened against the Japanese yen and the Euro.
Subsequently, there were moments where the U.S.
dollar weakened due to statements from European
Central Bank (ECB) officials pushing back against
speculation of an early rate cut and expectations
surrounding the Bank of Japan's policy changes.
However, as the policy shift remains within market
expectations, the yen temporarily weakened against
the U.S. dollar, slipping to the JPY151 /USD range.

then trade within a range, and if the market manages
to avoid a sharp and sustained deterioration in risk
sentiment, such as a financial crisis.
Regarding the Japanese yen, structurally significant
yen appreciation seems unlikely in terms of fund flows.
However, with the potential for the U.S. to movetowards moderate interest rate cuts and Japan facing
the possibility of additional rate hikes, these diverging
monetary policy trends could lead to yen appreciation.

Looking ahead, relative movements of the U.S. dollar
and the Euro will be influenced by financial market risk
appetite. We believe that the U.S. dollar will
depreciate against the euro if we are correct in our
expectation that U.S. Treasury yields will decline andEquity markets can be expected to continue their upward trend
While expectations for an early cut in U.S. interest
rates have diminished, the stock market has enjoyed asteady upward trend since the end of December lastyear, supported by strong economic growth in the U.S.
underlying this backdrop. A rate cut, aimed atadjusting the degree of monetary tightening in thecontext of the Fed’s expectations for robust economic
growth with low inflation, would have a positive effecton earnings per share (EPS) and the price-to-earnings
ratio (P/E) for stocks.

Looking specifically at the Japanese stock market,
strengthening of the yen could be expected to weighon corporate earnings. On the other hand, although
the Bank of Japan has removed its negative interest
rate policy, given its ongoing commitment to monetaryeasing together with the effect of a moderate
strengthening of the yen acting as a cost-containment
factor, we could expect the stock market to continue
rising.

Considering that the Fed's growth rate outlook as ofMarch is now slightly weaker than our U.S. economic
outlook presented in March, and considering the rapid
rise in stock, there is some risk of a temporary
adjustment in stock prices. However, looking towards
the year-end, it would be reasonable to assume thatthe stock market could maintain an upward trend withsome interim fluctuations.

4NAM Investment Outlook Spring 2024

Japan Equity Market Outlook
Expect a transition to a period of consolidation with some adjustments.

Yasuyuki Fukuda,
Chief Portfolio Manager,
Active Japanese Equity

Japan’s equity market broke its 34-year record high and the Nikkei 225 index passed the 40,000 yen
mark for the first time
Japanese stocks have enjoyed a strong uptrend
since the beginning of this year. Amid a global stock
market rally, gains in Japanese stock prices havebeen particularly notable. As of March 15, the yearto-date performance has shown the Dow Jones
Industrial Average was up by 2.7%, the S&P 500
was up 7.3%, and the NASDAQ Composite had
gained 6.4%. In contrast, the Nikkei Stock Average
had surged by 15.7% (the broader TOPIX, or Tokyo
Stock Price Index, gained 12.9%), indicating an evenstronger rally. Large-cap stocks, which have anespecially significant impact on stock price indices,
have been gaining momentum during the first quarter.
Looking at the returns (excluding dividends) during
the same period in descending order of market
capitalization of stocks that make up the TOPIX: thetop 100 stocks (large-cap index) have shown a returnof +15.3%, the next 400 (mid-cap index) +8.6%, andthose below that (small-cap index) +8.2%.

Large cap driven rally, but with distinct underlying market dynamics behind Japan and the U.S.
During the same first quarter period, the S&P 500 has
outperformed the Russell 2000 index (comprisingfrom the 1,001st to 3,000th largest stocks by market
capitalization), by about 6.7%. This shows that largecap stocks are dominating the market rally even in the
U.S. Specifically, some technology stocks such as theso-called "Magnificent Seven" (including Apple,
Microsoft, Alphabet, Amazon, Meta, NVIDIA, andTesla) have been driving the market higher. Currently,
these seven stocks alone account for approximately
30% of the market capitalization of the S&P 500.
When we look back at the history of the U.S. stock
market, with episodes such as the Nifty Fifty boom in
the 1970s and the IT bubble around 2000, there areconcerns about the sustainability of extraordinary
equity market gains characterized by such a lack ofbreadth (i.e. driven by a limited number of stocks). In
contrast, Japan’s market rally since the beginning of2023 has been characterized by investment rotation invarious industries, indicating a healthy andsustainable increase in stock prices that has outpaced
the gains in the U.S. market. The figure below shows
the composition ratio of the top 10 stocks by market
capitalization in the S&P 500 and TOPIX 500. In
recent years, the increase in the composition ratio andmarket concentration in the S&P 500 stands out.

Fig. 1. S&P500 and Top 10 by Market Capitalization(1994 to 2024, end of December each year, end of February for 2024 )Fig. 2. TOPIX500 and Top 10 by Market Capitalization(1994 to 2024, end of December each year, end of February for 2024 )

(%)

(pt)

6,000
4,500
3,000
1,500
0

1994 1998 2002 2006 2010 2014 2018 2022 (Yr)

(pt)

50
40
30
20
10

2,500
2,000
1,500
1,000
500
0

(%)

50
40
30
20
10

1994 1998 2002 2006 2010 2014 2018 2022 (Year)Top 10 stock composition ratio, right axis

Top 10 stock composition ratio, right axis

Note: The composition ratio does not take into account the number of outstanding
floating shares. The composition ratio of the top 10 stocks by market capitalization
before 1999 is calculated by excluding some constituent stocks for which market
capitalization data is not available.
Source: Nomura Asset Management based on Bloomberg data

Note: The composition ratio does not take into account the number of outstanding
floating shares. The composition ratio of the top 10 stocks by market capitalization
before 2004 is calculated by excluding some constituent stocks for which market
capitalization data is not available.
Source: Nomura Asset Management based on Bloomberg data

*References to individual stocks do not imply recommendations for buying or selling specific stocks, nor does imply any view on their price movements.

5

NAM Investment Outlook Spring 2024

NVIDIA Corp: Stock price is considered reasonable based on a solid EPS outlook. Even if momentum
weakens, the lack of overvaluation in terms of its P/E ratio suggests a major collapse is unlikely.
There are concerns that the recent surge in stock
prices of NVIDIA Corp and other AI-related stocks inthe "Magnificent Seven" might indicate a potential
bubble. While there are worries about a bubble inthese stock prices, such concerns are not definitive for
NVIDIA and other AI-related stocks. If there are
elements of a bubble, it is possible that they originate
from the earnings side.

high stock price, supported by high earnings, appears
sustainable for an extended period. Hence, theearnings base (E) for stock price formation is notindicative of a bubble.
Furthermore, with the stock currently trading at a P/E
ratio of 30 times, there doesn't seem to be a significant
overvaluation for a growth stock like NVIDIA. However,if the stock price increase continues, and we see manystocks forming what was often mocked during the IT
bubble period as "hockey stick charts," we should
recognize this as a possible danger signal.

The stock price (P) is expressed as E (earnings per
share) x P/E (price-to-earnings ratio). If the current
price is to be considered a bubble at around $900, it
would require that the company’s estimated E of
$29.44 for the fiscal year 2026 (from February 2025 toJanuary 2026) or its current P/E ratio of approximately
30 times, or both, to be considered a bubble.

Taking this into consideration, the current stock priceof NVIDIA at around $900 and the P/E ratio of
approximately 30 times are based on reasonable
expectations. Although market momentum could slow
down due to the law of large numbers, I believe acrash akin to the bursting of the IT bubble is unlikely.

Regarding E, it is crucial to assess how long NVIDIA
can maintain its dominant market share and high unit
prices in the GPU (Graphics Processing Unit) market
for server deployment for AI purposes. At the moment,
I believe NVIDIA can maintain its excess profits
brought by high market share and high unit prices for aconsiderable period.
In terms of the current scenario, I think NVIDIA could
maintain its leading position for a substantial period
given that production capacity for producing GPUs on
the most advanced process nodes is limited tocompanies like TSMC. Such supply limitations reduce
the likelihood of NVIDIA losing market share or gettingcaught up in price competition. Therefore, the current

6NAM Investment Outlook Spring 2024

Outlook for Japanese stocks: Consolidation can be expected, with periodic adjustments until the U.S.
presidential election passes.
The Nikkei 225 index has seen a significant reboundof more than 14,400 yen since the lows following theCovid-19 shock in March 2020. The market gain from
the March 2022 lows to the high in June 2023 wasmore than 9,000 yen, but from the October 2023 lows
to the high on March 7, 2024, the increase has
already surpassed 9,980 yen. The stock market’s
current level suggests that there could be a potential
pause in the upward trend.

range before again approaching the 40,000 yen level.
The re-establishment on a sustainable basis of the
40,000 yen milestone, a true surpassing of Japan’s
Heisei Bubble high, is expected to occur around 2025
rather than being a one-time event.
Fig. 3. Trends in the Nikkei 225 Index(January 5, 2020 to March 15, 2024, daily)(JPY)

45,000Given the dominance of the "Magnificent Seven"stocks in the S&P500, which now account for around
30% of market capitalization, the lack of clear
leadership in the rest of the U.S. stock market, thereluctance to adopt a risk-on sentiment until the U.S.
presidential election, potential overshooting of
economicandinflation
expectations,andexpectations of three rate cuts priced into the bondmarket, suggest a challenging environment ahead for
U.S. stocks with a bias towards downward pressure.
This is also expected to have an impact on Japanesestocks.

40,00035,000

1: 14,438 yen increase over a periodof approximately 18 months
2: 6,114 yen decrease, app, 6 months
3: 9,091 yen increase, app. 15 months

20,00015,0006

330,00025,0005

1

4
2

4: 3,285 yen decrease, app. 4 months
5: 9,984 yen increase, app. 5 months
6: 1,764 yen decrease (as of March 15)

10,000Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24

Considering the significant gains from the low of
30,487 yen on October 4 to the high of 40,472 yen on
March 7, with an increase of 9,984 yen in just fivemonths, it might be necessary for the Nikkei 225
index to consolidate in the mid to high 30,000 yen

Note: 1: Mar. 19, 2020-, 2: Sep. 14, 2021-, 3: Mar. 9, 2022-, 4: Jun. 19, 2023-, 5:Oct. 4, 2023, 6: Mar. 7, 2024Source: Nomura Asset Management based on Bloomberg data

*This commentary reflects the personal views of the author and does not necessarily represent NAM’s house view.

7

NAM Investment Outlook Spring 2024

Natural Capital Trends and Outlook
Assessment of theories and practices regarding natural capital.

Dai Yamawaki,
ESG Investment Manager

Growing market attention towards natural capital
Natural capital (including water, forests, soil, andbiological resources) has long been considered as agiven input to production functions in the world of
economic and financial modelling.

Nature-related Financial Disclosures (TNFD), areprogressing rapidly.

In recent years, this neo-classical perception of natural
capital primarily as an exploitable economic resource
has been challenged and is now changing, but criticalrisks to natural capital remain. The World Economic
Forum (WEF, 2024) has attempted to itemize and rank
the most serious risks that will worsen over the next 10
years into five categories (environmental, social,technological, economic, and geopolitical). The
environmental category includes natural capital andaccounts for five out of 10 most severe risks. In thiscontext, global frameworks regarding natural capital,such as the Kunming-Montreal Framework for
Biodiversity, agreed upon at the 15th Conference of
the Parties to the Convention on Biological Diversity inDecember 2022, and initiatives like the Task Force on

Figure 1. The most severe risks that will escalate
over the next 10 years
1stExtreme w eather events

2nd

Critical change to earth systems

3rd

Biodiversity loss nad ecosystem collapse

4th

Shortage of natural resources

5thMisinformation and disinformation

6th

Adverse outcomes of AI technologies

7th

Involuntary migration

8th

Cyber insecurity

9thSocietal polarization

10th

Pollution

Ranking

Env.

Soc.

Tech.

Econ. Geopol.

Source: Nomura Asset Management based WEF (2024) data

Theoretical approaches to natural capital
Natural capital has been traditionally treated as apublic good that meets the criteria of non-excludability(individuals cannot be excluded from its benefits) andnon-rivalry (one individual's consumption does not
impede another's consumption). However, in reality,
the latter condition only partially holds, making natural
capital more of a quasi-public good. Various
theoretical approaches have been attempted toaddress the complex question of how to evaluate suchnatural capital in this context.

(RCM), which attempts to evaluate natural capital by
the cost of replacing it with private goods (i.e. goods
that do not meet the conditions of non-exclusivity andnon-rivalry); 2. The Hedonic Pricing Method (HPM),
which evaluates based on the impact of natural capitalon land rent and wage structure; 3. the Travel Cost
Method (TCM), which calculates value based on travel
expenses to destinations such as landscapes andrecreational areas, and 4. The Contingent Valuation
Method (CVM); which evaluates through anassessment of the willingness to pay or compensate
for changes in natural capital.

For example, the market valuation approach attempts
to evaluate a resource rent value per unit by deducting
production costs from the market trading price of acertain input of natural capital, when a market trading
price is available. As for non-market valuation
methods, various approaches have been used toassign a monetary value to natural capital. Thesemethods include 1. The Replacement Cost Method

As mentioned above, in order to break free from thecrisis surrounding natural capital, the importance ofappropriate "valuation" and "disclosure" of natural
capital by social and economic actors has beenemphasized as increasingly important in recent years.

8NAM Investment Outlook Spring 2024

Valuation of natural capital

The World Bank defines wealth as a broad conceptthat includes not only manufactured capital (market
goods) but also human capital and natural capital, andis working towards valuing wealth based on thisexpanded definition. To this end, the World Bank has
constructed panel data on various types of capital(manufactured, human, and natural) in each of the 146
countries worldwide, and upon reviewing their trends(Figure 2), it was found that over the past 20 years,
manufactured and human capital have grown by over

35%, while natural capital has shown modest growth(9%) and its share of total capital has decreased by 2
percentage points.
In addition, upon examining the trends of per capita
GDP and natural capital in each country based on
income levels (Figure 3), it became evident that thegrowth rate of natural capital is experiencing a slightdecline in high-income countries, but a sharp decline
in low-income countries.

Figure 2. Changes in the Economic Value andPercentage of Capital(1995 – 2018, Annual)
Natural Capital (%)
Manufacturing Capital (%)
Human Capital(USD, mn)
20

Figure 3. Relationship between GDP per Capita andNatural Capital (by Income Group, 1995 vs. 2018)

Human Capital (%)
Manufacturing Capital
Natural Capital

GDP per capita (USD)

40,00020,000100%

15highincome
countries

2018

80%

15,00030,00060%

10,0001995(-0.9%)

10
40%
5

5,000

20%

0
0

1995

2000

2005

2010

2015

0%

0

lowincomecountries

low- andmiddleincome
countries(-13.1%)(+1.2%)

5,000

10,000uppermiddleincome
countries(+16.6%)15,00030,00040,00020,000Natural Capital Per Capita (USD)

Note: The economic value of each type of capital is based on realterms in U.S. dollars, using 2018 as the benchmark year.
Source: Data from the World Bank compiled by Nomura AssetManagement.

Note: Both axes are based on real terms. Changes in natural capitalare shown in parentheses.
Source: Nomura Asset Management based on FactSet data

Natural capital disclosure
In September 2023, the Taskforce on Nature-related
Financial Disclosures (TNFD) announced its
recommendations, which seek to provide a framework
for appropriately evaluating and disclosing risks andopportunities related to natural capital. The TNFD
recommendations are structured around four pillars:
Governance, Strategy, Risk & Impact Management,
and Metrics & Targets. In addition to these four pillars,
many of the recommended 14 disclosure items arealso commonly found in the Task Force on Climaterelated
Financial
Disclosures(TCFD)
recommendations.

In Japan, TCFD disclosures have become essentiallymandatory over the five years since the final
recommendations were released in June 2017.
Considering the similarities between these twoframeworks and the close relationship in the area of
focus between TCFD and TNFD, it seems possiblethat the adoption and mandatory requirements for
TNFD disclosures could occur more swiftly than thatfor the TCFD disclosures in Japan. This institutional
development could also be accelerated by action suchas the integration of TCFD and TNFD disclosures.

9NAM Investment Outlook Spring 2024

Measuring the natural capital risk of a domestic portfolio
Nomura Asset Management has launched an initiative

We use data and analysis methods from ISS toto evaluate the natural capital-related risks of its own

conduct a comparative analysis between a portfolio

portfolio using benchmark comparisons. In particular,

and its benchmarks. As benchmarks, we use thewe are focusing on an indicator that quantitatively

TOPIX for domestic stocks, while only the corporate

expresses the potential loss of unique species in abond component of the NOMURA-BPI (composite) is

geographical area due to environmental stress, known

used for domestic bonds.

as the "Potential Disappearance Fraction (PDF)." PDF

By calculating and comparing the weighted averageis mentioned in life cycle assessment (LCA) models as

PDF intensity, which is the PDF per unit of revenue fora method to reach a quantitative evaluation ofeach company in the portfolio weighted by eachenvironmental impact throughout the life cycle ofcompany's benchmark weighting, it was confirmed that

products and services. It is widely used as a

the PDF intensities of Nomura Asset Management's

coefficient to estimate the potential extent of damage

domestic model equity and bond portfolios was below

to natural capital. A higher PDF equates to a

the benchmark (as of the end of December 2023).

potentially greater impact on biodiversity.

Figure 4. Formula of Weighted Average PDF Intensity

𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊ℎ𝑡𝑡𝑡𝑡𝑡𝑡 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 = �(PDF km2.yr/ million Euro)𝑖𝑖
𝑛𝑛Market value of investment 𝑖𝑖 Absolute value of PDF for investment company 𝑖𝑖
×Portfolio market value
Sales of investment company 𝑖𝑖

NAM Japanese Equity Portfolio

39.3

Japanese Equity BM

41.4

NAM Japanese Bond PF

23.6

Japanese Bond BM

28.8
0EnergyHealth Care
Real Estate

Materials
Financials
Other

5

10

15

20

25

Industrials
Information Technology

30

35Consumer Discretionary
Communication Services

Source: Nomura Asset Management based on ISS Using Biodiversity Impact Assessment Tool data.

*This commentary reflects the personal views of the author and does not necessarily represent NAM’s house view.

10

40

45

Consumer Staples
Utilities

50

NAM Investment Outlook Spring 2024

Generative AI and Semiconductor
Trends and Outlook
Akira Kato
Takuya Oguchi
Senior Portfolio Manager, Senior Portfolio Manager,
Active Global Equity
Active Global Equity

With the emergence of AI, the semiconductor market isalso entering a period of expansion.

The AI market is transitioning from the emergent phase to the growth phase
It has been said that around 2015, when the practicaldeveloping new ideas, we can continue to develop theapplication of AI advanced due to the evolution of a

new industries of the future. The utilization of AI

machine learning method called "deep learning," it waspresents significant opportunities in areas where vast

equivalent to the year 1995 when "Windows 95" wasamounts of data are collected, such as autonomous

released and commercialization of the internet began

driving, medical research, and finance. For example,

to take off. Just as 1995 is known as the "Year of thein the healthcare field, the development of new drugs

Internet," 2015 can be considered the "Year of AI." Asis being accelerated by the use of AI.

of 2024, with the increased awareness of AI services,

On the negative side, there is active discussion about

we are now at the end of the "AI adoption period" andwhether the advance of AI will have a detrimental

at the beginning of the "AI growth period."

impact on people's lives. However, just as the

Looking ahead, population decline in advanced

widespread use of personal computers did notcountries is an inevitable trend. In a society with anecessarily lead to a loss of people's jobs but rather

declining population, AI can play an important role inbrought about many benefits, it is possible tolabor substitution by taking on some of the tasks that

anticipate a future where AI and human labor canhumans now perform. By leaving simple tasks to AI

coexist productively.

and focusing on creative work, such as originating andStock prices of AI-related companies are entering a stage of growth accompanied by solid fundamentals
AI became a prominent investment theme during the

Figure 1. Market Size of Generative AI

latter half of the 2010s, but this was still a period that(2022 to 2032, annual)

could be described as the "AI adoption period." This

(USD, bn)
1,400

was a time when services using AI began to be utilized
in the real world, and even though companies were
not yet making profits from AI services, the evaluation

1,200

of their growth potential led to an increase in the stock

1,000

prices of AI-related companies.

800

On the other hand, we think the current rise in stock600

prices of AI-related companies is the result of the400

recognition of the progress made in generative AI

200

technologies, such as Chat GPT and other products0that have tangible outcomes. Looking ahead, we

1304
1079
897
728
548

40

67

137

217

304

399

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

(Yr)

believe that over the next 5 to 10 years, AI-related
Note: Bloomberg forecast from 2023 and beyond.

businesses can expect medium-to long-term growth

Source: Nomura Asset Management based on Bloomberg datawith corresponding financial performance, making it an
exciting time to be involved in this field.

11

NAM Investment Outlook Spring 2024

Semiconductor market to reach U.S. $1 trillion
The semiconductor market has continued to expand

devices, the semiconductor market is thriving in theover the past half-century by riding waves offourth wave.

electrification and digitalization. Few markets have

The semiconductor market is projected to continue

sustained such high growth over such a long period of

growing at a rate of approximately 10% annually,time, and now, with the explosive proliferation of AI-

reaching a market value of $1 trillion by 2030. It took

related markets, including Generative AI, and IoTaround 50 years for the market to grow to $500 billion

devices, the semiconductor market has entered a newfrom the 1970s, but a significant leap is expected in a

growth cycle known as the "Fourth Wave."much shorter period, adding another $500 billion
within the foreseeable future.

Looking at the technological stages of the past 40
years, the 1980s marked the "Mainframe Era," with the

Furthermore,

first wave characterized by large-scale computers

semiconductor-related

second wave came in the 1990s with further advances
in integrated circuits driving the widespread adoption

the

rapid

spreadcompetitive

companies.

While

the

competition and price wars, recent trends such as a
the reduction in the number of companies throughsemiconductor usage. By the 2000s, mobile networks
and

the

semiconductor market has historically seen intenseof personal computers, leading to a surge inestablished,inenvironment are supporting the performance growth of

consuming massive amounts of semiconductors. The

wereimprovements

consolidation and M&A have shifted the landscape toofa more stable structure, enabling companies to securesmartphones and cloud services ushered in the third

profits without resorting to drastic price cuts.

wave. Now, driven by the proliferation of AI and IoT

The semiconductor cycle bottomed out in mid- 2023 and has entered into expansion phase
The semiconductor market exhibits cyclical patterns,

period, this expansion phase can be expected to

but it has also shown a high historical long-term

continue until around mid-2025 to mid-2026.

growth trend beyond those cycles. It is considered a
Figure 2. Semiconductor Market

market with the potential for long-term growth, evenas it navigates through these cycles. In the past, the(USD, bn)

semiconductor market was heavily influenced by700

fluctuations in demand for specific products such as

600

PCs and smartphones, leading to significant revenue

500

and stock price volatility. It was known for being an
industry that was susceptible to short-term economic

400

conditions.

300

Semiconductor market cycles typically repeat every 3

200

to 4 years, with around 2 to 3 years of expansion

100

followed by approximately a year of adjustment.

01990 1994 1998 2002 2006 2010 2014 2018 2022

Currently, it is observed that the market bottomed out
around mid-2023 and then transitioned into an(Yr)

Note: Red circles indicate years where new peaks were reached, surpassing theprevious peaks. The data for 2024 is based on projections by the SIA and WSTS
Source: Nomura Asset Management based on SIA and WSTS data

expansion phase. Assuming a 2 to 3-year growth12NAM Investment Outlook Spring 2024

Semiconductor cycle expected to last longer fueled by strong demand for AI semiconductors
There

is

a

stronglikelihood

that

the

current

Moreover, in the current environment, the field known

semiconductor cycle, which bottomed out in 2023, will

as analog semiconductors, which feature heavily incontinue for an extended period. In past examples,electric vehicles, robotics, and factory automation areindustry cycles have tended to extend to around four-

diversifying in terms of their applications and are

years. These cycles include the surge in PC demand

expanding. As semiconductor applications diversify in

following the release of "Windows 95" in August 1995,

the future, we can expect revenue and stock pricethe cycle driven by the widespread adoption of 3G

volatility to stabilize over time. Particularly, thecommunication services in Europe and the U.S. in

increasing utilization of AI-equipped autonomous

2005 leading to the emergence of smartphones fromrobots in sorting and transporting tasks within logistics

Blackberry to iPhone, and the cycle of cloud services

warehouses, the ability to delegate even tasks thatlike AWS reaching a period of widespread adoption in

once required human judgment to robots, and the2015. Expansion phases can generally extend tosurge in demand for data center processing to handle

about 3 years (within a 4-year cycle) in every third

the massive data needs from information sources

cycle. Considering the current expansion phase driven

such as video, all suggest that semiconductor demandby AI and IoT, supported by robust demand for AI-

will continue to grow.

specific semiconductors, it is plausible to expect the
expansion phase to lengthen.
Figure 3. Semiconductor market size
(1990 to 2030, annually)

1.2(Forecast)(USD, tn)

1.0
0.8
0.6
0.4
0.2
0.0

1990

1995

2000

2005

2010

2015

2020

2025

2030

(Yr)

4th Geneartion
3rd Generation
2nd Generation
1st Generation

Note: Forecast by ASML
Source: Nomura Asset Management, based on SIA, WSTS and ASML data.

*This commentary reflects the personal views of the author and does not necessarily represent NAM’s house view.

13

NAM Investment Outlook Spring 2024

U.S. High Yield Bond Market Outlook
NCRAM maintains a constructive outlook for the high yield asset
class based on expectations of Fed policy easing, resilient issuer
fundamentals, and supportive market technicals.

Brett Collins, CFA
Executive Director &Client Portfolio Manager.
NCRAM

Cautious optimism for U.S. high yield
High yield bonds enjoyed a surprisingly strong year in

US stock market create a positive backdrop, with

2023. As the U.S. economy staved off an expected

some market drag caused by higher rates and slower

recession, high yield issuers continued to deliver

growth overseas. Overall, we can expect business,buoyant operating earnings, while new issuanceconsumer, and government spending to support an

remained light amid an elevated interest rateenvironment of gradual economic growth. High yieldenvironment that offered little incentive for borrowers

spreads have narrowed, but all-in yields remain

to tap the capital markets unnecessarily. The ICE

attractive. NCRAM believes the likelihood of looser

BofA U.S. High Yield Constrained Index (HUC0)

Federal Reserve policy, resilient issuer fundamentals

ended 13.5% higher year-on-year. Heading into 2024,

and low rates of net new bond issuance support our

NCRAM expects US real GDP growth close to 2% for

expectations for a solid year of performance from thisthe full year (Bloomberg consensus forecast), and aasset class.

soft landing is increasingly likely, though we remainwary of potential downside risks to growth. An
ongoing flow of fiscal stimulus funding and a strong

Fed expected to ease monetary policy
Tighter financial conditions over the last two years

for aggressive monetary easing in 2024, hotter thanhave so far delivered few signs of a meaningfulexpected January and February CPI and PPI inflation

slowdown in the U.S. economy, as exemplified by thedata caused investors to reassess the outlook for

blowout 4.9% GDP growth rate in 3Q23 (final), and theinterest rate cuts. However, softer economic data

4Q23 growth of 3.4% (third estimate). The job market

released in February suggest the easier monetary

could be less vigorous in 2024, but the unemployment

policy thesis still holds, even if the cuts occur later inrate remains comfortably below 4% and there are 1.4

the year, and at smaller increments.

job openings for every unemployed worker according
to US Bureau of Labor Statistics data.

After thedovish December Fed meeting raised investor hopes

Resilient issuer fundamentals
High yield issuers continue to generate sturdy

from the cyclical nadir; yet the market’s 3.7x net

operating earnings, and profitable companies areleverage remains healthy relative to the market’s

using those resources to prepare for a slower

history since the global financial crisis (GFC).

economy. Fundamentals are not quite as robust as
observed earlier in 2023, but third quarter earnings did
grow modestly, both sequentially and year-over-year.
Fourth quarter earnings also generally outperformed
expectations. Balance sheet leverage is increasing

14

NAM Investment Outlook Spring 2024

Similarly, interest coverage has fallen from its

We expect to see a modest rise in the default rate

historical peak as earnings growth has decelerated

during 2024 from the 2.1% rate seen in 2023, but itand shorter tenor debt has been rolled over at higher

should remain below the market’s 3.0% long term

rates, but coverage remains solid a 4.5x. Furthermore,

average.

the high yield market’s credit risk profile is skewed
toward higher quality issues. Close to 50% of the
HUC0 index is rated BB, while only 11% is rated CCC
or below, near this century’s low point (as of the end of
February 2024). Resilient fundamentals and a higher
quality market should result in a manageable default
rate, even if U.S. economic growth disappoints in 2024.
Figure 1. U.S. High Yield Leverage Ratio

Figure 2. U.S. High Yield Interest Coverage
7.0

7.0
6.0

6.0

5.0

5.0

4.0

4.0
3.0

3.0
Gross Leverage

2.0

2.0

Net Leverage

1.0

1.0

0.0
2011

2014

2017

2020

0.0
2011

2023

Note: Weekly from the end of December 2011 to the end of
December 2021 and monthly thereafter
Source: NCRAM based on BofA Global Research data. As of January,
2024

2014

2017

2020

2023

Note: Weekly from the end of December 2011 to the end of
December 2021 and monthly thereafter
Source: NCRAM based on BofA Global Research data. As of January,
2024

Technical tail wind
The U.S. high yield market contracted by more than

$15bn, and total new issuance was about $175bn.

$90bn

This environment has created a favorable supply-

in

2023,

shrinking

the

par

amountofoutstanding bonds by more than 5%. Calls, tenders,demand dynamic that is supportive for bond prices.

and maturities were greater than $155bn, while risingstar upgrades into investment grade were nearly$125bn. Fallen angel downgrades were less than15

NAM Investment Outlook Spring 2024

As we progress into 2024, we do not expect theJanuary 31, only $25bn of high yield debt comes due

positive gap to persist between rising stars and fallen

in 2024 and $84bn in 2025. More than 90% of issuersangels. Large issuers on the cusp of an upgrade were

have no debt maturing before 2025. Looking out threelifted out of the high yield market in 2023, notably Fordyears, more than 60% have no maturities prior to 2027.

($40bn of debt) and Occidental Petroleum ($20bn).

Thus, there is little urgency for most issuers to tap the

However, we do expect net new issuance to remainhigh yield market until rates decline to more borrower-

light, as interest rates remain high, discouraging debt

friendly levels.

financed capital investments or acquisitions. As of

Figure 3. U.S. High Yield Bond Maturities(USD, bn)

300

246

250

196

200

113

84

100

0

165

162

150

50

269

39

25
2024

2025

2026

2027

2028

2029

2030

2031

2032

46
12
2033

2033+

Source: NCRAM based on BofA Global Research data. As of January, 2024.

Attractive entry point
Despite the strong rally over the last two months ofof capital growth in a market where average bond

2023, the asset class’ yield-to-worst (i.e. the lowest

prices are in the low 90s, and the potential forpossible yield on an issue with bond retirement

declining U.S. Treasury yields create an environment

provisions) remains in the cheapest quintile based on

conducive to favorable high yield performance in 2024.

the last ten years of yield data. Although spreads ofBased on this analysis, we can expect the high yieldless than 350 bps are tight relative to the post-GFC

market to generate returns for the full year close to

average, investors are focused on high yield’s resilient

their 7.7% starting yield .

fundamentals, supportive technicals, relatively low
average dollar price, and the ample all-in yield,
pushing down the option-adjusted spread. NCRAM
believes yields are attractive at current levels, as theincome offered by the asset class, the pull to par effect* This material contains personal views and does not necessarily reflect Nomura Asset Management house view.

16

Macroeconomic Environment Outlook

NAM Investment Outlook Spring 2024

Global Economic Outlook 1– Base Case Scenario
The U.S. and Europe to enter a moderate rate cut phase.
U.S. economy expected to avoid recession, but to slow gradually
Figure 1. U.S. Lending Rates of New Loans to Smalland Medium-sized Businesses

While the Eurozone economy has stagnated for over
one year and the Chinese economy is also lackluster,
the U.S. economy continues to achieve solid growth.
Covid-19-related fiscal stimulus package and liquidity
supply have mitigated any economic drag effect of rate
hikes. Although improvements in the real income
environment with lower inflation are expected tosupport the economy going forward, businesses will
face higher interest expense in refinancing debt assignificant rate cuts are unlikely at early stage due tothe resilient economy.

(Jan - Mar 2018 – Jul - Sep 2023, quarterly)

10(%)
New fixed-rate

9

New variable-rate

8
7
6
5
4
3

We believe that effects of past monetary tightening
have not been fully effective yet and forecast that
although the US economy will avoid recession, thepace of growth will slow down moderately throughsummer 2024.

2
1
0
2018

2019

2020

2021

2022

2023

Source: Nomura Asset Management based on data published by theFederal Reserve Bank of Kansas City.

U.S. and European central banks are expected to start rate cuts mid-year
The Federal Open Market Committee (FOMC) kept
the federal funds rate unchanged at its meeting held inMarch 2024 for the five consecutive meetings. The
federal funds rate projections (median) by participants
indicate a rate cut by 0.75 percentage points in 2024
as in the previous projections. Although key economic
indicators for January-February have been stronger
than expected, Federal Reserve Chair Jerome Powellstated that “they did not change the overall picture”
toward achieving the target inflation rate of 2%.

Figure 2. Federal Funds Rate Outlook by FOMC
Participants (Median)
5.5

（％）

As of Jun 2023
As of Sep 2023

5.0

As of Dec 2023
As of Mar 2024

4.5
4.0

We maintain our view that under our slowing inflation
scenario, the U.S. and European central banks will
decide to cut interest rates in a phased manner frommid-2024 in order to adjust the degree of monetary
tightening.

3.5
3.0
2.5

2024

2025

2026

Source: Nomura Asset Management based on the Fed’s data

17

NAM Investment Outlook Spring 2024

Global Economic Outlook 2– Risk Scenario
Risk balance is currently tilted toward upside from the somewhat conservative case scenario
Upside risk: Global economy will recover with no significant U.S. economy slowdown
According to the GDP Now published by the Federal
Reserve Bank of Atlanta, U.S. real GDP growth for
January-March 2024 is up approximately 2.1% year
on year (as of March 19, 2024), indicating thesustained healthy growth.

Figure 1. U.S. Real Income Environment(January 2015 - February 2024, monthly)(YoY, %)
10

Real wage

8

While our base scenario forecasts a moderate
slowdown in growth, we consider an upside scenariothat as the US economy maintains a growth rate ofaround 2%, the economies of Europe and some otherregions which are currently stagnant, will start torecover, and the global economy will avoid further
slowdown.

CPI
Nominal wage

6
4
2
0

Consumption is underpinned by a steady real income
environment and ongoing penetration of deferredpayment for consumers without interest expenseburden (BNPL). It is resulting in solid domestic
demand, and, in turn, the employment and income
environment is sustained. This virtuous cycle may last
longer than our forecasts.

-2
-4

15

16

17

19

18

20

21

22

24
（Yr）

23

Note: The wage index published by the Federal Reserve Bank ofAtlanta is used for nominal wage. Real wage is calculated bydeducting year-on-year percentage changes in CPI from year-onyear percentage changes in nominal wage.
Source: Nomura Asset Management based on data published by theFederal Reserve Bank of Atlanta and CEIC data

Downside risk: Greater slowdown than the base scenario or occurrence of shocks
Our base scenario forecasts that the U.S. andEuropean economies will slow down moderately or
stagnate through summer 2024.

U.S. Loan Delinquency Rates(Jan-Mar 2003 - Oct-Dec 2023, quarterly)（％）
16

However, the credit card and other loan delinquency
rates in the US are rising. There is a downside riskthat consumption will slow down significantly as
economically vulnerable households in particular will
face liquidity constraints, which will lead to lower
short-term growth expectations and prompt businessto reduce employment and investment.

Auto

Credit card

14
12
10
8

There is also a possibility that the central bank will
not implement rate cuts due to the strong U.S.
economy. The continuation of the high interest rate
may have a clear negative impact on the real
economy or cause certain shocks to the financial
system.

6
4
2

03

05

07

09

11

13

15

17

19

21

23
（Yr）

Note: The percentage of loans that have newly become overdue for
30 days or more
Source: NAM based on data published by the Federal Reserve Bankof New York18

NAM Investment Outlook Spring 2024

Global Economic Outlook 3– Economic Cycle
Global economic recovery is a rare case in a high interest rate environment
The global economic leading indicators are steadily recovering in a high interest rate environment
The Composite Leading Indicator (CLI) of theOrganization for Economic Co-operation andDevelopment (OECD) continues to recover steadily.
CLI is approaching its long-term average of 100, andonce it exceeds this level, it will suggest further
strengthening of the economy from the recovery
phase to the expansion phase.

Figure 1. Changes in OECD Composite
Leading Indicators(January 2022 - February 2024, monthly)
102(Historical Average = 100)
GlobalUS
EuropeJapan

101

In the current cycle, the CLI started to rise after
hitting bottom in late 2022. The difference from past
recovery patterns is that it started to recover when
the interest rate remains high. Possible underlying
factors include that the post-Covid-19 excess
savings have continued to support consumption
particularly in the U.S. and that the wealth effect of
the stock market has contributed to economic
activities. On the other hand, a strong stock market
has not driven the domestic economy in Japan, andthe Japanese CLI has remained weaker than in otherregions.

100

99

98
Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24

Note: “Global” is based on G7 data. “Europe” is based on data for
four major European countries.
Source: Nomura Asset Management based on OECD data

Key points to watch are different in the economic recovery phase and the expansion phase
As the CLI is correlated to the stock market to someextent, it is important to watch changes in key areasof the stock market as the economy is expected toenter the expansion phase.

Figure 2. Key Areas of Stock Market
in the Recovery and Expansion Phases(Trends in the Last 15 Years)

In the last 15 years, Europe and emerging countries,
materials, and financials sectors have tended to berelatively strong in the recovery phase. In addition,
reversal factors have been relatively advantageous,and this is likely because assets that have been in amore disadvantageous position in the slowdown
phase tend to recover more significantly. On theother hand, energy and real estate have tended to be
more advantageous in the expansion phase because
these sectors are strongly linked to real assets.

Stage

Recovery

Expansion

RegionEuropeUnited States

EmergingJapan

Materials

EnergyFinancials

Health Care

Industrials

Real Estates

ReversalMomentum

Mid-Small Cap

Large Cap

Cyclicals

Defensives

Sector

FactorHowever, we should note that the themes that havebeen advantageous in the past, may not work well
given that the current economic recovery phase isdifferent from past recovery periods in terms of theinterest rate environment.

Note: The table above indicates those themes that have been most likely to
become advantageous in the recovery phase and in the expansion phase.
Value and growth strategies are not included in this table as no clear
tendency has been observed for them.
Source: Nomura Asset Management based on LSEG Datastream data

19

NAM Investment Outlook Spring 2024

U.S.
With higher expectations for soft landing, mid-year rate cuts are contemplated
The likelihood of soft landing has increased
The U.S. economy is solid. The real GDP growth rate
reached about +3% yoy in the second half of 2023, andemployment has increased significantly and business
confidence has been improving since the beginning of
2024. Nevertheless, the disinflation trend has been
maintained, and the core inflation rate excluding energy
and food has dropped to nearly 3%. High economic
growth and slowing inflation co-exist probably as thepotential growth rate rises with increase in the supply
capacity of the economy due to more immigration andother factors. The supply-demand balance has nottightened as much as the high GDP growth suggests,
and, as a result, the inflationary pressure has not beenvery strong. While we forecast that the effect of rate
hikes will apply downward pressure on the economy
through mid-2024, we expect that a significant
economic slowdown or deterioration of employment will
be avoided. We expect that the supply-demand balance
will be softened in the meantime, and the inflation rate
will gradually drift down to the Federal Reserve Board(FED)’s target inflation rate of 2%.

Figure 1. U.S. GDP growth and core inflation(From Jan-Mar of 2018 to Oct-Dec of 2023, quarterly)(y-o-y, %)8

GDP growthCore inflation

6
4
2
0
-2

18

19

20

21

22

23

(Yr)

Note: Core inflation rate represents inflation rate excluding food and energy(personal consumption expenditure deflator basis).Some of the data for 2020
and 2021 are not displayed for the latest trends to be easier to see.
Source: Nomura Asset Management based on CEIC data.

Price indicators are more important than economic indicators in foreseeing the timing of rate cuts
The projections of Federal Open Market Committee

Figure 2. FOMC Participants’ Projections(FOMC) participants revised in March indicate a rate cut(Unit: %)by 0.75 percentage points in total in 2024. In the same

2024

2025

2026

March
2024

2.1

2.0

2.0

December
2023

1.4

1.8

1.9

March
2024

2.6

2.2

2.0

December
2023

2.4

2.2

2.0

March
2024

4.6

3.9

3.1

December
2023

4.6

3.6

2.9

projections, whereas GDP growth rates through 2026
have been revised upward, inflation rates have beenGDPgrow threvised slightly upward or unchanged. It appears that
FOMC participants also believe that the strength of theeconomy has been driven by the increase in supply
capacity and will not lead to inflationary pressures. Mid-Core
inflation

year rate cuts have become realistic, and we expect
interest rate cuts to start around the same time.
Although the actual timing of rate cuts will depend on
economic data, given the statement of Federal Reserve
Chair

JeromePowell,any

Policyrate

more-than-expected

improvements in economic indicators are likely to havea limited impact on FOMC’s decision. On the other hand,Note: Median projections of FOMC participants. Core inflation rate
represents inflation rate excluding food and energy. GDP growth rates andinflation rates are year-on-year percentage changes for October-December
each year. Policy rates are as at the end of each year.
Source: Nomura Asset Management based on data published by the Fed ‘sdata

FOMC participants are very wary of the risk of
unexpected rise in inflation. If price indicators rise morethan expected, the timing of rate cuts will more likely bedelayed.

20

NAM Investment Outlook Spring 2024

Eurozone
Economic recovery and disinflation are likely to be more muted than ECB projects, but policy rate
will be cut at mid-year.
Although the economy is showing signs of bottoming out, rapid recovery is unlikely
The Eurozone economy continues to stagnate.
Following the contraction in the second half of 2023,
the Eurozone Purchasing Managers’ Index (PMI) has
remained near the turning point of 50 for JanuaryMarch 2024. Given that the level of the PMI has been
marginally rising, the economy appears to bebottoming out as the effect of rate hikes by theEuropean Central Bank (ECB) has likely passed peak.
Nevertheless, it is difficult to expect a rapid economic
recovery given the real income of households that hasremained at low levels, and we expect that theeconomy will remain sluggish going forward. On theother hand, inflationary pressures continue to bestrong particularly on service prices. This is because
businesses are passing increased labor costs ofexcessive personnel to consumers. There are someobservations that inflationary pressures will subside
while employment will remain strong and businesses
will refrain from such price pass-throughs, but weshould cautiously evaluate the possibility of suchobservations.

Figure 1. Business Sentiments in the Eurozone(From 2019 January to 2024 March, monthly)
(Pt)
66
64
62
60
58
56
54
52
50
48
46
44
42
40

Composite
Manufacturing
Services

19

20

21

22

23

24
(Yr)

Note: Some of data in 2020 are not displayed for visibility of recent data.
Source: Nomura Asset Management based on S&P Global data

Policy rate will start to be cut at mid-2024 in ECB’s basic direction
The ECB staff projections revised in March maintainits past forecasts that GDP growth will gradually
accelerate while revising downward the core inflation(excluding energy and food) estimate. This isconsistent with the previous announcement of ECB
Governing Council members that economic recovery
and disinflation will coexist. ECB President Christine
Lagarde, while saying that “we are not sufficiently
confident” in achieving the target inflation rate of 2%,
pointed out that “we will know a little more in April, we
will know a lot more in June,” suggesting the possibilityof a rate cut in June. We expect that both economic
recovery and disinflation are likely to be more muted
than ECB projections, and there is a possibility that the
ECB will decide to carry out preventive rate cuts if
economic stagnation continues until June.

Figure 2. ECB Staff Macroeconomic Projections(Unit: %)GDPgrow thHICP
core
inflation

2024

2025

2026

March
2024

0.6

1.5

1.6

December
2023

0.8

1.5

1.5

March
2024

2.6

2.1

2.0

December
2023

2.7

2.3

2.1

Source: Nomura Asset Management based on ECB materials

21NAM Investment Outlook Spring 2024Japan
Growth momentum is expected to increase through summer 2024
Real income is recovering, reflecting high wage increase rates in annual spring wage negotiations
We expect that the Japanese economy will continue
to grow at a rate above the potential growth rate forthe time being, supported by improvements in thereal income environment.

Figure 1. Wage Increase Rates in Annual Spring
Wage Negotiations and Inflation Rates(1989 - 2024, annual)In the 2024 spring labor negotiations, the first roundof responses compiled by Rengo showed a wage
increase rate of +5.28%, significantly surpassing the
expectations of most observers as of February. As
the results are currently centered around large
corporations, we should watch how much the highwage increase rate will spread in the economy andwhether the wage increase will be passed through toselling prices. We expect that the inflation rate will
gradually drift downward and reach the level slightly
below 2% in the second half of 2025. The real
income environment is headed for recovery, which
will support personal consumption. We also expectthat the consumption boosting effect of fixed-amounttax cuts will be materialized around June, and growth
momentum will somewhat be strengthened throughsummer.

7（y-o-y,％）65（y-o-y,%）3.0
Spring wage negotiations(LHS)
2.5
Inflation rate(RHS)
2.0
1.5

4

1.0

3

0.5
0.0

2

-0.5

1
0

-1.0
-1.5
89 92 95 98 01 04 07 10 13 16 19 22（Yr）

Note: The inflation rates shown above represent consumer price index(headline inflation rate excluding food and energy) and are shown through2023. Source: NAM based on data provided by the Japanese Trade Union
Confederation and the Statistics Bureau of the MIC

Short-term interest rates is the main policy tool for BOJ
At the monetary policy meeting held in March 2024,
the BOJ has announced departure from quantitativeand qualitative easing with yield curve control and thenegative interest rate policy, designating short-term
interest rate control as its main policy tool. The BOJ
has explained that it has confirmed the strengtheningof the “virtuous cycle of wages and prices” and can
now foresee that the “price stability target” will be
realized in a sustainable and stable manner throughthe end of the projection period.

Figure 2. Real Policy Rates(March 1, 2016 - March 21, 2024, daily)
（Yr）
2.0
1.5

Nominal policy rate
Breakeven inflation rate
Real policy rate

1.0
0.5
0.0
-0.5

The next focal point of the central bank’s monetary
policy should be (1) the path of policy rate (whether
there will be additional rate hikes and the timing ofthem, if any) and (2) whether there will be a change inthe purchase amount of long-term Japanese
government bonds, which may lead to balance sheet
downsizing. Based on the recognition that a rate hikeof around 0.25% continues to be in the domain ofmonetary easing, the Bank of Japan may make suchdecisions in the second half of 2024 while monitoring
the progress of wage increases and how much they
are passed through to selling prices.

-1.0
-1.5
-2.0
Mar-16

Mar-18Mar-20Mar-22Mar-24

Note: The policy rates shown above represent interest rate on policy-ratebalance through March 18, 2024 and the upper limit of the unsecured callrate target range thereafter. Source: NAM based on Bloomberg data

22

NAM Investment Outlook Spring 2024

China
While the target growth rate is unlikely to be met, the economy will be stabilized
The target growth rate is unlikely to be achieved while growth target has been maintained
At the National People’s Congress held in March, it
was announced that the target economic growth rate
for 2024 will remain unchanged at around 5.0%.
Although the growth rate for 2023 was 5.2%, it was
inflated due to the low activity levels in 2022. As sucha boosting effect is small in 2024, it is not easy for the
Chinese economy to achieve the target growth rate.

Figure 1. Industrial Productions and Retail Sales(January 2022 – February 2024, monthly)（MoM, 3MMA, ％）Retail Sales
Industrial Production

1.5
1.3
1.1
0.9

As the fiscal budget size announced at the National
People’s Congress was nearly unchanged from theprevious year, we expect that the target growth rate for2024 will be unmet. However, while a strong recovery
is unlikely, the economy should be headed forstabilization. On the back of ongoing inventory
adjustment and resilient external demand, production
activities are improving. Infrastructure investments arealso likely to maintain high growth due to policy effects.

0.7
0.5
0.3
0.1
-0.1
-0.3
-0.5

Jan-22

Jan-23

Jul-22

Jul-23Jan-24

Source: Nomura Asset Management based on CEIC data

Chinese economy comes under deflationary pressure due to weak domestic demand
Domestic demand, such as consumption and realestate investments is expected to remain weak. Due tothe collapse of the house myth that house prices willcontinue to rise, households will likely continue topostpone house purchases. In this environment,houses accounting for the largest portion of household
wealth, are likely to be subject to deflationary pressure,and decline in house prices is expected to negatively
impact on consumption. While consumption remains
weak, we expect that the inflation rate is less likely torise while it is affected by supply factors. Unless thehousehold sentiment picks up, the weak domestic
demand and deflationary pressure will continue in along-term period.

Figure 2. Inflation Rates(January 2014 – February 2024, monthly)(YoY,%)
6CPI

5Core CPI

4
3
2
1
0
-1

Even so, we expect that the People’s Bank of China(central bank) will keep a distance from major monetaryeasing due to concerns about the deterioration of
profitability (lower profit margin) in the banking sector
and currency depreciation.

14

15

16

17

18

19

20

21

22

Source: Nomura Asset Management based on CEIC data

23

23

24
(Yr)

NAM Investment Outlook Spring 2024

Emerging
Currencies are expected to remain resilient amid cautious rate cuts
Growth will start to recover after slowing moderately
We forecast that emerging economies in 2024 will
start accelerating after slowing moderately throughmid-year. In first half of the year, the economies are
expected to decelerate moderately by reflecting the
cumulative effect of past rate hikes and the slowdown
in external demand. However, as several central
banks have already turned to rate cuts, their economic
boosting effect will start to be materialized, and theeconomies are expected to accelerate in the second
half of the year.

Figure 1. Emerging Market Policy Rates and Inflation Rates(January 2019 – February 2024, monthly)(%)
10

RealPolicy Rate
Nominal Policy RateCPI Inflation

8
6
4
2

Inflation rates have been falling steadily. Althoughservice prices remain high in some countries on theback of tightening in the labor market, it is unlikely toprevent rate cuts given the high levels of policy rates.
On regional basis, while high interest-rate countries in
Latin America are expected to continue rate cuts
throughout the year, low interest-rate countries in Asia
are not expected to start rate cuts until the US central
bank’s policy turns to easing in mid-year.

0
-2
-4

19

20

21

22

23

24
(Yr)

Note: The real policy rates shown above are calculated by subtracting
inflation rates from nominal policy rates. The data shown above represent
a simple average of major emerging countries/regions excluding Turkey
and Russia. For countries where inflation rate data for February 2024 areunavailable, the most recent available data are used.
Source: Nomura Asset Management based on Bloomberg data

Emerging currencies are expected to remain resilient while interest rates are lowered
Generally speaking, rate cuts cause currency
depreciation through the tightening of differences ininterest rates between countries. However, we expectthat emerging currencies will remain strong for thefollowing reasons: First, central banks of emerging
countries are cutting rates at a cautious pace. Ratecuts, which are implemented simultaneously withfalling inflation rates, will mitigate the headwinds
against currencies because policy rates on real terms
remain high. We also expect those central banks toadjust the pace of rate cuts depending on the directionof the U.S. monetary policy. Second, the externalbalance of emerging countries is expected to bestabilized. Their current account deficits are
decreasing by reflecting falling energy prices andcontrol of overheated domestic demand. Moreover,capital which has flown to China will be diverted toother emerging countries due to geopolitical risks.
Such a capital flight is likely to support emerging
currencies.

Figure 2. Current Account Balance ofEmerging Countries (Median)(Jan-Mar 2013 - Oct-Dec 2023, quarterly)(% of GDP)
4
2
0
-2
-4
-6

13

14

15

16

17

18

19

20

21

22

23

(Yr)

Note: The red line represents the median of emerging countries, and theshaded area shows the range between the first quartile and the third quartile.
For countries where data for October-December 2023 are unavailable, themost recent available data are used.
Source: Nomura Asset Management based on Bloomberg data

24

NAM Investment Outlook Spring 2024

Globl Financial Market Forecast
2024

2025

2022

Q1

Q2

Q3

Q4

Q1

Q2

F

F

F

F

F

F

2023

2024

2025

F

F

Real GDP

World

*1,*4

2.6

2.4

2.2

2.1

2.2

2.3

2.9

2.9

2.3

2.4

(qoq, ann, %)Developed

*2

1.2

0.9

1.2

1.4

1.6

1.8

2.6

1.7

1.4

1.5

Emerging

*1,*3

4.1

4.0

3.7

3.6

3.6

3.6

3.3

4.6

3.8

3.6

United States

2.3

1.5

1.5

1.8

1.8

1.9

1.9

2.5

2.5

1.8

Eurozone

-0.1

0.2

0.6

0.7

1.0

1.2

3.5

0.5

0.1

0.9

Japan

0.2

1.2

1.7

0.8

1.0

1.3

1.0

1.9

0.4

1.1

China

*1

4.4

4.7

4.4

4.3

4.0

4.1

3.0

5.2

4.5

4.1

CPI

World

*4

3.4

3.5

3.3

3.3

2.9

2.7

7.0

4.4

3.4

2.6

(yoy, %)Developed

*2

2.9

2.9

2.8

2.7

2.5

2.3

7.5

4.7

2.8

2.3

Emerging

*3

4.0

4.5

4.2

4.1

3.4

3.3

6.2

3.9

4.2

3.1

3.2

3.2

3.3

3.2

2.8

2.6

8.0

4.1

3.2

2.6

United States
Eurozone
Japan

2.6

2.6

2.3

2.4

2.2

2.0

8.4

5.4

2.5

2.0

*5

2.5

2.5

2.5

2.1

2.2

2.0

2.3

3.1

2.4

2.0

0.0

0.7

1.2

1.8

1.5

1.6

2.0

0.2

0.9

1.3

Policy Interest Rate

United States

China
*6

5.50

5.25

5.00

4.75

4.50

4.25

4.50

5.50

4.75

3.75

(%)

Eurozone

*6

4.00

3.75

3.50

3.00

2.50

2.00

2.00

4.00

3.00

2.00

Japan

*6

0.10

0.10

0.25

0.25

0.25

0.25

-0.10

-0.10

0.25

0.25

China

*6

3.45

3.45

3.45

3.45

3.45

3.45

3.65

3.45

3.45

3.45

4.20

4.10

3.90

3.80

3.60

3.50

3.87

3.88

3.80

3.40

10-Year GB Yield

United States(End of Period, %)Germany

2.30

2.10

2.00

2.00

1.90

1.90

2.57

2.02

2.00

1.90

Japan

0.73

0.80

0.90

0.90

0.90

0.90

0.42

0.61

0.90

1.00

Equity Index

S&P500

5,254

5,340

5,470

5,580

5,720

5,850

3,840

4,770

5,580

6,130

(End of Period, Point)

EURO300

2,031

2,050

2,090

2,120

2,160

2,200

1,678

1,889

2,120

2,290

TOPIX

2,769

2,830

2,800

2,880

2,960

3,030

1,892

2,366

2,880

3,330
1,190

MSCI EM ($)

1,043

1,070

1,090

1,110

1,130

1,150

956

1,024

1,110

Currency

USD/EUR

1.08

1.09

1.11

1.12

1.14

1.15

1.07

1.10

1.12

1.18

(End of Period)

JPY/USD

151.3

147.0

143.0

142.0

140.0

139.0

131.9

141.0

142.0

140.0

JPY/EUR

163.5

160.0

158.0

159.0

160.0

160.0

140.8

155.7

159.0

165.0

RMB/USD

7.23

7.20

7.10

7.10

7.00

6.90

6.95

7.09

7.10

6.90

2022
Currency(Per USD,
End of Period)

Policy Interest Rate
(%)

2023

2024

2025

F

F

INR
IDR
BRL
MXP
ZAR
TUR
India
Indonesia
BrazilMexicoS. Africa

82.7
15,568
5.3
19.5
17.0
18.7
6.25
5.50
13.75
10.50
7.00

83.2
15,397
4.9
16.9
18.3
29.5
6.50
6.00
11.75
11.25
8.25

82.0
14,800
4.8
17.0
18.0
40.0
6.00
4.75
8.25
9.00
7.00

82.0
14,600
4.6
16.6
17.5
54.0
5.75
4.75
7.75
6.50
7.00

Turkey *6

9.04

42.50

50.00

50.00

Note: Forecast as of March 25, 2024. 1) YoY, 2) GDP weighted average of U.S., Eurozone, Japan, UK, Canada, Australia, 3) GDP weighted average of China, India,
Brazil, Korea, Taiwan, Indonesia, Thailand, Malaysia, the Philippines, Hungary, Poland, Russia, Turkey, Mexico, and South Africa, 4) GDP weighted average of 2)
and 3), 5) core consumer price, 6) for Japan the policy interest rate imposed on the current account deposits held by financial institutions at the Bank of Japan, for the
US the upper limit of the FF target range, for the Eurozone the central bank deposit interest rate, for China the 1-year loan prime rate, for Turkey, weighted averagefunding ratio of the central bank, *As for forecast columns, actuals are prioritized if available.
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