Nomura Asset Management

Investment Outlook
Autumn 2023

Autumn 2023

Contents
I. Investment Strategy
02┃ Quarterly Market Recap
03┃ Investment Environment Outlook
Rumi Kurumizawa, Chief Economist
Takahiro Homma, Senior Corporate Managing Director, Chief Investment Officer
Interest rates are expected to fall in 2024 as the rate hike phase winds down05┃ Introduction to Corporate Hybrid Bond Strategy
Julian Marks, Head of Corporate Hybrid Bonds
The past 18 months have been turbulent for fixed income markets. However, recent
events have left the corporate hybrid bond market – a high quality sector that has
grown up “under the radar” over the past decade - trading at particularly attractive
levels.

10┃ Engagement Activities for Japanese Companies
Yosuke Uchida, Head of Engagement Department
Tokyo Stock Exchange (TSE) calls for measures for companies with a PBR consistently
below 1 to show clear policies and initiatives for improvement

13┃ Human Capital Management Implementation for Japanese Companies
Madoka Minagoshi, Senior ESG Specialist
Human capital management that improves corporate value

II. Macroeconomic Environment Outlook
Global16┃ Global Economic Outlook 1 – Base Case Scenario
17┃ Global Economic Outlook 2 - Risk Scenario
18┃ Global Economic Outlook 3 - Economic Cycle
Regional/Country Based
19┃ U.S.
20┃ Eurozone
21┃ Japan

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

Note: In the Investment Strategy section, most of Nomura Asset Management’s senior investment professionals offer their views of theinvestment strategy and market prospects – commentaries are as of September 2023, and reflect each professional’s personal views, and do
not entirely match NAM’s house view.

1

NAM Investment Outlook Autumn 2023

Quarterly Financial Market Recap
During the July-September quarter of 2023, U.S. long-term bond yields briefly fell after the release ofJune U.S. CPI data that was below market expectations; but yields then started to rise again, pushingtowards a 15-year high as the U.S. economy remained resilient. While stock prices advanced when U.S.
market interest rates declined, stocks later tended to weaken alongside rising bond yields. The U.S.
dollar appreciated against both the euro and the yen as the gap between U.S. and other sovereign longterm bond yields continued to widen.
Equity Market of Major Countries

10 Year Bond Yields in Major Countries(January 2, 2019 - September 30, 2023, daily)(January 2, 2019 - September 30, 2023, daily)(Points)

(%)

5,000

5.0

S&P5004,500

USEuro300

4.0

TOPIX

4,000
3,500

3.0

3,000

2.0

2,500

Germany
Japan

1.0

2,000
0.0

1,500
1,000

Jan-19Jul-19Jan-20Jul-20Jan-21

Jul-21

Jan-22

Jul-22

Jan-23-1.0

Jul-23Jan-19Jul-19

Yen and Euro against the US dollar

JPY/USD (RHS)

1.20

Jul-21

Jan-22

Jul-22

Jan-23

Jul-23(January 2, 2019 - September 30, 2023, daily)(Points)(JPY/USD)
USD/EUR (LHS)

Jan-21

Trends in VIX and MOVE

(January 2, 2019 - September 30, 2023, daily)

1.25

Jul-20Source: Nomura Asset Management based on Bloomberg data

Source: Nomura Asset Management based on Bloomberg data

(USD/EUR)

Jan-20

250

160

140

1.10

130

1.05

120

1.00

110

MOVE

200

150

1.15

VIX

150

100

50

0.95

Jan-19 Jul-19

Jan-20 Jul-20

Jan-21 Jul-21

Jan-22 Jul-22

Jan-23 Jul-23

0100

Source: Nomura Asset Management based on Bloomberg data

Jan-19Jul-19Jan-20Jul-20Jan-21

Jul-21

Jan-22

Jul-22

Jan-23

Jul-23

Note: The VIX and the MOVE are indexes that show the risk of
future volatilities of US stocks and US bonds, respectively.
Source: Nomura Asset Management based on Bloomberg data2

Investment Strategy

NAM Investment Outlook Autumn 2023

Investment Environment Outlook
Interest rates are expected to fall in 2024 as the rate hike phasewinds down

Rumi Kurumizawa
Chief Economist

Takahiro Homma
Senior Corporate
Managing Director,
Chief Investment Officer

U.S. and Europe expected to enter rate cutting phase of interest cycle in latter half of 2024
We expect a period of negative economic growthstabilize as inflation subsides, and (2) firms willrates in the first half of 2024, accompanied by a rise

accelerate fixed investment on the back of industrial

in the unemployment rate, as monetary tightening

policies such as the U.S. Inflation Reduction Act

implemented by the U.S. Federal Reserve and(IRA). If we define a soft landing as a scenario where

European central banks begins to belatedly takethe economy and prices return to cruising speed

effect.

without a recession, then this scenario remains apossibility.

In the U.S., high interest rates are likely to begin
weighing down on the economy even more going

In the case of both our house view forecast and theforward as (1) households face the depletion ofsoft-landing scenario, inflation fears will recede in"excess savings" and (2) firms face the prospect of

mid-2024, justifying a rate cut to adjust the degree ofrefinancing debt from the low interest rate era. In themonetary tightening.

Eurozone, we are already seeing some of the

Financial market participants should pay attention to

downward pressure on demand from interest rate(1) a risk scenario in which inflation concerns remain,

hikes.

raising expectations of further interest rate hikes orOn the other hand, the "soft landing" scenario is also

pushing back expectations of interest rate cuts, andbecoming

more(2) a risk scenario in which the effects of monetary

perspective:(1)

plausible
real

from

incomethefollowingconditions

tightening on demand are more pronounced thanfor

expected in our house view.

households will improve and consumption will

Bond yields on a downward trend
With expectations of a soft landing remaining for theremain higher than during the period of low inflation

time being, long-term interest rates in the U.S. andand interest rates prior to the pandemic. This isEurope are expected to remain flat. Afterwards, webecause (1) the neutral rate of interest, a rate thatcan expect interest rates to enter a downward trend

implies neither policy tightening nor easing, could

as the economy approaches a projected recession.

rise against a backdrop of worsening fiscal conditions

However, if the economy remains in what we would

and other factors, and (2) medium- to long-term

categorize as a "moderate recession," then rapid

inflation expectations could remain higher thaninterest rate cuts in the future are unlikely, and thebefore after experiencing this recent episode of highdecline in long-term interest rates could be relatively

inflation.

gradual.

JGB yields rose to around 0.7% in response to theWith a view to stabilizing the economy in the futureeasing of yield curve controls (YCC) in July andthrough a rate cut expected from the July-September

subsequent remarks by BOJ Governor Kazuo Ueda.

period of 2024, long-term interest rates are expected

The BOJ is expected to abandon the YCC policy

to stop falling and to begin rising slightly even if

during the second half of 2024, but even if thepolicy interest rate cuts continue.

decision is made, we expect JGB yields to stabilize ina manner linked to global interest rates.

Over the long run, long-term interest rates could3NAM Investment Outlook Autumn 2023

Weaker U.S. dollar trends expected
The U.S. dollar depreciated against the yen and

we assume that recent correlation with the U.S.-

against the euro as a result of the U.S. Consumer

Japan interest rate differential is maintained, we canPrice Index data for June (released mid-July), which

estimate that the exchange rate would trend aroundshowed an easing of inflationary pressure. Since

the 130-135 yen/USD level towards the middle ofthen, amid heightened soft landing expectations, the2024.

interest rate gap between the U.S. and Japan andAmid expectations of an eventual interest rate cut by

Europe has widened, and the U.S. dollar has

the Federal Reserve, there is a chance that

appreciated again, partly because of the supply-

depreciation of the U.S. dollar and the appreciation ofdemand balance of U.S. government bonds, but also

the yen could accelerate amid speculation that the

partly due to the debate over a rise in the natural rate

Bank of Japan might undertake relatively large-scaleof interest.

monetary policy revisions, including the elimination ofnegative short-term interest rates.

Looking ahead, however, we uphold our view that thehistorical strength of the U.S. dollar could be revised

As the economic recovery prospects become clearer

as monetary policy moves from a tightening bias

in the second half of 2024, including through rate

towards maintenance of the status quo, with interest

cuts, risk sentiment is expected to improve. We

rate cuts eventually coming into view. The exchange

expect the euro to be the strongest among the threerate is not necessarily determined solely by monetary

major currencies, followed by the U.S. dollar and thepolicy differences and interest rate differentials, but if

yen.

Stock market expected to see upward trend from mid-2024
We believe that the time lag between the weakening

If there is a consensus that any subsequentof the real economy and a fall in inflation, and therecession will be "shallow and short," and if it actuallytransition from monetary tightening to easing will

occurs as we expect, the pivot towards interest rate

drive stock price fluctuations.

cuts as central banks start to adjust their tightmonetary polices, could be enough to lift the stock

For the time being, robust economic growth will bemarket from a range-bound to an upward trend.

positive for risk assets, but any upward pressure on
interest rates, with expectations that a rate cut is along way off, will be negative for stocks from avaluation perspective. With the market beginning to
notice a deterioration in economic indicators and thesense of caution about the persistent high inflation
rate receding, the expected decline in interest rates
will in turn be positive for stock prices, while at thesame time, the fear of a recession will be negative.

4

NAM Investment Outlook Autumn 2023

Introduction to Corporate Hybrid Bond Strategy
The past 18 months have been turbulent for fixed income markets. However,recent events have left the corporate hybrid bond market – a high quality sector
Julian Marks
that has grown up “under the radar” over the past decade - trading at
Head of Corporate Hybrid Bonds
particularly attractive levels.
Why now is the right time to buy Corporate Hybrid Bonds
The past 18 months have been turbulent for fixed▌ Subordinate to senior bonds in the capitalincome markets. Sharp rises in interest rates, higher

structure of companies

inflation, war in Europe and an economic slowdown▌ Coupons that are deferrable at the discretion ofhave led to falling and volatile bond markets.

the issuer

However, recent events have left the corporate

Corporate Hybrids are generally issued by highhybrid bond market – a high quality sector that has

quality, investment grade, non-financial issuers. The

grown up “under the radar” over the past decade -real attraction for investors is that yields on

trading at particularly attractive levels.

Corporate Hybrids are significantly higher than those

Before expanding further on the opportunity, it ison senior bonds of the same issuers. Investors areworth explaining what corporate hybrid bonds are

essentially offered a high-yield-type coupon fromand who issues them.

strong investment grade issuers. Due to theirstructural features, Corporate Hybrid bonds are

Corporate Hybrid Bonds or ‘Corporate Hybrids’ aretypically more volatile than senior investment gradebonds with certain equity-like features.

bonds.

Key characteristics include:▌ Long-dated or perpetual bonds that are callable,
typically 5-10 years from issuance

Figure 1: Option Adjusted Spreads on Corporate Hybrid Bonds
(bps)
450
400
350
300
250
200
150
100
50
0
Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18Dec-19Dec-20Dec-21

Dec-22

Note: Using 50%/50% mix of ICE BofA Global Hybrid Non-Financial Index (GNEC) and ICE BofA Global Hybrid Non-Financial High Yield Index(HNEC) for Corporate Hybrid . The OAS is the measurement of the spread of a bond over the risk-free rate, which is adjusted to take into
account an embedded option’.
Source: Nomura Asset Management based on Bloomberg data, as at August 18, 2023

*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

5NAM Investment Outlook Autumn 2023

As we can see, the universe of Corporate Hybrid issuers is extremely high quality.
 The vast majority of issuers are investment grade rated.
 Most of the issuers are from sovereign AAA/AA rated northern European countries.
 There is very limited issuance from emerging markets.
 In terms of sectors, utilities is by far the largest, followed by energy and telecoms.
 The majority of issuers are market leaders in their sectors, with significant pricing power.
 The universe offers diversification away from US issuers, USD bonds and banks/financials.
Figure 2: Characterristics of Corporate Hybrid Universe
Statistics

Total*Excluding real estate sector

Yield to Call (EUR hedged, %)

10.53

6.91

Yield to Call (USD hedged, %)

12.31

8.69

Yield to Call (GBP hedged, %)

12.69

9.07

Yield to Call (JPY hedged, %)

6.58

2.96

Option Adjusted Spread (bps)

281

254

Effective Duration (yrs)

3.3

3.5

Average Rating

BBB

BBB

Number of Bonds

295

260

Number of Issuers

110

95

Market Value (EUR bn)

186

176

Currency Breakdown

Rating Breakdown

EUR

A+ or… 0.52%
A
5.47%
A1.27%
BBB+
8.57%
BBB
BBBBB+
BB
2.47%
BB- or… 0.76%
UR
2.28%

74.23%

USD

17.47%

GBP

4.96%

JPY

1.73%

Others

1.61%
0%

20%

40%

60%

80%

0%

7.06%
5.23%
3.57%
3.40%
2.47%
0%

5%

38.34%
20.33%

20%

30%

40%

50%

Sector Breakdown

Country Breakdown
FranceGermany
UK
Spain
Italy
US
CanadaSwedenJapan
Others10%

19.99%

10%

20.08%
16.59%
13.58%
11.05%

16.97%
15%

20%

Utilities
EnergyCommunications
Consumer Non-cyclical
Consumer CyclicalReal Estate
Industrial
Basic Materials
Other Financials
Technology

25%

8.92%
7.55%
5.42%
5.45%
2.69%
1.28%
0.61%

20.06%
17.27%

30.74%

0% 5% 10% 15% 20% 25% 30% 35%

Note: Custom universe which includes all non-financial corporate hybrid instruments globally to the best of our knowledge. Hedged
yield is calculated based off the 12M FWD points for the currencies of the underlying securities
Source: Nomura Asset Management, Bloomberg, as at August 18, 2023
*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

6

NAM Investment Outlook Autumn 2023

Why are they issued?
Issuing Corporate Hybrid bonds allows companies to support their credit ratings in a relatively cost-efficient way
without diluting their shareholders. Due to their equity-like features, credit rating agencies view hybrids as 50%
equity and 50% senior bond. Furthermore, in most jurisdictions, the coupons on Corporate Hybrids are fully taxdeductible from the issuer’s perspective, just like coupons on senior bonds but unlike dividends on shares. The
combination of these points can allow non-financial issuers to lower their weighted average cost of capital andmaintain their credit ratings by substituting Corporate Hybrid bond issuance for an equal mix of senior bonds andequity issuance.
Corporate Hybrids have a very investor-friendly structure. Issuers have strong incentives to pay the coupons andto call the bonds at the first call date. If issuers fail in this regard, they risk losing access to this source of funding
and the cost-of-capital benefits discussed above. The main risks of these bonds to investors each havesignificant mitigating characteristics:

Why do investors like them?
Key Risks
Subordination / Zerorecovery in event of defaultHigh quality, stable issuers
Highly unlikely to default

Coupon Deferral Risk



Solid ratings, sustainable cash flows and strong, flexible balance sheets







Stable and regular common dividends paid
Mechanisms in place to connect interest on hybrid bond remuneration withother securities
Bond structures ensure the notes lose equity credit after first calldate - transforming them into potentially expensive senior debt
Coupon step-ups
Reputational risk

Reputational damage

Extension Risk

Early Redemption Risk

MitigantsEssentially, investors are purchasing subordinated bonds of high quality non-financial issuers and then ‘selling’
management various ‘options’ embedded in these bonds:
1. The option to defer the coupon
2. The option to extend rather than calling the bond at the first call date
3. The option, under certain circumstances, to call the bonds back early at or above par.
We believe – mainly due to the risk mitigating characteristics listed above – that the options embedded in these
instruments are generally far ‘out of the money’ for most of the bonds and provide investors with significant
opportunities.
In fact, there has never been a missed coupon on a Corporate Hybrid bond by an investment grade issuer.
In addition, aside from recent extensions by real estate issuers – a sector we have long been cautious on – there
is very limited history of call dates being skipped by investment grade Corporate Hybrid issuers. We expect thesetrends to continue in future.

Environment, Social and GovernanceAs might be expected for a strong, investment grade, developed market universe, Corporate Hybrid issuers
generally score very well on ESG criteria. Many of these issuers – particularly in the utilities sector – are at theforefront of the energy transition and have often issued Corporate Hybrid bonds to support investment along thispath – reducing fossil fuels and carbon emissions and investing in areas such as wind and solar power*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

7

NAM Investment Outlook Autumn 2023

Why do Corporate Hybrid Bonds look attractive and why might they perform from here?
We believe there are three key reasons why corporate hybrids are looking so attractive relative to otheropportunities right now. This undervaluation is mainly due to misconceptions that, once corrected, should lead tostrong performance.
1. The aftermath of the Credit Suisse Contingent Convertible (CoCo) bond situation has scared investors andhas left corporate hybrids trading at unfairly wide spreads. Corporate Hybrids are not CoCos and do nothave a regulator who can convert them or write them down. As time goes on, memories of Credit Suisse will
fade and as people learn more about hybrids, their spreads should narrow.
2. Real estate. It is only around 5% of the asset class and 3.5% of our benchmark. However, it is more risky
than the rest of the universe. Issuers are smaller, more cyclical, more highly leveraged, with much lessoperating history and have less reliance on senior debt markets. Hence, they are more likely to miss calldates rather than call. By contrast, Hybrids in all other sectors continue to be called. As investors realise
there is no contagion here beyond real estate, this should lead to (non-real estate) hybrid spreads tightening.
3. Interest rates. Clearly, rising interest rates are negative for bonds generally. However, many investors
appear to believe that at higher rates, corporate hybrids are less likely to be called. For reasons discussed
above - the loss of ratings agency equity treatment and particularly the post-call skip (higher) coupon will bebased on swap rates – so the level of interest rates is irrelevant to call risk. Senior debt spreads are thevariables that matter most. The risk of a call being skipped surfaces only if senior debt spreads are larger
than the callable hybrid spreads at the time of the call. This point is especially important. As rates stabilise
and start to fall, corporate hybrids should do very well - as they have in the past amid falling interest rateenvironments – see figure 1.

Our approach
When managing active Corporate Hybrid portfolios, we focus only on investment grade, developed market
issuers with strong ESG characteristics. Our approach is best described as long term, value-oriented,
fundamental and bottom-up. Our aim is to outperform our benchmark by a significant margin over a 3-5 year
period. We tend to form relatively concentrated portfolios focused on bonds that we believe are significantly
undervalued. We try to be patient in waiting for the market to offer us opportunities but attempt to act decisively
when they are offered.
Given that Corporate Hybrids are typically more volatile than senior bonds and have structural differences, adeep understanding of the issuer and the structure of the bond is critical in coming to a view on valuation. We
look carefully at the prospectus in order to understand the terms of the bond. We ‘stress test’ each issuer andconsider the probability of call and extension risk under various challenging scenarios. We look at the history of
the issuer and consider points like the length of time the issuer has been listed, its dividend-paying record –particularly in times of stress – and its relationship with bond investors.
Our analysis is forward-looking – we tend to favour strong, defensive issuers with pricing power that we believe
will continue to thrive even in challenging times, but, most importantly, where the bonds are trading significantly
below their fundamental fair value. We compare our findings with the potential returns currently on offer from thebond in question and calibrate them with the other opportunities available to create what we consider the optimal
portfolio from a long-term risk-adjusted return perspective. The recent growth and development of the market has
led to particularly interesting opportunities for active, long-term investors.

*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

8

NAM Investment Outlook Autumn 2023

Conclusion
The Corporate Hybrid Bond market allows investors to access high-yield-like coupons from strong investment
grade issuers. It is mainly composed of robust, defensive, non-financial companies, with significant pricing power,
which leaves it relatively well placed in both a recessionary and inflationary environment. Furthermore, thestructure is extremely bondholder-friendly and should not be confused with Coco bonds, which have riskier
features than Corporate Hybrids. There has never been a missed coupon by an investment grade Corporate
Hybrid issuer, and there are very few historical incidents of extension and no Corporate Hybrid can ever be
written-down in the manner of Credit Suisse’s Cocos recently. As interest rates reach a peak and start to decline
and as bonds continue to be called, we believe Corporate Hybrids should perform extremely well. Our
fundamental driven, value-approach looks to take advantage of what should be a great set of opportunities forinvestors.

*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

9NAM Investment Outlook Autumn 2023

Engagement Activities for Japanese Companies
Tokyo Stock Exchange (TSE) calls for measures for companies with a PBR
consistently below 1 to show clear policies and initiatives for improvement
Yosuke UchidaHead of Engagement Department

TSE calls on companies with PBR below 1 to disclose specific improvement policies
In March 2023, the TSE asked listed companies tocompanies

responding

was

not

sufficient,

strengthen their efforts to take account of capitalconsidering that such a significant number ofcosts and stock prices as part of their managementcompanies responded so soon, the quick response

policy. This has had a considerable impact on manyfrom these companies can be viewed as a positive

investors, including overseas investors, as well as

signal.

Japanese companies. It seems the TSE has made a

Figure 1. State of Disclosure based on TSE request of“Action to implement management that is conscious of
Cost of Capital and Stock Price”

big impact by clearly indicating a specific valuation
target (PBR) and by addressing the cost of capital,
which has not been discussed in much depth until

20%

now.
Indeed as of July 2023, more than 30% of companies
listed on the Tokyo Prime Market, including thoseunderconsideration,

disclosed

such

69%

initiatives

11%(Figure 1), suggesting the effects of the TSE
announcements were felt sooner than expected.
While there is an alternative view that the number ofDisclose Measures

Under Consideration

No Description

Source: Nomura Asset Management based on materials of TSE listed sections

Actual capital cost disclosure ratio has been less than 10%
NomuraAsset

Management’s

Engagement

Department held a hearing with equity research

Figure 2. Introduction and disclosure of ROIC and capital costs
Sectoranalysts at the beginning of this fiscal year toinvestigate the efforts of each company in terms ofGeneralElectronics

capital efficiency and capital cost. The table (Figure2.) shows sectors that have been relatively active in
improving their return on capital (Return on Invested

SPE

Capital). Most conglomerates, such as generalelectronics and general chemicals, have introduced
measures to improve return on capital to some extent,
but few companies have introduced capital costs as a
specific management indicator, except for some inthe electronic components and machinery industries.
Although there is a bias among industries, it isApproximately 30% of ROIC and capital cost,
mainly for international blue chip companies

TradingCompany

Introduction of ROIC is about 10%. Only one
company introduced capital cost.

Chemical,Fiber

Introduction of ROIC and Capital Cost is app.
20-30% and 10% respectively.

introduced return on capital (including sectoral)
Machinerydisclosures, and the actual cost of capital was lessthan 10%.

ROIC is used by many companies, but it ismainly an internal management indicator.
No capital costs introduced.
ROIC was introduced by two companies as aninternal management indicator. No capital cost
disclosure.

Electronic
Component

Automobile

estimated that, overall, about 20% of companies

Measures and Progress

Introduction of ROIC is about 10%. There is noneed to separate business divisions. No capital
cost introduced.
For internal revenue management, ROIC has
been introduced to app. 30%, Capital cost hasreached to app. 40%.

*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

10

NAM Investment Outlook Autumn 2023

Engagement on return on capital
Figure 3. Engagement - Key Themes (FY2022)

Engagement with companies to improve return on

1. Integrate business strategy and sustainability

capital is also an ongoing theme. Our engagement

2. Climate change

activities follow nine key themes (Figure 3), which

3. Natural capitalare updated annually and are spread across several

4. Human rights risk

broad themes, such as "strengthen commitment to

5. Utilization of human capital with diverse values

capital efficiency”, “rational explanation of financial
strategy”, and "integrate business strategy and6. Resolving challenges to achieve societal well-being

sustainability”. Specific contents of this engagement

7. Redefine the Board of Directors

include: disclosures of ROIC by division and capital

8. Strengthen commitment to capital efficiency

cost, restructuring of business portfolio strategy

9. Rational explanation of financial strategy

based on disclosures, and setting of optimal capital

Figure 4. Engagement Goals

structure.

The

primary

engagement

goal,

i.e.

focusing on improving return on capital,has

increased 1.4 times during the past reporting year
(from the end of September 2022 to the end of

Engagement Goals- TotalReturn on Capital(ROC)
ROC / Total

September 23).

Mar-22Jun-22

Sep-22

Dec-22

420

535

665

793

905

990

1072

85

94

112

128

146

151

158

20%

18%

17%

16%

16%

15%

15%

Mar-23 Jun-23 Sep-23

Source: Nomura Asset Management

Increased awareness of improving return on capital by the investee companies
Next, we turn to the introduction of the case studies.

linked compensation were operating income and net

For the medium-term management plan, simply

income. We therefore urged the company to add arequiring disclosure of information about return on

measure of capital efficiency. ROE was added to thecapital improvements and explanations of financial

target indicators in 2023 and we expect management

strategy are not in themselves enough to raise equity

to show a greater commitment to capital efficiency invaluations or resolve situations where PBRs remain

future.

below 1.

Case 2. Midsize transportation company

Measures that could have an immediate effect are to

Since 2021, we have conducted several direct

resolve excess balance sheet reserves by enhancing

engagement activities. In our assessment, theshareholder returns, such as through share buybacks.

company has a large amount of financial assets, andMany Japanese companies still hold cash reserves inconcerns remain that the company has not set up

excess of appropriate levels, and they need to invest

policies to utilize financial assets and to set capital

more in research and development, human capital,

efficiency targets, and therefore they have not been

and measures to improve returns to shareholders.

used effectively. The company has since announced

Case 1. Midsize semiconductor manufacturera growth strategy, ROE targets, and shareholder
returns policies along with the release of its medium-

Although the company posted stable profits, its

term management plan in June 2023.

excessive financial assets have contributed to acapital efficiency slump. We took issue with the factthat the only indicators of executive performance-*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

11

NAM Investment Outlook Autumn 2023

Engagement on capital efficiency
The following case studies focus on resolving thedeveloping improvement measures, we have also

most

asked the company to establish and disclose suchimportantissues(materiality)

faced

by

measures. At a briefing held in April 2023, theindividual companies.

company disclosed its capital cost calculations, its

Case 3. Major tire manufacturer (Figure 5)
Thecompany

expanding

its

made

a

major

acquisitionbybusinessfromautomotive

totarget for return on capital and improvement
measures with the aim of increasing its PBR to 1.
Case 5. Non-ferrous metal manufacturer

construction and industrial applications, but its
market evaluation remained low. We asked for aThisbusiness briefing on off-highway tires (OHT) and an

multiple businesses with low returns and highexplanation of its growth strategy. The company

performance volatility. We have asked the company

disclosed measures to strengthen the business andto disclose its return on capital and explain its

announced that it would sell ¥30 billion in cross-business portfolio. At a briefing held in April 2023, theshareholdings for the full year of 2023 to fund its

company disclosed its sales growth rate and ROICOHT business.

by business. It also laid out a policy of optimizing its

long-establishedcompany isengagedbusiness portfolio by taking this into account.

Case 4. Major retailer
The company's return on capital indicators, such as
ROE, have remained subdued. While other peers are

Figure 5. Engagement Case Study – A Major Tire Manufacturer*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

12inNAM Investment Outlook Autumn 2023

Human Capital Management
Human capital management that improves corporate value
Madoka Minagoshi
Senior ESG Specialist

Human capital information disclosure begins
Since the fiscal year ended March 2023, listed

disclosures of human capital information in the past,companies have been required to include disclosures

the revised Corporate Governance Code of 2021

relating to human capital in their annual reports.

made disclosure of human capital information a

Human capital refers to the knowledge, skills, andrequirement within a company’s Annual Securities

motivation of the firm’s human resources andReport – a statutory document. This signifies the

personnel. Traditionally, corporate investment has

growing importance of human capital information.

focused on tangible assets like factories andFigure.1. Domestic Trends in Human Capital Disclosure

production facilities. However, changes in recent
years to the industrial structure have seen the sourceof corporate competitiveness shift towards intangible
assets such as patents and business models. For
this reason, information on human resources thatgeneratesuchintangible

assets

(e.g.

human

intellectual capital) has attracted attention as anindicator of a company's growth potential.
Although some companies have made voluntarySep-20

Ito Report for Human Capital Management
released by the Ministry of Economy, Trade andIndustryJun-21

Human capital criteria added to revised Corporate
Governance CodeAug-22“Guidelines for Human Capital Visualization”
announced by the Cabinet Secretariat

FY23 -

Require listed companies to disclose human capital
information in annual securities report

Source: Nomura Asset Management based on various information sources

Global trend in human capital information disclosure
Globalcorporateinterest

in

human

information in their annual reports.

capitalinformation is growing, and disclosure rules are being

In addition, the International Sustainability Standards

established in each country and region.

Council (ISSB), which is part of the IFRS Foundation,

In Europe, the Non-Financial Reporting Directive

is seeking to establish standards for the disclosure ofmandated that non-financial information, including

sustainability information in relation to climate

human capital, must be disclosed by companies withchange, and they have listed four priority projects:

sales

threshold

in

2014.

biodiversity, human capital, human rights, andof

Corporate

integration in reporting. If the ISSB formulates human

Sustainability Reporting Directive, which sets out

capital standards, then it is expected that themore detailed disclosure rules, will gradually expand

Japanese authorities

the scope of the directive from 2024.

standards in Japan, and companies will be required

above

Subsequently,acertainpublication

themight also adopt

similarto disclose them.

In the United States, the U.S. Securities andExchange Commission (SEC) revised Regulation SK under the U.S. Securities Act in 2020 to require
listedcompanies

todisclosehumancapital*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

13

NAM Investment Outlook Autumn 2023

Declining population and human capital
To ensure continuous growth in corporate value amid

create a rewarding work environment in whichsignificant and complex changes in the businessdiverse human resources can maximize their abilities,

environment, it is becoming increasingly important toand where corporate human capital initiatives canadopt more flexible recruitment policies and to invest

attract attention.

in the development of the necessary human

Figure 2. Trends in Estimates of working-age Population（15-64 yrs old）

resources in line with a company’s overall business(persons, mn)

strategy.
(15-64 years old), which is economically active, hadalready peaked by 1995 and has been in decline

100

shrink to 52.75 million in 2050, a drop of around 30%

80

from 2021, making it increasingly difficult to secure

60

the necessary human resources. As the value ofyounger

40

generation, and following the Covid-19 pandemic, it

20changes, especially amongthe

15-64 yrs old
75 yrs old and above120

since then. The working population is expected towork

0-14 yrs old
65-74 yrs old

140

In Japan, in particular, the working-age populationis also an important management requirement to

0

1950

1970

1990

2010

2030

2050

Source: Nomura Asset Management based on the Ministry of Internal Affairs
and Communications “Population Census of Japan," National Institute ofPopulation and Social Security Research "Population Projections for Japan"

Research on human capital make advances
Amid growing interest in the disclosure of human“Employee engagement” refers to a sense of worth,

capital information, Nomura Asset Management

and a high number indicates that employees are

conducted an analysis of the relationship between

taking more initiative in their work. “Well-being” refers

human capital and stock prices. Specifically, weto good physical, mental and social health, and it has

selected indicators related to human capital tobeen found that happier employees are morequantitatively evaluate a company's ability to utilize

creative and productive than those who are not. In

human resources and to examine the relationshipaddition,with its stock price performance. Analysis of Japan's“Demographic diversity”, which refers to attributes

there

are

two

types

of

diversity:

1,000 largest companies by market capitalization,that cannot be changed, such as gender and race,suggested a clear difference in annualized returns

and “Cognitive diversity”, which refers to the diversity

between the highest-scoring and lowest-scoringof thought characteristics, skills, and experiences.

groups. Our analysis found that companies withThe latter type is considered important for building

higher human capital assessments had a strong

innovative organizations.

correlation with higher investment returns.

In the future, we will deepen the dialogue on human

In addition, human capital indicators such as

capital between companies and investors, drawing“Employeeon these new topics.

“Cognitive

engagement”,
diversity”

are“Well-being”,
attracting

andattention.

*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

14

NAM Investment Outlook Autumn 2023

Human capital management that improves corporate value
Ultimately, human capital management aims to improve corporate value. So, in what ways can human capitalmanagement help to improve corporate value?
Corporate value is defined in finance theory as the present value of future cash flows. In order to growcontinuously and to generate cash flow in an era of high uncertainty, a company needs a management strategy
that takes into account expected future changes in the business environment and it needs the right human capital
to implement it. Therefore, it is necessary to analyze and understand where there are any gaps between thefirm’s current human capital and the human capital needed to implement future management strategies.
Investment in human capital therefore aims to close this gap. Companies are then required to set agenda-specific
KPIs to manage the progress of human capital investments and to conduct regular reviews.
From this perspective, we will engage in human capital dialogue with our investee companies to raise the overalllevel of the Japanese market by improving the value of the companies in which we invest.

Figure 3. Correlations between corporate value and human capital investment

Current

Future

as is

to be

Gap Analysis
Purpose: Redefining the raison d'etre of a company

Vision: For achieving the purpose

Current
Human
CapitalBusiness model to realize the vision

Current business modelTransformation

Current businessstrategy

Business strategy
to implement the business model

Materiality (important business issues)

Human capital investment to close the gap
KPI

Current
management

Interlocking

Governance with Board of
directors as core function
Management Relay
Futuremanagement（Appointment and remuneration based system design)Free cash flow creation

Corporate Value
Source: Nomura Asset Management*This commentary is based on our investment and research professionals’ personal views and does not represent NAM’s house view.

15

Required
Human
CapitalMacroeconomic Environment Outlook

NAM Investment Outlook Autumn 2023

Global Economic Outlook 1– Base Case Scenario
Economic growth to slow as effects of monetary tightening surface

The effect of past monetary tightening has not completely surfaced yet
We predict that the U.S. economic growth rate will be

U.S. Lending Rates of New Loans to Small and Mediumsized Businesses(January-March 2018 - January-March 2023, Quarterly)

negative with rising unemployment rates due to theeffect of past monetary tightening on the real
economy with a certain time lag. However, we

9

expect that its timing will be postponed by about six
months from the second half of 2023, which was our

8previous prediction. We believe that the pre-COVID

7

low interest rate environment that lasted for a long6

time and the liquidity supply during the COVID-19

5pandemic, among other things, have prevented part4of the effect of rate hikes from surfacing. However,3

as debt raised under the COVID low interest rate(%)
New fixed-rate
New variable-rate2

environment is refinanced going forward, the current

1high interest rates should work to slow economic
growth.

0
2018

As a result, inflationary pressures will also decrease.

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

2019

2020

2021

2022

2023

Rate cuts expected to start in 2024
The FOMC meeting held in September did not

FF Rate Outlook by FOMC Participants (Median)change the target range for the federal funds rate. On
the other hand, one additional rate hike this year was
suggested

by

FOMC

6.0

participants’ projections of the federal funds rate.

5.5

According to their latest projections, interest rate cuts

5.0

will start in 2024, but the pace of rate cuts will be

4.5

slower

4.0

than

the

medianthat suggested

value

in

of

their

previous

projections in June.

(%)

As of Dec 2022
As of Mar 2023
As of Jun 2023
As of Sep 2023

3.5

We maintain our view that under our moderate

3.0

recession scenario, the U.S. and European central

2.5

banks will decide to cut interest rates in a phased

2.0

manner in and after mid-2024. If these central banks
implement flexible policy operations, the economy is

2023

2024

2025

2026

Source: Nomura Asset Management based on the Fed data

expected to start moving toward stabilization in thesecond half of 2024.

16

NAM Investment Outlook Autumn 2023

Global Economic Outlook 2– Risk Scenario
Risk balance is currently tilted toward upside from the somewhat conservative base casescenario
Upside risk: Recession to be avoided or delayed
Regarding the base case scenario that the U.S.

U.S. Real Income Environment(January 2015 - August 2023, Monthly)

economy will start contracting in the first half of 2024,
the following upside risks exist: (1) Although growth
momentum will soften, a recession will be avoided(YoY, %)10and (2) A recession will occur, but a little later than
expected.

8

Although both inflation rates and wage growth rates

6

have been slowing down, nominal wage growth has

Real wage
CPI
Nominal wage

4

remained above inflation rates for approximately last
six months, indicating that the income environment is2

improving in real terms. Although there are certain0

estimates indicating that the excess savings ofhouseholds is being depleted, we cannot deny the-2possibility that the US economy will continue to grow-4

at a normal pace as the real income environment
now starts supporting consumption, and recession is
avoided as a result.

Downside risk: A significant contraction or shock will occur
Although our base case scenario has taken into

15

16

17

18

19

20

21

22

23 （Yr）

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

Financial Stability Real Rates Estimated by the Federal
Reserve Bank of New York
(January 2000 - September 2023, Monthly)

consideration the impact on the economy and pricesof a tighter financial environment and central banks’

(％pt)
3.0

responses to it, sufficient attention needs to be paid
to the downside risk that the financial environment

2.5

will tighten far more than expected.

2.0

The actual real Fed funds rate has approached fairly

Financial stability real rate Real FF rate
(Simulation)

1.5

closer to the financial stability real rates (above which
the financial environment is likely to be destabilized)

1.0

estimated by the Federal Reserve Bank of New York.

0.5
0.0

For the time being, upside risks may outweighdownside risks in the economy. However, we should-0.5

be wary of the downside risk that the cumulative-1.0

effect of rate hikes will weigh more heavily on the

00 02 04 06 08 10 12 14 16 18 20 22(Yr)

Note: The Federal Reserve Bank of New York has published estimates throughDecember 2022. Simulation data are used for 2023 by assuming that thefinancial stability real rates will remain flat while rate hikes will occur in 2023.
Source: Nomura Asset Management based on data published by the Federal
Reserve Bank of New York.

real economy than expected, and financial stability
will be undermined.

17

NAM Investment Outlook Autumn 2023

Global Economic Outlook 3– Economic Cycle
While the global economy will continue to recover, the size of growth will be small due to thesoftening of the European economy
Global Composite Leading Indicators are rising, but the pace is moderate
The

Composite

Organizationfor

Leading

Indicator

Economic

(CLI)

of

Co-operation

theChanges in OECD Composite Leading Indicators(August 2022 - August 2023)

andDevelopment (OECD) started to recover sometimearound the end of 2022. After entering the recovery
phase in the first half of 2020 last time, the economy102

has come full circle in about three and a half years.

(Historical Average = 100)

101

While the global CLI entered the recovery phase, thedirections of CLIs of individual countries and regions100

are varied. While the Chinese CLI is rising significantly,
the size of recovery in the U.S., Europe, and Japan has

99

been small. The European CLI showed signs of98

GlobalUS

Europe

Japan

23/8

23/7

23/6

23/5

23/4

23/3

23/2

23/1

22/12

been somewhat slower than in similar periods in the
past.

22/11

developments, the recent rise in the global CLI has(yy/m)
22/10

97

22/9

CLIs, but has started declining again. Given these

22/8

economic recovery earlier than the US and Japanese

China

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

Attention to whether Europe can achieve economic recovery under the inverted yield curve
Recovery in stock markets has so far preceded

Changes in U.S. Policy Rates in Similar Periods over the Past Year
(Similar Periods in Economic Cycles in and after 1970)

economic recovery. This is largely the same trend as
in the past. On the other hand, the interest rateenvironment is different from those during the past(%pt)

similar phases. In the past similar periods, there was6

a clear pattern that the U.S. and European central

4bank continued to cut policy rates until the economy

Latest2

starts to recover, and it is almost certain thatmonetary easing triggered economic recovery.

0

In contrast to the U.S., the European CLI may-2

indicate that interest rate hikes have gradually-4

dragged economic recovery down. In Germany, the-6

policy rate (deposit facility rate) has remained above

-8
Prev.
12M

the 10-year bond yield since March this year,
resulting in an inverted yield curve. The several
constituent indicators of its CLI have also been

9M

6M

3M

Similar
Periods

Note: Similar periods have been identified quantitatively based on global
economic cycles. U.S. policy rates are changes from 12 months earlier
than the respective similar period, which is set at zero. Ten similarphases have been identified in and after 1970.
Source: Nomura Asset Management based on OECD and Refinitiv
Datastream data

worsening in response to the situation.

18

NAM Investment Outlook Autumn 2023

U.S.
The economy remains resilient, but is expected to soften going forward due to the effect of rate
hikes
The economy currently remains resilient, but is expected to soften going forward
The U.S. economy is resilient. Despite rate hikes, aU.S. Inflation Rate
(January 2019 - August 2023, monthly)

virtuous cycle between more employment/wage growthand increased consumption continues to be working.

(YoY, %)
15

On the other hand, the inflation rate continues tomoderate although it remains above the Fed’s inflation
target of 2%. In this situation, expectations are rising for12

soft landing that achieves inflation target while avoiding

Core inflation
Core goods
Core services

9

recession. However, if you look at the breakdown of
inflation, while the inflation rate of prices of goods has

6

slowed down significantly, the slowdown in the inflation
rate of service prices has been limited on the back of

3

wage growth. For further slowdown in inflation rates

0including that of service prices, a recession andworsening of the labor market would be necessary. As-3the excess savings accumulated during the period of
the COVID-19 pandemic will be reversed more and

19

20

21

22

23

(Yr)

Note: Based on consumer prices. Core and core goods exclude energy
and food, core services exclude energy.
Source: Nomura Asset Management based on CEIC data.

more going forward, it is expected that the effect of rate
hikes will intensify, and an economic downturn will
occur.

The FOMC did not raise rate in September, but a possibility of additional rate hikes remains
At its meeting in September, the Federal Open Market

Projections of FOMC participantsCommittee (FOMC) decided not to raise interest rate
after undertaking a rate hike of 0.25 percentage points(Unit: annual percentage changes)

in July. Nevertheless, Federal Reserve Chair Jerome
Powell has left door open to further rate hikes going
forward by stating to the effect that the pause in rateGDPgrowthhike does not mean that we have reached an
appropriate level of interest rate, but rather means that
the Fed awaits further data.
The September projections of FOMC participantsCoreinflation

indicate that the pace of rate cuts in and after 2024 will
be slower than that indicated in their June projections
although their projections about rate hike goals areunchanged. Nevertheless, their GDP growth projections

Policyrate

have been revised upward through 2024 to reflect
strong economic trends. On the other hand, theirprojections about inflation have been largely unchanged,

2023

2024

2025

2026

September
2023

2.1

1.5

1.8

1.8

June
2023

1.0

1.1

1.8

-

September
2023

3.7

2.6

2.3

2.0

June
2023

3.9

2.6

2.2

-

September
2023

5.6

5.1

3.9

2.9

June
2023

5.6

4.6

3.4

-

Note: Median projections of FOMC participants. Core inflation rate represents
inflation rate excluding food and energy. GDP growth rates and inflation 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 data

indicating their view that the inflation rate will continue
to moderate. We can say that the projections of FOMC
participants are much like a soft landing scenario.

19NAM Investment Outlook Autumn 2023

EurozoneThe effect of rate hikes is expected to drag the economy down further with great uncertainty about
its ripple effect to prices
The economy is currently stagnant and is expected to continue to stagnate due to the effect of rate
hikes
The Eurozone economy is stagnant. The Eurozone
GDP growth rate for April-June was low. Whilepersonal consumption and capital investment lacked
strength, inventory investment has boosted GDP. It
appears that the increase in inventory levels, which
occurred during the period of weak demand, has been
unintended by the corporate sector. The Eurozone
Purchasing Managers’ Index (PMI) for July-September
has fallen below the turning point of 50, suggestingthat economic stagnation will continue. The service
sector as well as the manufacturing sector is weak,indicating the spread of the effect of rate hikes by theEuropean Central Bank (ECB). However, ripple effectsof economic stagnation over to prices have been
delayed. The inflation rate in the Eurozone has beenslowing. However, the pace of slowdown in the core
inflation, which excludes energy and food, has beenmoderate, and inflation pressures remain strong. The
effect of rate hikes is expected to drag the economy
down further going forward and also to ripple over toprices, but the uncertainty of this ripple effect is high.

Eurozone PMI(January 2019 - August 2023, monthly)
(Pt)
66
64
62
60
58
56
54
52
50
48
46
44
42
40

Composite
Manufacturing
Services

19

20

22

21

23

(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

The additional rate hike in September is most likely to be the last one
At its Governing Council meeting held in September
the ECB decided to raise the policy rate (deposit
facility rate) further to a record high level of 4.00%.
The newly announced ECB staff projections indicatethat GDP and core inflation projections through 2025
have generally been revised downward. At a glance,
they do not prompt the ECB to raise interest rates
further. However, ECB President Christine Lagarde
explained that the reason for the additional rate hike
was to reinforce progress toward the central bank’s
inflation target. Regarding the future course of actions,
her statement newly included a sentence that “weconsider that the key ECB interest rates have reachedlevels that, maintained for a sufficiently long duration,
will make a substantial contribution to the timely returnof inflation to our target,” which strongly suggests thatthe additional rate hike in September is most likely tobe the last one. It appears that the focus of the ECB’smonetary policy has shifted from the levels of thepolicy rate to how long the current levels should bemaintained.

Economic outlook by ECB staff（Unit: annual percentage changes）
2023

2024

2025

September
2023

0.7

1.0

1.5

June
2023

0.9

1.5

1.6

September
2023

5.1

2.9

2.2

June
2023

5.1

3.0

2.3

GDP
growthHICP
inflation

Source: Nomura Asset Management based on ECB materials

20

NAM Investment Outlook Autumn 2023

Japan
The BOJ is expected to abandon its yield curve control sometime in the second half of 2024
Attention to the risk of price hikes
The Japanese economy is expected to continue toachieve solid growth for the time being, supported
by recovery in domestic and inbound demand.
According to the Monthly Labor Survey, year-onyear real wage growth remains to be negative dueto the effect of high inflation, but we expect that real
wage growth will improve going forward as theeffect of cost-push factors will fade while wage
growth rates will rise.

Wages and Prices(January 1991 - July 2023, Yearly)(YoY, %)
5

Scheduled Cash Earnings

4

CPI excl Food & Energy

32
1

However, it is also possible that the inflation rate
will remain at or rose to higher levels than expected.
It is taking a long time to pass past increases incosts onto selling prices. In addition, somecompanies are passing wage increases onto selling
prices. On the other hand, there are households ofpensioners whose income environment is expected
to worsen in real terms as a result ofmacroeconomic slides. It is important to watch
whether there will be a virtuous cycle of rise inwages and prices accompanied by an increase in
consumption.

0
-1
-2
-3

91

96

01

06

11

16

21
（Yr）

Source: Nomura Asset Management based on CEIC data

The next move of the BOJ is expected to be to abandon its yield curve control in the second half of 2024
At the Monetary Policy Meeting held in July, the Bankof Japan effectively capped the long-term yield curve
control (YCC) interest rate at 1.0%, allowing it toexceed the previous limit of 0.5%. The next focus will
be on the YCC framework itself and negative shortterm interest rates.

Scheduled Major Events(September 2023 – December 2024)

US Econom y

Jan-Mar2024

Wage・PriceBOJ

LDP andCabinetreshuffle(Sep)

After Sep.
2023

The Bank of Japan's policy decisions will be
influenced not only by wage and price trends inJapan, but also by political developments andoverseas economic developments. In early
September, Governor Kazuo Ueda stated that there
was a “non-zero chance” that the data on wage andprice developments would be available by the end of
this year, which was seen as a factor in the market.
However, if risks to overseas economies become
apparent in the first half of 2024, the focus will be on
the October 2024 meeting, in light of the timetable forthe ruling Liberal Democratic Party presidential
election and the broad-perspective review ofmonetary policy.

Political
situation

US recession(NAM outlook)

Spring Labor
Negotiations(Mar)

Apr-JunJuly-Sep

Oct-Dec

Report on
Expiration ofminimunm
the term of LDP
US rate cuts
w age revisionpresident (Sep)(NAM outlook)(Jul-Aug)US presidential
election (Nov)

Broadperspective
review(Apr-Oct)

Source: Nomura Asset Management based on BOJ data and various
media coverage.

21

NAM Investment Outlook Autumn 2023

China
Slow-growth to linger for a long time

No strong recovery can be expected without recovery in sentiment
The Chinese economy is slowing down as therecovery following the economic reopening was notsustained. We believe that the largest factor behind
this is the weak sentiment in the household and private
corporate sectors. For example, households haveremained cautious about their consumption after the
economic reopening and are saving a sizable portionof their income. This is because they have lost
confidence in the outlook of the economy in view ofhigh unemployment rates among young people andfalling prices of their houses, which account for thegreatest part of their assets. In addition, privatecompanies are refraining from aggressive investmentson the back of uncertainty in the business environment
arising from regulations of authorities and geopoliticalconfrontations as well as the worsening of demand
outlook.

Consumer Confidence Index(January 1990 - May 2023, monthly)
(Pt)
130
120
110
100
90
80

90

93

96

99

02

05

08

11

14

17

20

23

（Yr）

Such weakness in sentiment is in the process of selfrealization. Unless the pessimism about outlook
recedes, no strong recovery can be expected.

Source: Nomura Asset Management based on CEIC data

No major fiscal stimulus measures are likely to be announced
We believe that given the lack of demand in the privatesector, the government needs to actively create
demand to break the vicious cycle stemming from theweakness in sentiment. However, the government is
keeping a distance from major fiscal stimulus measures
like those implemented in the past. The governmenthas been reluctant to introduce stimulus measures that
could increase long-term financial risks by stressing thequality of growth. Another factor behind the reluctanceis that revenue from the sale of land use rights, which isan important source of revenue for local governments,
has decreased significantly due to the downturn in the
housing market, and the capacity for further economic
stimulus is limited.
Although small policy adjustments have recently been
made, we expect that low growth is likely to continue
going forward through weak sentiment unless major
stimulus measures are introduced.

22

Financial Condition of Local Governments(January 2016 - August 2023, Monthly)(YTD YoY,%)
60
50
40
30
20
10
0
-10

Revenue-20

Expenditure

-30
-40

Land Sales Revenue
16

17

18

19

20

21

22

Source: Nomura Asset Management based on CEIC data

23

(Yr)

NAM Investment Outlook Autumn 2023

Emerging
The economy and inflation continue to slow while some countries will start cutting interest rates

The economy and inflation will continue to slow
Emerging economies as a whole remain weak due tothe effects of weak external demand and monetary
tightening. Inflation continues to moderate. For
example, the core inflation rate (an inflation rate
calculated by excluding items that are subject tolarge fluctuations, such as food and energy) has
decelerated on month-over-month basis. However,the downward pressure from food and energy due tothe effect of comparison with the previous year has
run its course most recently, and these items havebecome factors to drive the inflation rate higher again
as international commodity prices rise.

Changes in Core Inflation Rates(January 2020 - August 2023, Monthly)
(％)
15
12

India
South Korea
BrazilMexicoIndonesia
Poland
Chile

9
6
3

The economy is expected to remain weak going
forward as weakness in foreign demand and tightmonetary policies will continue. Inflation is also
expected to continue to moderate, but rises ininternational food and energy prices will be a risk ofhigher inflation than expected.

0-3
Jan-20

Sep-20May-21

Jan-22

Sep-22

May-23

Note: Measured in terms of the seasonally adjusted three-monthmoving average of month-over-month percentage changes(annualized). The definition of core inflation varies with each country.
Source: Nomura Asset Management based on CEIC data

Some countries entering the rate cut cycle
As inflation continues to moderate, some central
banks, particularly among those of countries thathave been actively tightening monetary policies until
recently, have started cutting interest rates. These
countries have also suggested that they will continue
to cut interest rates several times going forward,
which indicates a shift from very restrictive monetary
policies in the past. However, cautious monetary
policy stances are maintained as a whole, includingthese central banks.

Monetary Policy Trends in Major Emerging Countries(December 2019 – September 2023, monthly)(Number of Countries)
18
16
14
12
10

We expect that many more countries will start cuttinginterest rates if inflation continues to moderate.
However, it is likely that cautious monetary policy
stances will be maintained going forward, and ratecuts will be deterred if inflation rates rise mainly infood and energy prices more than expected or theircurrencies are depreciated rapidly.

8
6
4
2
0

Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23

Rate Hike

Keep

Rate Cut

Note: Monetary policy trends are measured in terms of three-monthchanges in policy rates.
Source: Nomura Asset Management based on CEIC data

23

NAM Investment Outlook Autumn 2023

Globl Financial Market Forecast
Major Economic and Market Forecast
2023

*1,*4

2024

Q1

Q2

Q3

Q4

Q1

F

F

F

F

2.4

3.1

2.3

2.3

1.5

1.1

2021

2022

2023

2024

F

F

6.2

2.9

2.5

1.5

Q2

Real GDPWorld(qoq, ann, %)Developed

*2

1.5

1.7

1.0

0.4

-0.6

0.0

5.5

2.6

1.4

0.3

Emerging

*1,*3

3.7

5.2

3.9

4.0

3.0

2.5

7.4

3.4

4.2

3.2

United States

2.0

2.1

1.8

0.9

-0.9

-0.3

5.9

2.1

2.0

0.4

Eurozone

0.3

0.5

0.6

-0.5

-0.9

-0.1

5.3

3.4

0.5

-0.2

Japan

3.2

4.8

-0.7

1.4

1.0

0.9

2.2

1.0

1.9

1.1

China

*1

4.5

6.3

4.4

4.9

3.7

3.6

8.4

3.0

5.0

3.8

CPI

World

*4

5.9

4.2

4.2

3.9

3.7

3.8

3.2

7.0

4.5

3.5

(yoy, %)Developed

*2

6.5

4.9

4.2

3.5

3.2

2.9

3.3

7.5

4.8

2.7

Emerging

*3

4.9

3.1

4.1

4.5

4.6

5.3

3.0

6.2

4.2

4.6

United States

5.8

4.1

3.6

3.3

3.3

2.9

4.7

8.0

4.2

2.8

Eurozone

8.0

6.2

5.1

3.8

2.7

2.6

2.6

8.4

5.7

2.3
2.4

Japan

*5

China
*6

3.5

3.3

3.1

2.8

3.0

2.5

-0.2

2.3

3.2

1.3

0.1

0.1

0.4

0.6

1.9

0.9

2.0

0.5

1.9

5.00

5.25

5.50

5.50

5.50

5.50

0.25

4.50

5.50

4.50

Policy Interest Rate

United States(%)

Eurozone

*6

3.00

3.50

4.00

4.00

4.00

4.00

-0.50

2.00

4.00

2.00

Japan

*6

-0.10

-0.10

-0.10

-0.10

-0.10

-0.10

-0.10

-0.10

-0.10

-0.10

China

*6

3.65

3.55

3.45

3.45

3.45

3.45

3.80

3.65

3.45

3.45

3.47

3.84

4.57

4.20

3.70

3.40

1.51

3.87

4.20

3.50
2.00

10-Year GB Yield

United States(End of Period, %)Germany

2.29

2.39

2.84

2.40

2.00

1.90

-0.18

2.57

2.40

Japan

0.35

0.40

0.77

0.60

0.45

0.40

0.07

0.42

0.60

0.50

Equity Index

S&P500

4,109

4,450

4,288

4,200

4,100

4,250

4,766

3,840

4,200

4,600

(End of Period, Point)

EURO300

1,811

1,832

1,785

1,720

1,700

1,770

1,890

1,678

1,720

1,830

TOPIX

2,004

2,289

2,323

2,290

2,150

2,200

1,992

1,892

2,290

2,350

MSCI EM ($)

990

989

953

940

930

970

1,232

956

940

1,000

Currency

USD/EUR

1.09

1.09

1.06

1.07

1.05

1.05

1.14

1.07

1.07

1.11

(End of Period)

JPY/USD

133.1

144.5

149.2

145.0

140.0

135.0

115.2

131.9

145.0

132.0

JPY/EUR

144.6

157.7

158.0

155.0

147.0

142.0

131.0

140.8

155.0

147.0

RMB/USD

6.87

7.26

7.30

7.30

7.40

7.40

6.37

6.95

7.30

7.10

Emerging FX and Policy Interest Rate Forecast
2021
Currency(Per USD,
End of Period)

Policy Interest Rate
(%)

2022

2023

2024

F

F

INR
IDR
BRL
MXP
ZAR
TUR
India
Indonesia
BrazilMexicoS. Africa

74.3
14,253
5.6
20.5
16.0
13.3
4.00
3.50
9.25
5.50
3.75

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

83.0
15,400
5.0
17.3
19.0
29.0
6.50
5.75
11.75
11.25
8.25

80.0
14,500
4.7
16.5
18.0
38.0
6.00
5.00
9.00
9.00
7.50

Turkey *6

14.00

9.04

35.00

35.00

Note: Forecast as of September 25, 2023. 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 of2) 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
average funding ratio of the central bank, *As for forecast columns, actuals are prioritized if available.
Source: Oxford Economics, Bloomberg, and Nomura Asset Management

24Index Hedge Clause
The index used as references in material is as follows: (Includes indicators partially used and/or not shown.)
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