Nomura Asset Management

Investment Outlook
Winter 2024

Winter 2024

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
Assuming steady interest rates and only a mild economic contraction, significant stock
price adjustments can be avoided in 2024

05┃ Japan Equity Market Outlook
Shintaro Harada, Senior Investment Officer, Active Japanese Equity
Will the second round of governance reform and inflation deliver results?

08┃ Global Equity Market Outlook

Takahiro Nakayama, Senior Managing Director, Chief Investment Officer,
Active Global Investments

Productivity revolution driven by AI should provide attractive investment opportunities. In the
short term, we are monitoring economic trends, changes in monetary policy, and presidential
elections. In emerging markets, we are paying attention to the benefits of the US interest ratecuts and the weakening of the US dollar.

11┃ J-REIT Market Outlook

Tomoyuki Nobuhara, Senior Portfolio Manager
Positive signs include improving office market conditions and a declining interest
rate trend

13┃ Bond and Currency Market Outlook
Wataru Kato, Senior Portfolio Manager
Yuji Maeda, Head of Investment, Global Fixed Income
A pivot to interest rate cuts by the Federal Reserve will trigger a turnaround in bondand currency markets

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┃ US
21┃ Eurozone
22┃ Japan

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

Note: The commentaries are as of middle to late December 2023.

1

NAM Investment Outlook Winter 2024

Quarterly Financial Market Recap
Earlier during the October-December 2023 review period, concerns arose in the financial markets over the
possibility of a “higher for longer” approach to interest rate policy by Federal Reserve along with rising US
government bond issuance that briefly pushed the 10-year US Treasury yield above 5%. However,Indications that employment growth and inflation were beginning to slowdown in the United States raised
hopes of a shift towards monetary easing. This change in sentiment later caused a significant decline US longterm-bond yields, back to near where they had been at the beginning of the review period. The stock market
also responded favorably to the drop in market interest rates and so equity prices rallied. With lower yields onlong-term US bonds, and the narrowing of interest rate differentials with other countries, the US dollar
declined against both the euro and the yen.

Equity Market of Major Countries

10 Year Bond Yields in Major Countries(January 2, 2019 - December 31, 2023, daily)(January 2, 2019 - December 31, 2023, daily)(%)(Points)
5,000

5.0

S&P5004,500Euro300

4,000

TOPIX

US
4.0

Germany
Japan

3.0

3,500

2.0

3,000
2,500

1.0

2,000
0.0

1,500
1,000
Jan-19Jan-20Jan-21

Jan-22-1.0
Jan-19Jan-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 US dollar

Trends in VIX and MOVE

(January 2, 2019 - December 31, 2023, daily)(January 2, 2019 - December 31, 2023, daily)(USD/EUR)(Points)(JPY/USD)

1.25

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

1.20

250

160
150

1.15

140

1.10

130

1.05

120

1.00

110

VIX
MOVE

200
150
100

0.95
Jan-19Jan-20Jan-21

Jan-22

Jan-2350
0Jan-19100

Jan-20Jan-21

Jan-22

Jan-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 data

Source: Nomura Asset Management based on Bloomberg data

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NAM Investment Outlook Winter 2024

Investment Strategy

Investment Environment Outlook
Assuming steady interest rates and only a mild economic contraction,
significant stock price adjustments can be avoided in 2024

Rumi Kurumizawa
Chief Economist

Takahiro Homma
Senior Corporate
Managing Director,
Chief Investment Officer

The US and European central banks may be approaching a pivot point for interest rates
Policy meetings held by the major central banks of
the United States, Eurozone, and Japan in December
2023 revealed important information that could prove
crucial for forecasting the monetary policy outlook in
2024.

However, Bank of Japan Governor Kazuo Ueda
mentioned that while there is growing certainty overwhether it can achieve stable and sustained
attainment of its price stability target, it will needmore time to assess conditions and did not provide
clear indications about the timing of any policychanges.

In the United States, the Federal Open Market
Committee (FOMC) participants’ median outlook forpolicy interest rates suggested there would be nofurther rate hikes in this stage of the cycle. Indeed
the so called “dot-plot” forecast indicated a total of 75
basis points in rate cuts during 2024. In the Eurozone,
while the European Central Bank (ECB) has
distances itself from suggestions of further rate hikes,
ECB President Christine Lagarde has issued
comments aimed at restraining expectations of anearly rate cut.

Based on our assessment, we expect that from mid2024 onwards, central banks in the United Statesand Eurozone will begin to cut rates to adjust thedegree of monetary tightening, while Japan is
expected to begin the rollback of its unconventionalmonetary easing tools.
Recent communication from the central banks
suggests that while the US and European central
banks are heading towards rate cuts, their first moveis not imminent, which aligns with our expectations.

In contrast, there were growing expectations of earlyend of negative interest rate policy in Japan.

Bond yields on a downward trend
The bond market has responded to this bias towards
interest rate cuts by the Federal Reserve Board(Fed), with the yield on the 10-year US Treasury notefalling below 4% after the FOMC meeting in
December 2023. Amid expectations of a rate cut inMarch 2024, comments from New York Fed
President John Williams and others have sought torestrain expectations of an early rate cut. While thebond market has been moving as anticipated towards
lower yields, we believe the current pricing in ofpolicy rate cuts might be somewhat premature andover done.

decline in interest rates from current levels towards
the middle of 2024. Even if the rate cutting phase
continues, the pace of declining government bondyields expected to be very gradual once there aresigns of the economy bottoming out.
Yields on German and Japanese government bonds
are also expected to be somewhat correlated to US
Treasury yields. Regarding JGB yields, while there issome possibility of temporary interest rate increases
beyond this correlation around the time of policy
adjustments by the Bank of Japan, it is expected toreturn to a more stable trajectory as expectations ofcontinuing rate hikes diminish.

Therefore, there is some potential for a temporary
rolling back of these early rate cut expectations,which could bring a rebound in interest rates amidst
the ongoing decline. However, as the economic
momentum deteriorates and the possibility of a rate
cut becomes more likely, there could be a further

3

NAM Investment Outlook Winter 2024

Weaker US dollar trend expected
Awareness of the relative weakness of theEurozone's economy and expectations of an
economic slowdown in the US in the first half of 2024
are seen as likely to limit the Euro's appreciation
against the US dollar, but as signs of a global
economic recovery become evident towards the endof the year, we expect the Euro to appreciate against
the US dollar.

Alongside observations of a potential shift in US
monetary policy, yields on US Treasury bonds havefallen back, leading to a depreciation of the US dollar
against the euro and the yen. In particular, while ratecuts are anticipated in the US in 2024, there has
been an increase in rate hike expectations in Japan,
leading to a strengthening of the yen.
Factors such as market risk sentiment, disparities inmonetary policies, interest rate differentials, andcapital flows have an impact, although the main
exchange rate determinants are not always interest
rate differentials. However, assuming that the
anticipated downward trend in US bond yields in
2024 is correct, as long as there is no sharp andsustained deterioration in market risk sentiment, suchas a financial crisis, we expect the US dollar todepreciate further.

As for the yen, we believe structural factors will makea significant appreciation of the yen unlikely.
However, in the short-term until the end of 2024, we
anticipate that the narrowing of the interest rate
differential between Japan and the US will contributeto a stronger yen.

Stock market expected to see upward trend from mid-2024
Against this backdrop of declining bond yields, US
equities have been on the rise toward mid-December
2023. If the situation unfolds in line with thestatement by Fed Governor Christopher Waller at theend of November 2023, suggesting that fallinginflation rates could justify interest rate cuts even
without an economic slowdown, it is likely to have apositive impact on the earnings per share (EPS) andprice-earnings ratio (PER) for stock prices.

likely to take hold, and under a trend of declining
interest rates, we can expect stock prices to shift
towards an upward trend.
Regarding Japanese stocks, if the yen continues tostrengthen as we predict, it is expected to weighheavily on corporate earnings. However, consideringthat the Bank of Japan is likely to maintain arelatively easy monetary policy, even after theremoval of negative interest rates, and given that astrengthening yen could lead to cost containment, we
anticipate that a corresponding increase in stock
prices might be possible even during a period of yen
strength.

However, looking ahead to the first half of 2024,
where we anticipate the strong effects of pastmonetary tightening to become more apparent, we
expect the outlook for corporate earnings to facesome weakness. On the other hand, as expectationsof a "shallow and short" economic slowdown
increase towards the second half of 2024, a more
optimistic view on future corporate earnings seems

4

NAM Investment Outlook Winter 2024

Japan Equity Market Outlook
Will the second round of governance reform and inflation deliver results?
Shintaro Harada
Senior Investment Officer,
Active Japanese Equity

After a successful 2023, there are many uncertainties in 2024
Japanese stocks enjoyed a significant rally in 2023,
with the market gaining more than 20%. However,
events in 2024 could bring potential turning points
from various perspectives. Instability stemming fromthe Israel-Palestinian conflict has already shaken thestability of the global security framework. In addition,
factors associated with a more authoritarian
approach from the government of Xi Jinping in China
could have a repercussions for technology driven
market of Taiwan. Significant political events also
loom large - like the US presidential election, as wellas general elections in Taiwan and possibly Japan
too. While the ideal scenario would be for theseoccasions to pass off uneventfully and help tomaintain stability in the global economy, it might beoverly optimistic to assume that this series of polls
will all lead to positive resolutions.

In this uncertain environment, at the macroeconomic
level, the timing and pace of interest rate cuts in the
United States, as well as how far long-term interest
rates will decline in response, will determine thedirection of global capital markets. This will also be
discussed in a similar context within the Japanesestock market. Factors determining the market’s
prospects include the economic outlook and theinflation rate. However, the market outlook seems to
be fairly universal given the broad expectations of amild economic slowdown, a fall in the inflation rate,
and the eventual pivot in US policy interest rates
towards rate cuts. However, there is some disparity
in perspectives regarding the timing and the extent ofinterest rate cuts, and this is one cause of variation in
the current market outlook.

Short-term stagnation in global economy and Japan's position
In terms of business conditions, the global economic
cycle is transitioning from a period of stagnation to arecovery phase, as shown in the diagram on the right.
However, due to fluctuations in demand and supply
constraints caused by the Covid-19 pandemic, thecurrent situation is not following the usual pattern of acyclical recovery, and it could therefore regress backto a stagnation phase. Reflecting weak growth inChina and Europe, as well as possible decelerationin the US for the first half of 2024, it is possible there
could be a counter-clockwise cyclical recovery.

upward cycle in product prices is complete, themomentum for wage growth in the coming year could
weaken. We should also be mindful of thepersistence of inflation.
Figure 1. OECD Composite Leading Indicator (CLI) Cycle+5(3)
Downturn

CL12

CL11

CL10

CL9

CL13

Level (%)

CL8

Jan-22

CL14

On the other hand, Japan’s economy looks relatively
favorable due to its delayed recovery; although thefocus there lies on the progress toward a full-fledged
escape from deflation. This year's spring wage
negotiations are expected to yield better results thanlast year, and they could drive a broad increase inreal wages amid a slowdown in food inflation. In thiscontext, there could be a continued favorable
impression of the Japanese economy among global
investors. However, there is a risk that once the(2)Expansion
CL7

CL15

CL6

Jan-19-5CL16
CL17

CL18

(4)
Slowdown

Jan-21
Nov-23Jan-23
CL19

CL20

-5

Jan-20
CL1

CL2

CL5
+5
CL4

CL3

(1)
Recovery

Growth (% p.a.)
Source: Nomura Asset Management based on OECD (Organisation for Economic
Co-operation and Development) data.

5

NAM Investment Outlook Winter 2024

Slower corporate earnings momentum and currency fluctuations
Judging from FY23 earnings results, there has been
continued profit growth driven by the Automobiles
and Utilities sectors. However, prospects for next
fiscal year are contingent on exchange rate
assumptions. It is important to note that the
Aubomotiles sector could face a decline in profits
next fiscal year, and the Utilities sector could see alower year-on-year profit growth due to the reboundfrom this year. For instance, the exchange rate effecton the Automobiles sector is estimated to result in aforex loss of -1.5 trillion yen in fiscal year 2024 using
the exchange rate assumption of 130 yen per dollar,
compared to a foreign exchange gain of 800 billion
yen in 2023 (our estimates). This would have asignificant impact on the Automobiles sector, causing
an estimated 2% fall in the market's overall recurring
profits of 68 trillion yen. Despite this, the export
sector as a whole can likely maintain profitability
unless there is significant yen appreciation beyond
this level. However, earnings momentum is trending

towards a more sluggish outlook, so depending on
the global economic slowdown, sustaining profit
growth could become more challenging.
Figure 2. Corporate Earnings Trend
Recurring Profits Grow th Rate

(Fiscal YoY, %)
FY22
4.2
7.7
2.7
15.8
-5.2
6.6
2.9
5.3
18.2
17.7
18.6
20.5
-12.8

RN Large Cap
RN Large Cap (ex Financials)
Manufacturing
Non Manufacturing (ex Financials)
Chemicals
Machinery
Automobiles
Electrical machinery, precision equipment
Pharmaceuticals, healthcare
Food
Trading companies
Retailing
Services

FY23E
11.8
8.7
14.2
1.0
-6.5
10.2
58.2
-0.8
-10.2
8.7
-11.6
9.8
7.1

赤字 1521.9
-18.3
38.0

Utilities
Financials

FY24E
8.3
8.0
9.0
6.3
12.5
10.5
2.0
10.6
29.3
8.0
-5.0
8.2
9.9

FY25E
7.4
7.1
7.5
6.4
7.7
7.5
1.7
12.9
11.9
8.2
2.2
8.4
6.6

-31.5
10.0

1.3
9.7

Note: Nomura Securities industry classification selected the major sectors. The
forecast is from FY23 to FY25, with an assumed exchange rate of 145 yen to the
US dollar.
Source: Nomura Asset Management based on Nomura Securities data.

Direction of the Tokyo Stock Exchange's guidance on management reform
Equity market gains in Tokyo during 2023 can be
attributed partly to the Tokyo Stock Exchange's
guidance and its request for corporate management
to focus on cost of capital. The TSE seemed much
more committed to these efforts and attracted
positive attention from foreign investors. While someeffects have been noticeable, such as rising shareprices of companies announcing share buybacks, theactual overall results may not have met expectations,as indicated in Figure 3.

Figure 3. Share buybacks(JPY, bn)

10,000

FY20229,000

FY20218,000

FY20197,000

FY2018

6,000
5,000

The TSE's specific recommendation that companies
should aim for a price-to-book ratio (PBR) higher
than 1.0, suggests that we could see comprehensive
management improvements unfold over time.
Therefore, it seems that the TSE has set the course
by its request to those companies in January 2023,
and this will encourage sustained initiatives andongoing efforts towards improvements in shareholder
returns for low PBR companies.

FY2020FY2016FY20234,000

FY2014

3,000
2,000

FY2012

1,000
Apr

Jun

Aug

Oct

Dec

Feb

Source: Nomura Asset Management based on QUICK and
SMBC Nikko Securities data

6

NAM Investment Outlook Winter 2024

Japanese Stock Market in 2024: Focus on the 2nd Round of Governance Reform and Inflation
The year-end market forecast for 2024 is 2500 for the
TOPIX index and 35,000 yen for the Nikkei 225
Average. These forecasts are based on assumptionsof 2025 fiscal year EPS of 180 yen, PER of 14, andan NT ratio (Nikkei 225 Average divided by TOPIX)
of 14. Since the Global Financial Crisis, andparticularly following the Abenomics policies, theaverage PER for the TOPIX Index has been around
14, with an average of 16 when optimistic forecasts
are discounted and around 12 when incorporating a
pessimistic outlook.

Overall, the view is that amidst an economic
slowdown, with lowered interest rates bolstering thestock market and economic conditions poised torecover from a shallow trough, then we cananticipate steady corporate earnings, leading tomarket returns that are broadly consistent withearnings growth. For the first half of the year, weshould consider the uncertainty centered on
economic conditions and the potential risk of yen
appreciation. To the extent that global equity markets
may have factored in the early adoption of reducedinterest-rate expectations, it is envisioned that thesecond half of the year will see a turnaroundfollowing a period of uncertainty.

These projections incorporate earnings growth
expectations for FY2025 without stretching valuations.
In the case of a shallow macroeconomic slowdown,
leading to a swift economic recovery, an ideal“Goldilocks” market scenario would potentially justify
an average sell-side estimate of 38,000 yen (Nikkei
225). If the scenario were to include a more
substantial improvement in corporate governance, it
could also imply some valuation expansion,
manifesting as a most bullish forecast of 40,000 yen
for the Nikkei 225. However, the negative impact ofongoing global monetary tightening could materialize,
while also the scenario of an appreciating yen
progressing beyond expectations cannot be ruled out.
Therefore, our assumptions do not lean towards suchhigh expectations.

In conclusion, alongside cyclical theories of
economic and interest rate fluctuations, otheressential
components
includetheTSE-ledgovernance reforms and rising wage trends,
including the spring wage negotiation, which can
impact investor confidence to the extent that suchoutcomes become visible. We should therefore adopt
a cautious approach initially, mediated by a morepositive approach while closely assessing the
progress of these trends.

Figure 4. TOPIX and PER Band, and PBS(pts)(TOPIX: Jan-06 - Nov-23, PER Band and PBS: Jan-06 - Dec-25, monthly)

3,500
3,000

BPS

2,500

PER 162,000

PER 141,500

PER 12

1,000

TOPIX

500
0
Jan-06

Jan-09Jan-12

Jan-15Jan-18Source: Nomura Asset Management based on Nomura Securities data.

7

Jan-21

Jan-24

NAM Investment Outlook Winter 2024

Global Equity Market Outlook
Productivity revolution driven by AI should provide attractive investment
opportunities. In the short term, we are monitoring economic trends, changes inmonetary policy, and presidential elections. In emerging markets, we are paying
attention to the benefits of the US interest rate cuts and the weakening of the US
dollar.

Takahiro Nakayama
Senior Manageing Director
Chief Investment Officer,
Active Global Investments

Revolution in productivity driven by Artificial Intelligence
Looking back on 2023, the impact of localized bankfailures in the United States and the rapid interest
rate hikes by various central banks has been limited,
and as a result, the global stock market (MSCI ACWI
index: US dollar-based) saw a 21% increase for theyear as of December 20th. Particularly notable was
the May 2023 earnings report from Nvidia, whichsignificantly surpassed market expectations and led
to renewed focus on AI-related stocks in the stock
market, highlighting the strength of demand in the AI
sector. The efforts by companies to digitallytransform (DX) accelerated during the pandemic, andnow, the utilization of generative AI is rapidly
evolving from the trend of digitalization and cloudbased operations. Unlike many new technologies thatwere traditionally used by a limited group of IT
engineers, generative AI, exemplified by chatbot GPTlaunched in November 2022, is expected to be
utilized across various fields, driving the global AI
market size (revenue) towards an estimatedexpansion to $1.847 trillion by 2030. With generative
AI's potential to handle a wide range of intellectualtasks depending on the training data, an increase in
overall productivity across the economy can be
expected. Looking at the example of the significant
expansion of IT-related investments in the 1990s, it

can be observed that the labor productivity in the
United States surged from 1.7% to 2.5% following thelaunch of Windows 95 in 1995. Given the anticipatedtransformation generative AI is expected to bring to
the entire economy, it is not only the performance
growth of related companies that is expected, butalso an improvement in the profitability of a wide
range of businesses over the medium to long term.
Figure 1. Trends in Global AI Makret Size(bn, USD)(2021 - 2030, annually)

2,000
1,500
1,000
500
0

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Source: Nomura Asset Management based the Ministry of Internal Affairs
and Communications' Information and Communications White Paper.

Figure 2. Productivity changes in the US labor fource (yoy)1980-1981

0.7

1990-1998

1.9

ow 1990-1996

1.7

ow 1996-1998

2.5

Source: Nomura Asset Management based the Fed’s data

Changes in monetary policy
The market's emphasis regarding monetary policy for2024 is likley to shift towards the timing andmagnitude of eventual interest rate cuts. With
inflationary pressure easing as the recovery fromsupply chain disruption progresses, and with a likley
deceleration in strong US consumer trends going
forward, markets are now incorporating rate cuts in
2024. Lower interest rates should act as a supportive
factor for the overall stock market.

Figure 3. US Policy Interest Rate Outlook(January 2024 – January 2025, FOMC announcement date)(As of December 20, 2023)

5.5

(%)

5.0
4.5
4.0
3.5
3.0
(YY/MM/DD)
Source: Nomura Asset Management based on Bloomberg data

8

NAM Investment Outlook Winter 2024

Focus on the quality of corporate earnings
In the 2024 market earnings outlook, the easing of
cost pressure is expected to drive profit margin
improvements as raw material prices and labor costs
settle down. This is in addition to companies’ own
efforts to enhance their earnings. For companies
included in the S&P500 index, the 2024 EPS growthforecast is 11% (yoy). However, there is a generaltrend towards decelerating economic growth, andthere are indications of increased borrowing andrising delinquency rates for low-income households.
There are also concerns regarding a potential
slowdown in spending by lower-income and middleincome groups. Some economically sensitive
companies are revising their profit growth outlook
downwards. While there are longer term
expectations for a productivity revolution driven by AI
and lower interest rates, it will be more important tofocus on the structural growth factors in 2024,
including the strength of profitability, financial health,and other quality-related aspects of corporate

earnings that are not influenced by economic trends.
Figure 4. S&P500 Operating Profit Rate
(2021 - 2024, annually, forecast for 2023-2024)
(%)
17
16
15
14
13
12

2021

2022

2023

2024

Source: Nomura Asset Management based on Bloomberg data

Figure 5. S&P500 Earnings per Share(2019 - 2024, Forecast for 2023-2024)
+11%

300
250
200

163

150

208

219

221

2021

2022

2023

245

140

100
50
0

2019

2020

2024

Source: Nomura Asset Management based on FactSet data

Impact of the US Presidential Election
In the United States, the presidential election isscheduled for November 2024. At present, it is highly
likely that the Democratic Party will nominate theincumbent President Joe Biden, while the Republican
Party will nominate former President Donald Trump.
If President Biden wins, we should expect no major
policy changes. However, if former President Trump
returns to the White House and the Republican Party
also wins the congressional elections, we should
anticipate significant policy changes. In domestic
matters, there would be a greater emphasis on tax
reduction policies, while policies for promoting
renewable energy led by the Biden administration
may also be subject to change. Moreover, changes
to foreign policy could be expected regarding theRussia-Ukraine conflict and policies towards China.
Poll numbers so far offer no clear indication of whichside might emerge victorious, but depending on theoutcome, it is important to closely monitor thesituation as it could have a significant impact on thefinancial markets.

Figure 6. Trends of Public Opinion Polls for the2024 US Presidential Election(December 20, 2022 – December 20, 2023, daily)
(%)
50
49
48

Joe Biden
Donald Trump

47
46
45
44
43
42
41
40
Dec-22 Feb-23 Apr-23

Jun-23 Aug-23 Oct-23

Source: Nomura Asset Management based on Real Clear Politics data

9

NAM Investment Outlook Winter 2024

Emerging equities: US interest rate cuts will be a tailwind. The Central and Eastern European
markets are of particular focus.
In anticipation of a shift towards interest rate cuts by

Finally,

we believe thatCentral and Eastern

the Federal Reserve later in 2024, we are seeing an

European markets are also worthy of attention.

improved investment environment lately for emerging

Following Russia’s invasion of Ukraine, investment inmarket stocks, with support coming from a decline in

Russia effectively became unfeasible, leading thelong-term US interest rates and the depreciation ofcurrent Eastern European market to be comprised of

the US dollar. Weakening of the US dollar is

EU countries such as Poland, the Czech Republic,

expected to benefit commodity markets especially,

and others in Central Europe. Stocks in Central

providing a tailwind for stocks in resource-richEuropean countries experienced a sell-off after thecountries such as South Africa, Brazil, and Indonesia.

invasion, but have made significant recoveries since

Furthermore, if falling inflation allows the Federal

the beginning of 2023. Considering the dividend yield

Reserve to transition towards rate cuts, it couldof 4.3% and a price-to-earnings (PER) ratio ofprovide room for rate cuts in emerging markets thatapproximately 8, we believe there is still upside

have been maintaining policy rates at relatively highpotential in regional stock prices. Moreover, inflationlevels for reasons such as currency defense. For

rates in these countries increased temporarily to theinstance, as of December 15, Mexico's policy rate

20% range following the surge in fuel prices after thestood at 11.25% despite a November inflation rate ofinvasion, which had an adverse impact on household

4.3% (yoy), resulting in a real interest rate of

consumption.

approximately 7% (accounting for inflation); similarly,

decreased from the spring of 2023. On the otherBrazil's real interest rate is also around 7%. While nothand, with direct investment from the Eurozone andas high, Indonesia and South Africa also have realtight labor markets, wages have been growing at a

Butenergyprices

have

since

interest rates at around 3%. In these emerging

strong pace over an extended period, potentiallymarket countries, rate cuts could lead to a decline inleading to an increase in consumer purchasing

corporate funding costs and consumer loan interest

power and expansion of household spending,

rates for housing and automobiles, allowing for athereby supporting the economy and stock markets

boost to the economy through monetary policy.

in Central and Eastern European countries.
Figure 8. Central and Eastern European Countries:
Wage Growth Rate and Inflation Rate

Figure 7. Year-to-date Stock Market Returns(in US dollars, total return)(December 31, 2022 - November 20, 2023)(February 2022 – November 2023, monthly)(%)

Eastern Europe

30

Emerging

25

Developed

Poland Wage Growth Rate
Hungary Wage Growth
Czech Wage Growth Rate

Poland Inflation Rate
Hungary Inflation Rate
Czech Inflation Rate

20

PolandHungary

15

Czech Republic

10

South Aftica

5

Indonesia
0

10

20

30

40

50

(%)

0

Feb-22Jun-22Oct-22

Feb-23

Note: Left: Emerging Markets: MSCI EM(Emerging Market)Index, Developed Markets: MSCI World Index, Countries: MSCI Country Index
Source: Nomura Asset Management based on FactSet and Bloomberg data

10

Jun-23Oct-23

NAM Investment Outlook Winter 2024

J-REIT Market Outlook
Positive signs include improving office market conditions and a declining interest
rate trend.

Tomoyuki Nobuhara
Senior Portfolio Manager

Interest rates domestically and internationally have been trending downwards
J-REIT prices fell in 2022 as a result of the indirect

Figure 1. TSE REIT Index and US 10Y T-Note Yield（January 4, 2022 – November 30, 2023, daily）

impact of rising interest rates in overseas markets. In
2023,

amid

ongoing

uncertainty

surrounding

TSE REIT Index (LHS)
US 10Y T-Note (RHS)(pts)

monetary policies, both domestic and international

2,200interest rates remained volatile and the J-REIT
market again struggled to regain upward momentum.

(%)
5.5
5.0

2,100

4.5

However, as inflationary pressures are easing, there

2,000

are signs that the Fed is consider a pause in its
interest rate tightening and may even be looking

4.0

1,900

ahead to lowering rates from later in 2024. While it is

3.5
3.0

1,800

possible that the Bank of Japan might consider lifting

2.5

its negative interest rate policy, both domestic and

1,700international interest rates seem to be tapering off

2.0

1,600
Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23

lately and could be approaching a pivot point and ashift towards a downward trend, which could drive

1.5

Note: US 10Y Treasury Note yields are Bloomberg Generic

positive movements in the J-REIT market.

Source: Nomura Asset Management based on Bloomberg data

J-REITs look resilient compared to overseas REIT markets
Figure 2. Trends in TSE REIT Index and US REIT Index

In the US, although there has been a pause in policy(January 4, 2022 to November 30, 2023, daily)interest rate tightening, borrowing costs remain high,leading to increased hurdles for new real estate(pts)

investments. With a limited number of property

2,400

buyers, falling real estate prices in the office sector
particularly have become a major risk in the US
market, leading to a stagnation in the US REIT
market. On the other hand, given the relatively low
inflation and interest rates in Japan and theunchanged lending stance of financial institutions,
there has been little impact on real estate prices. As
a result, the J-REIT market has performed steadily
compared to overseas markets. Recently, with the
downward trend in US interest rates, the decline in
the US REIT market has also eased.

TSE REIT Index (LHS)
US REIT Index (RHS)

4,800

2,200

4,400

2,000

4,000

1,800

3,600

1,600

3,200

1,400

2,800

1,200
Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23

2,400

Note: The US REIT Index is the FTSE/NAREIT US Index.
Source: Nomura Asset Management based on Bloomberg data

11

(pts)

NAM Investment Outlook Winter 2024

Japanese real estate prices have not declined
Rising interest rates can lead to a decline in real

Figure 3. Trends in Expected Real Estate Yield(October 2005 to October 2023, half-year)

estate prices through an increase in the required
yields for real estate investment. This has been the

A Class Building/Marunouchi, Otemachi Districtcase in some overseas markets. However, in Japan,

Commercial Stores/Metropolitan Luxury Boutiques, Ginza

although market interest rates have increased slightly,

Logistics Facilities/Multi-Tennant, Coast, Toyo

they remain relatively low, and this has not led to any

7.0%

increase in the yields expected by real estate

6.5%

investors. Consequently, the appraisal prices of

6.0%

properties held by J-REITs have been stable. If the

5.5%

current difficulties facing real estate investment in

5.0%

overseas markets persist then Japan is likely to

4.5%

remain positioned as an attractive investment market,

4.0%

so stable trends in real estate prices can be expected.

3.5%

Business Hotels/Tokyo

3.0%
Oct-05Oct-10

Oct-15Oct-20Source: Nomura Asset Management, based on data from the Japan Real Estate
Institute

No significant differences in sector returns in 2023
In 2022, sector-specific returns were indirectly

Figure 4. TSE REIT Index Sector Based Return

impacted by rising interest rates in other leading

2023 YTD(Dec 30, 2022 May 30, 2023)

2022(Dec 30, 2021 –Dec 30, 2022)

economies, which led to a fall in the distribution yield
and a perceived decline in the investment appeal of
the logistics sector, resulting in negative returns.
Conversely, the hotel sector saw significant price

40%

40%

gains as a result of the expected recovery in

30%

30%

20%

20%

10%

10%

0%

0%

market, resulting in relatively high but still modest

-10%

-10%

price gains for the office sector.

-20%

-20%

-30%

-30%

domestic demand and inbound tourism.
In 2023, while there have not been any significant
differences in sector-specific returns as in 2022,
there are early signs of improvement in the office

Note: Market capitalization weighted average, industry classification is GICS
industrial subsector classification.
Source: Nomura Asset Management based on Bloomberg data

12

NAM Investment Outlook Winter 2024

Office market shows signs of recovery in demand
The office vacancy rate rose to the mid-6% range

Figure 5. Tokyo Business District Office Market

during the pandemic before stabilizing, but it has now(January 2001 to November 2023, monthly)

fallen back to the lower 6% range from the second

Average Rent (Tokyo Business District, RHS)

half of this year. In 2023, there was a significant(%)

supply of new office buildings, but as corporate office10

demand increased due to the recovery in office

924,0008

23,0007

22,0006

21,0005

20,0004

19,0003

18,0002

17,0001

16,0000
Jan-01 Jan-05 Jan-09 Jan-13 Jan-17 Jan-21

15,000attendance and post-pandemic trends, demand for
office space has begun to show signs of recovery
and the increase in vacancy rates has been limited.
Looking ahead to 2024, there are forecasts of adecline in the supply of new office buildings
compared to the previous year, which bodes well forthe sector from a supply and demand perspective.
With the ongoing recovery in office demand, there is
the potential for vacancy rates to fall further.

Average Vacancy (Tokyo Business District,
LHS)

(JPY/
Tsubo)
25,000Source: Nomura Asset Management based on data from Sanki Shoji

Rising vacancy rate at logistics facilities, but rental rates are stable
Strong demand for advanced logistics facilities

Figure 6. Logistics facility market (Tokyo area)

remains consistent, driven by the expansion of e-(January 2016 to October 2023, quarterly)commerce and the need for logistics restructuring.

(%)(JPY/Tsubo)

However, the pace of new logistics facility supply has

4,900

accelerated, leading to an upward trend in vacancy

Market Rent (LHS)
Vacancy Rate (RHS)

7

rates. Despite the high rental costs for newly

4,700

supplied logistics facilities, average rental asking

4,500

5

properties owned by logistics REITs still remain

4,300

4

relatively cheap, leading to continued increases in

4,100

3

3,900

2

3,700

1

rates have remained stable. Rents for existing

cash flow due to rising rents. In the medium-term,
there is some possibility of a slowdown in new
logistics facility supply due to rising development
costs like land and construction expenses, and it will

3,500
Jan-16

be important to monitor whether this results in an
improvement in the supply and demand dynamics ofJan-18Jan-20Jan-22

60

Source: Nomura Asset Management, based on data from Ichigo Real
Estate Service.

logistics facilities.

*This commentary contains the personal views of the author and does not necessarily represent the house view.

13

NAM Investment Outlook Winter 2024

Bond and Currency Market Outlook
A pivot to interest rate cuts by the Federal Reserve will
trigger a turnaround in bond and currency markets

Wataru Kato
Senior Portfolio Manager

Yuji Maeda
Head of Investment,
Global Fixed Income

High volatility seen in the bond market
Figure 1. Changes in Government Bond Yields

As major central banks shifted their monetary
policies from tightening to interest rate maintenance,
the bond market saw a volatile turn of events. The
yield on the 10-year US Treasury note reached 5%
in October, the first time since 2007, as markets
expected the Fed to maintain its policy rate atelevated levels for an extended period. However, as
inflation decelerated and signs of a slowdown
appeared in the previously robust labor market, thebond yields rapidly declined. Following theDecember FOMC meeting, where there was a
growing impression that the Fed might be poised totransition to an interest rate cut sometime during2024, the yield on the 10-year US Treasury note fell
further, dropping below 4%.

(January 2, 2019 – December 16 2023, daily)

(%)
6
5
4

US 2Y T-Note
US 10Y T-Note
US 30Y T-Bond
German 10Y Bond
UK 10Y Gilt
JGB 10Y3
2
1
0-1
Jan-19Jan-20Jan-21

Jan-22

Jan-23

Note: Yield is Bloomberg Generic
Source: Nomura Asset Management based on Bloomberg data

Timing of FRB’s policy shift towards an interest rate cut
Based on the policy interest rate outlook issued by
FOMC members in December, the so called “dot-plot”
implied that the Fed might implement a total of 75
basis points in interest rate cuts during 2024. We also
expect the Fed to lower interest rates in 2024 as the
US economy falls into recession. In Europe, we arealso expecting the ECB to implement policy rate cuts
more rapidly than the Fed in 2024. While ECB
President Lagarde stated there was no discussion
about cutting interest rates at the December meeting,
we think there is a strong possibility of a policy shiftconsidering the slowing of inflation and weakereconomic conditions compared to the US.

cuts. 2024 is poised to become a year of significant
policy shift in monetary conditions.
While we are already observing signs of this shift, we
also anticipate a change in market trends as monetary
policy undergoes a significant transition. In the bondmarket, we expect a downward trend in yields, while inthe currency market, there is some risk of a weaker
US dollar and the potential for a significant rebound in
the Japanese yen, depending on the policy stance of
the Bank of Japan. With this substantial shift inmonetary policy, we believe there is a need to remain
cautious about the potential for significant market
changes.

Major central banks have implemented significant andunusually rapid interest rate hikes from 2022 to 2023
in response to accelerating inflation. However, we
believe 2024 will bring a policy reversal, with many
central banks beginning to implement interest rate

14

NAM Investment Outlook Winter 2024

US economy expected to head into recession
Figure 2. US CPI and Labor Market

Based on the cumulative adverse effects of the steep
rise in policy interest rates, we expect the US
economy to slip into recession during the first half of2024. In the US, the consumer price index (CPI)
inflation rate, which had previously reached 9%, aregradually easing into the 3% range, alleviating
inflationary pressures. On the economic front,
personal consumption has been robust so far, but weanticipate some weakening of consumption as
households draw down their excess savings. While
the job market remains robust with an unemployment
rate in the high 3% range, there are indications thatlabor market conditions could deteriorate, such as arising number of continuing jobless claims and a
decline in job openings.

(January 2008 to November 2023, monthly)
(%)

10
8

(cases, k)
8,000

CPI Monthly YoY (LHS)
Continued Claims (Insured
Unemployment) (RHS)

7,000

6

6,000

4

5,000

2

4,000

0

3,000

-2

2,000

-4

Jan-08Jan-11

Jan-14Jan-17Jan-20Jan-23

1,000

Note: Chart truncated for 2020 to highlight most recent moves.
Source: Nomura Asset Management based on Bloomberg data

Bond yields could fall further as Fed pivots towards an interest rate cut

The US bond market has seen a significant decreasein yields since their October peak, factoring in thepotential for the Fed to cut interest rates at a fasterpace than indicated at the December FOMC meeting.
However, we still believe there is room for bond yields
to fall further. According to the FOMC's outlook, theFed anticipates that the US economy will remain firm
and avoid a recession. Although the economic dragfrom the series of rapid interest rate hikes has not yet
been fully realized, we forecast that the sustained highlevel of policy rates, stabilizing around the mid-5%
range, will gradually begin to weigh on both consumer
and corporate spending.

to a further decrease in bond yields. However, a rapid
decline in long-term bond yields, along with the easing
financial environment due to the high stock prices,
also poses the risk of quickly reigniting economic
growth and inflation. We therefore need to remain
cautious. However, with high sustained policy rates
gradually exerting downward pressure on economic
growth, we anticipate that the US economy is heading
towards a recession.

We anticipate that as inflation decelerates and thehitherto robust labor market shows further signs ofslowing down, there is an increased likelihood of the
FRB taking a more proactive stance on interest ratecuts to prevent a recession. This could potentially lead

15

NAM Investment Outlook Winter 2024

US dollar is expected to remain on a downward trend
Given the anticipation of a slowdown in the US
economy and potential future policy rate cuts by theFederal Reserve, we expect the US dollar to comeunder downward pressure in the currency market.
The US dollar saw a significant appreciation from thesecond half of 2021 to 2022 amid rapid interest rate
tightening. However, with the possible shift in the
FRB’s monetary policy towards rate cuts, we can
expect the US dollar to depreciate on the foreignexchange market.

Figure 3. JPY/USD and USD/EUR(Jan 2, 2019 to December 15, 2023, daily）(JPY/USD)
160
150

During periods of economic downturn in the US andEurope, there is a possibility that the US dollar could
experience a temporary safe-haven rally in response
to market risk-aversion. However, as the FRB takes
more active measures to lower interest rates in lightof an economic recession, we ultimately expect the
US dollar to depreciate..

(USD/EUR, inverse scale)
0.95

JPY/USD (LHS)

1.00

USD/EUR (RHS)

140

1.05

130

1.10

120

1.15

110

1.20

100
Jan-19Jan-20Jan-21

Jan-22

Jan-23

1.25

Source: Nomura Asset Management based on Bloomberg data

Risk of a rapid appreciation of the yen
In the context of an overall weakening of the US dollar,
especially once the Fed starts to cut interest rates, we
anticipate that the yen will likely appreciate against
the US dollar. We expect the Bank of Japan to lift its
negative interest rate policy in the latter half of 2024
and then aim to move gradually away from its
unconventional monetary easing policy. With
overseas central banks expected to be uniformly
implementing interest rate cuts, while the Bank ofJapan conducts rate hikes, the contrasting direction ofmonetary policy between these overseas central
banks and the Bank of Japan may lead to yen
appreciation.

negative interest rate policy. If the Bank of Japan's
rate hikes are gradual and limited in scale, then the
upward pressure on the yen could be muted.
However, there is a risk that the unwinding ofaccumulated short yen positions, which have
expanded due to the widening interest rate
differentials, could occur due to the transition ofmonetary policies domestically and overseas. Even if
the interest rate differentials between overseas
central banks and the Bank of Japan remains, as theinterest rate spread narrows, the market must be
attentive to the potential for significant yen
appreciation as those short yen positions are
unwound.

However, considering the vulnerability of personal
consumption in the Japanese economy, we believe it
will be difficult for the Bank of Japan to carry out
consecutive rate hikes soon after abandoning its

16NAM Investment Outlook Winter 2024

Macroeconomic Environment Outlook

Global Economic Outlook 1– Base Case Scenario
Slowdown in growth and the start of rate cuts expected in 2024
We expect further economic slowdown ahead
We forecast that the US economy will be inrecession with rising unemployment rates due to theeffect of tight monetary policy on the real economy
with a certain time lag. We believe that the preCOVID low interest rate environment that lasted for along time and the liquidity supply during the COVID19 pandemic, among other things, have mitigated theimpact of rate hikes, but such effects will likely fadeaway. In fact, households’ credit card loandelinquency rates are rising, which suggests that
consumption will be suppressed. In addition,businesses are facing the need to refinance debts
that they borrowed in the low interest-rateenvironment. We expect that the current high interest
rates will work to slow economic growth, and as aresult, inflationary pressures will also decrease.

Figure 1. US Lending Rates of New Loans to Small andMedium-sized Businesses(January - March 2018 – April - June 2023, quarterly)

9(%)
New fixed-rate

8

New variable-rate

7
6
5
4
3
2
1
0
2018

2019

2020

2021

2022

2023

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

We expect rate cuts to start in mid-year
The Federal Open Market Committee (FOMC) kept
the federal funds rate unchanged at its meeting heldin December 2023 for three meetings in a row. The
federal funds rate outlook (median) by the FOMC
participants suggests the end of hike rates and arate cut by 0.75 percentage points in 2024. This is
close to the forecast that we have presented
previously.

Figure 2. Federal Funds Rate Outlook by FOMC
Participants (Median)
6.0

(%)

As of Mar 2023
As of Jun 2023

5.5

As of Sep 2023

5.0

As of Dec 2023

4.5

We maintain our view that under our moderaterecession and lower inflation scenario, the US andEuropean central banks will decide to cut interest
rates in a phased manner in and after mid-2024 inorder to adjust the degree of monetary tightening. If
the central banks are flexible to implement policy
operations, the economy is expected to start moving
toward stabilization in the second half of 2024.

4.0
3.5
3.0
2.5
2.0

2023

2024

2025

2026

Source: Nomura Asset Management based on the Fed data

17

NAM Investment Outlook Winter 2024

Global Economic Outlook 2– Risk Scenario
Risk balance is currently tilted toward upside from the somewhat conservative base casescenario
Upside risk: A recession will be avoided
According to the GDP Now, US real GDP for
October-December 2023, estimated by the Federal
Reserve Bank of Atlanta, is up approximately 2.7%
on a quarterly year-on-year basis (as of December
19, 2023), indicating the consistent healthy growth.

Figure 1. US Real Income Environment(January 2015 - November 2023, monthly)(YoY, %)
10

Real wage

8

In 2024, a so-called “soft landing” scenario, in whicha recession is avoided while inflation continues to bemoderate, may play out.

CPI
Nominal wage

6
4

Given the positive real wage growth since 2023, wecannot deny the possibility that the economy willcontinue to grow at a moderate speed as the real
income environment will support consumption. On
the other hand, the labor participation rate in thelabor market is trending upward. It is also possiblethat inflation rates will continue to decline on theback of increasing labor supply, and growth andinflation control will be achieved at the same time.

2
0
-2
-4

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 by deducting
year-on-year percentage changes in CPI from year-on-year percentagechanges in nominal wage.
Source: Nomura Asset Management based on data published by theFederal Reserve Bank of Atlanta and CEIC data

Downside risk: A severe recession or shock will occur
Our base case scenario is that the US and European
economies will dip to negative growth with rising
unemployment rates in the first half of 2024, but can
avoid a severe recession.

Figure 2. Loan Demand of US Small andMedium-sized Businesses(January 2015 - October 2023, Quarterly)(DI, %)

However, according to survey results, loan demandof small and medium-sized businesses is weak, andlending standard is tightening. Under a high interest
rate environment, businesses may act moreconservatively than expected.
If inflation is re-accelerated, central banks may cut
rates in a cautious manner, in which case clear
bottoming out of economy may not be observed
anytime soon.

(DI, %)

30

Loan demand（LHS）

-40

20

Credit standard
（RHS）

-20

10
0

0

-10

20

-20
-30
Decrease indemand -40

40
Tightening
60-50

Given that out base case scenario’s economic
outlook is rather bearish compared to themainstream view in the financial market, we see thatthe risk balance is tilted somewhat toward upside.

-60

15

16

17

18

19

20

Note: Senior Loan Officer Opinion Survey
Source: NAM based on CEIC data

18

21

22

23 (Yr)80

NAM Investment Outlook Winter 2024

Global Economic Outlook 3– Economic Cycle
There is a risk that the global Composite Leading Indicators will start worsening again
There is a risk that the global Composite Leading Indicators will start worsening again
The Composite Leading Indicator (CLI) of theOrganization for Economic Co-operation andDevelopment (OECD) currently remains almost flat.
Although the current situation is technically defined
as a recovery phase, the pace of recovery is very
weak compared to similar period in the past.

Figure 1. Changes in OECD Composite Leading Indicators(November 2022 - November 2023, monthly)(Historical Average = 100)

103
102

In the past, most similar periods were followed by an
expansion phase as the Indicator rose above thehistorical average of 100. On the other hand, theIndicator may fail to reach 100 this time and start toworsen again. In recent years, this happened in 2002
after the IT bubble and in 1991 after the collapse of
the bubble economy.

101
100
99
98
97

Unlike developed countries/regions, the ChineseComposite Leading Indicator remains strong.
However, as the Indicator has deviated upward fromgrowth forecasts and other economic statistics, there
is a risk that the Chinese Composite Leading may
also start worsening temporarily.

Nov-22GlobalMar-23May-23

US

EuropeJan-23

Jul-23

Sep-23

Nov-23

Japan

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

Interest rate and hedged foreign bond investment environments unlike those in past similar periods
In past recovery phases, interest rate cuts had
started earlier, and the monetary easing contributed
to the economic transition. However, the current
cycle has moved to a recovery phase without going
through monetary easing, and this has likely
prevented the economy from reaching a full-fledged
recovery.

Figure 2. Changes in US Policy Rates in Similar Periods
over the Past Year
(Similar Periods in Economic Cycles in and after 1970)(%pt)
4
Latest2

In such an environment, hedged foreign bonds inparticular among financial assets have been
negatively affected in 2023. Usually, the investment
environment for hedged foreign bonds improves
most during the period of monetary easing. However,in the current cycle, their return on investment has
worsened significantly due to the double factors ofhigh policy rates (hedging cost) in the US and Europe
and rising long-term interest rates. The investment
environment for hedged foreign bonds is expected to
improve going forward as long-term interest rates will
start to decline. On the other hand, the hedging costburden will likely remain for the time being.

0
-2
-4
-6
Prev.
12M

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

19

NAM Investment Outlook Winter 2024

US
Although soft landing expectations are rising, ultimate inflation control would require an
economic downturn
US economy remains resilient
The US economy is slowing down, but remains resilient.
While the effect of rate hikes is taking time to realize,
employment and wage growth has slowed, but remains
at high levels, supporting the expansion of consumption.
That said, as inflation continues to moderate,
expectations are rising for soft landing that achieves
inflation targets while avoiding recession. However, theslowing inflation so far has been led by the moderationof inflationary pressures from supply-side factors, suchas the normalization of distribution network. To achieve
2% inflation rate set by FRB with steady decline ininflation, changes in demand-side factors, such as amoderate recession or deterioration of the labor market,
will also be necessary. As the effect of rate hikes is
expected to get even stronger, we forecast an
economic downturn and moderation of inflationarypressures from demand-side factors in 2024.

Figure 1. US Employees and Average Hourly Earnings(From 2018 January to 2023 November, monthly)
Employees(yoy, %)

Average hourly earnings

8
6
4
2
0
-2

19

20

21

22

23

(yr)

Note: “Employees” are employees in the non-farm sector. Some of theemployee 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.

Although the FRB is increasingly confident in forecasting more moderate inflation, uncertainties remain
At its meeting in December, the Federal Open Market
Figure 2. FOMC Participants' Assessments ofRisks Around their Inflation Outlook

Committee (FOMC) decided to keep interest rates
unchanged in the three consecutive meetings. The
participants has shown a scenario that is close to “soft(Number of participants)
15
September FOMC

landing” as before. Regarding the risk in inflation
outlook, the number of participants who answered“upside” has decreased and the number of participants

12

December FOMC

who answered “largely balanced” increased since
September.

FOMC

participants

appearto9

beincreasingly confident about continued moderation of

6

inflation. That said, whether a “soft landing” scenario will
be realized or not, remains uncertain. While FOMC

3

participants foresee rate cuts by 0.75 percentage points
through 2024, if the rate cuts start too early, there is a0risk that inflationary pressures will increase with the reacceleration of economy. On the other hand, if they
start to be late, the economy may be dragged down too

Weighted toownsideBroadlybalanced

Weighted to
upsideNote: The number of participants who indicated “weighted to downside” waszero at both times.
Source: Nomura Asset Management based on data published by the FRB
datamuch. 2024 will be a very tough year for the FRB.

20

NAM Investment Outlook Winter 2024

Eurozone
While Euro economies are stagnated, it is taking time for wages and prices to be moderateWith continued stagnation, inflation is trending downward, but service inflation remains at high levels
The Eurozone economy continues to stagnate.
Following negative growth in July-September 2023, theEurozone Purchasing Managers’ Index (PMI) for
October-December has remained below the turning
point of 50, suggesting that the economy continues tostagnate. The effect of rate hikes by the European
Central Bank (ECB) appears to be getting stronger.
The pace of job growth has slowed in the major euroeconomies, and unemployment is increasing in somecountries. However, moderation of price increase has
been delayed. Inflation rates are trending downward on
the back of the fading effect of rises in energy prices in
the past, but remain at high levels. It appears that
economic stagnation and weakness in the labor market
are taking time to moderate inflationary pressure
through wages. Attention is called to whether further
softening of the labor market due to the effect of rate
hikes will lead through wages to the moderation of
inflationary pressures including service prices.

Figure 1. Eurozone PMI(January 2019 - December 2023, monthly)
(pts)
66
64
62
60
58
56
54
52
50
48
46
44
42
40

Composite
Manufacturing
Services

19

20

21

22

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 ECB intends to wait and ascertain the effect from economy to wages
At its Governing Council meeting in December, theECB decided to keep interest rates unchanged in thetwo consecutive meetings and released a statement
indicating that an additional rate hike is unlikely.
However, there is a high hurdle for the central bank tostart cutting rates. While the new ECB Staff outlook
has forecast that the core inflation rate (excluding
energy and food prices) will remain slightly above 2%
through 2026, ECB President Christine Lagarde said
that “we did not discuss rate cuts at all,” indicating that
the ECB’s cautionary stance on inflation has not beenchanged. The President also pointed out that “we will
receive a lot of data in the first half of 2024,”
suggesting that ECB is unlikely to cut rates in the first
half. The ECB intends to wait and ascertain the effectfrom economic downturn to wages and prices.
However, as the risk of excessive downward pressure
on the economy from high interest rates is increasing,the ECB is facing difficult management of monetary
policies.

Figure 2. Economic Outlook by ECB Staff（Unit: annual percentage changes）
2023

2024

2025

2026

December
2023

0.6

0.8

1.5

1.5

September
2023

0.7

1.0

1.5

-

December
2023

5.0

2.7

2.3

2.1

September
2023

5.1

2.9

2.2

-

GDP
growthHICP
core
inflation

Note: Core inflation excludes energy and foods.
Source: Nomura Asset Management based on ECB materials

21NAM Investment Outlook Winter 2024Japan
The Bank of Japan is expected to abandon its negative interest rate policy in the second half of 2024
Wage increase rates in annual spring negotiations with labor unions in 2024 likely to exceed 2023 results
Real wages (Monthly Labor Survey) in October 2023
were down 2.3% year on year, and inflation rates
have remained above wage growth rates for morethan one and a half years. However, the real income
environment is expected to improve in the second
half of 2024.

Figure 1. Factors Considered to Be Importantby Businesses in Revising Wages(2005 - 2023, yearly)

(%)
80
70

Among factors considered to be important bybusinesses in revising wages, the highest percentageof respondents indicated corporate profits as animportant factor, but the percentage of respondents
who indicated maintenance of employment as animportant factor has increased in recent years. As
labor shortage is increasingly recognized as astructural problem, businesses may start maintaining
steady wage growth regardless of corporate profits.
According to the Financial Statements Statistics ofCorporations by Industry, corporate earnings
currently remain at record high levels. There is agood chance that wage increase rates in annual
spring negotiations in 2024 will exceed 2023 results.

60
50
Corporate profits

40

Maintenance of employment + Securing andestablishing workforce
Price trend

30
20
10
0

05

07

09

11

13

15

17

19

21

23
(yr)

Source: Nomura Asset Management based on MHLW data

The Bank of Japan is expected to change its policy in the second half of 2024
Figure 2. Prices and Wages

Amid rising expectations for early rate hikes, theBank of Japan (BOJ) decided at its monetary policy
meeting in December 2023 to keep interest rates
unchanged and maintained the same expression
regarding its future policy direction.

(January 2000 – October 2023, monthly)(yoy, %)
4
3
2

At the press conference after the monetary policy
meeting, BOJ Governor Ueda said that the certainty
of sustainable and stable achievement of pricestabilization target is gradually increasing by referringto the moderate rises in service prices, but also
stated that it takes more time to ascertain thevirtuous cycle of wages and prices.

CPI(General services)
Nominal wage index(scheduled, full time)

1
0
-1
-2
-3

The BOJ’s policy decisions will be affected not only
by wage and price trends in Japan, but also bypolitical situations and trends in overseas economies.
For the BOJ, the cost of waiting for several months
before changing its policy would be low. If downside
risks in overseas economies surface in the first halfof 2024, the focus of attention will likely be on themeeting in July or October 2024.

-400 02 04 06 08 10 12 14 16 18 20 22(yr)

Source: Nomura Asset Management based on data from the Statistics
Bureau, MIC and CEIC

22

NAM Investment Outlook Winter 2024

China
A tug of war between policy support and structural problems
Policy support to stabilize the economy, but downward pressure to remain due to structural problem
We expect that the Chinese economy will gradually
start stabilizing with policy support in 2024. In
particular, the additional infrastructure investments ofabout 1 trillion yuan (equivalent to 0.8% of GDP in2022) approved in October 2023 is expected to boost
domestic demand in the first half of 2024.

Figure 1. Fixed Asset Investment(January 1990 - November 2023, monthly)(yoy,%)
30
20

However, the recovery momentum will likely lackstrength because of the following two reasons. First, if
the US and European economies fall into a recession,
it will be a drag on the Chinese economy through thedeceleration of exports. Second, various problems
currently faced by the Chinese economy will continue
going forward. In particular, activities in the real estatemarket are unlikely to improve markedly in 2024. The
stagnant real estate market is expected to cause
negative impacts on the economy mainly through thenegative wealth effect of falling housing prices on
consumption and increasing pressure on local
government finance due to decrease in proceeds fromthe sales of land use rights.

10
0
-10
Manufacturing

-20
-30

Real Estate
Infrastructure
19

20

21

22

23

(yr)

Note: Year-on-year percentage changes are calculated for each monthby Nomura Asset Management based on year-to-date data published by
the National Bureau of Statistics of China. Some of the data for certain
periods are not displayed for the latest trends to be easier to see.
Source: Nomura Asset Management based on CEIC data

Large stimulus packages should not overly be expected
Chinese leadership may maintain the 2024 growthtarget at around 5.0% in order to prevent any
expectations for further economic slowdown. Givensuch target setting, our growth forecast of low 4% may
appear to be too low. However, we expect that the
government will accept somewhat low economic
growth rates and it will not forcefully stimulate theeconomy to meet the growth target.

Figure 2. 2-year Average Real GDP Growth Rates(Jan-Mar 2019 – Oct-Dec 2024, quarterly)(yoy,%)
7

6

The growth rate for 2023 was inflated due to the lowlevel in 2022 and overstates the reality of the economy.
There will be no such padding effect in 2024. In
addition, given the nation’s demography and stagnationin the real estate market, the potential growth rate of
the Chinese economy may have dropped to low 4%.
Trying forcibly to overcome this with economic stimulus
would cause adverse side effects and contradict the
government’s stance of prioritizing financial stability.

Forecast

5

4

3

19

20

21

22

23

24

(yr)

Note: Some of the data for certain periods are not displayed for the latest
trends to be easier to see.
Source: Nomura Asset Management based on CEIC data

23

NAM Investment Outlook Winter 2024

Emerging
Headwinds are expected to moderate toward the second half of 2024

Economy, inflation, and policy rates are all in the process of normalization
In 2023, many emerging economies remained below
their potential growth rates due to the effect ofsignificant rate hikes. At the same time, inflation has
been steadily slowing, and some of the central banks
have already started rate cuts.

Figure 1. Exports of Goods and Services(2022)(% of GDP)80

If the US and European economies fall into a
recession in the first half of 2024, emerging
economies will also be hit particularly if their degreeof dependence on external demand is high. However,if the recession proves to be short-lived and the US
switches to monetary easing, emerging countries will
have further room for rate cuts, and their economies
will be headed for relatively early recovery. The
stabilization of the Chinese economy should also
gradually mitigate headwinds against emerging
countries. In emerging countries, their economies,
inflation, and policy rates will all move towardnormalization through the end of 2024.

70
60
50
40
30
20
10

Brazil

India

Indonesia

Philippines

South Africa

TurkeyMexicoKorea

Thailand

Malaysia

0

Source: Nomura Asset Management based on World Bank data

Pay attention on the degree of dependence on external demand and room for rate cuts
The themes in emerging economies that should draw
our attention are the degree of dependence on
external demand and room for rate cuts.

Figure 2. Real Policy Rates and Policy Rate
Gap with the US(As of the end of November 2023)
Policy Rate gap with the US (%pt)

Malaysia and Thailand, for example, are expected tobe easily affected by fluctuations in global economy
due to their high degree of dependence on external
demand. On the other hand, countries with a highproportion of domestic demand, such as Brazil andIndia, are likely to continue to achieve relatively
stable growth.
In order to assess room for rate cuts by observing thedegree of monetary tightening in the domestic market(real policy rates) and risk of capital outflow (policy
rate gap with the US), countries in Latin America
generally have larger room for rate cuts. In Asia,
certain room for adjusting monetary tightening has
emerged as inflation slows. However, given the rate
gap with the US, central banks of emerging countries
are expected to start cutting rates only after
ascertaining that the US has switched to easing
monetary policies.

8

Brazil6
Mexico42South Africa

India

Philippines
Indonesia

0
Korea
-2
-4

Malaysia

02

Thailand4

6

8

Real Policy Rate (%pt)

Note: Real policy rates are calculated by subtracting inflation rates
from nominal policy rates. The upper limit of the federal funds
target range is used as US policy rates.
Source: Nomura Asset Management based on Bloomberg data

24

NAM Investment Outlook Winter 2024

Globl Financial Market Forecast
2023
Q1

2024
Q2

Q3

2021

Q4

Q1

Q2

F

F

F

2022

2023

2024

F

F

Real GDP

World

*1,*4

2.4

3.1

2.8

2.7

2.0

1.8

6.3

2.9

2.8

1.7

(qoq, ann, %)Developed

*2

1.9

1.6

2.2

0.9

-0.6

-0.1

5.6

2.6

1.7

0.5

Emerging

*1,*3

3.7

5.2

4.6

4.4

3.7

3.6

7.4

3.4

4.5

3.6

United States

2.2

2.1

5.2

1.8

-0.7

-0.4

5.8

1.9

2.5

1.0

Eurozone

0.4

0.5

-0.5

-0.5

-0.9

0.0

5.9

3.4

0.5

-0.3

Japan

5.0

3.6

-2.9

1.1

0.5

0.8

2.6

1.0

2.0

0.5

China

*1

4.5

6.3

4.9

5.1

4.1

4.5

8.4

3.0

5.2

4.3

CPI

World

*4

5.9

4.2

4.0

3.5

3.3

3.4

3.2

7.0

4.4

3.2

(yoy, %)Developed

*2

6.5

4.9

4.1

3.2

3.1

2.8

3.3

7.5

4.7

2.7

Emerging

*3

4.9

3.1

3.7

3.8

3.8

4.5

3.0

6.2

3.9

4.1

United States

5.8

4.1

3.6

3.3

3.2

3.0

4.7

8.0

4.1

3.0

Eurozone

8.0

6.2

4.9

2.9

2.6

2.2

2.6

8.4

5.5

2.0
2.4

Japan

*5

China
*6

3.5

3.3

3.0

2.8

2.7

2.5

-0.2

2.3

3.1

1.3

0.1

-0.1

-0.3

-0.3

1.0

0.9

2.0

0.3

1.1

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

0.00

China

*6

3.65

3.55

3.45

3.45

3.45

3.45

3.80

3.65

3.45

3.45

10-Year GB Yield

United States

3.47

3.84

4.57

3.88

3.90

3.80

1.51

3.87

3.88

3.60

(End of Period, %)Germany

2.29

2.39

2.84

2.02

2.00

2.00

-0.18

2.57

2.02

1.90

Japan

0.35

0.40

0.77

0.61

0.60

0.60

0.07

0.42

0.61

0.80

Equity Index

S&P500

4,109

4,450

4,288

4,770

4,610

4,760

4,766

3,840

4,770

5,120

(End of Period, Point)

EURO300

1,811

1,832

1,785

1,889

1,840

1,880

1,890

1,678

1,889

1,970

TOPIX

2,004

2,289

2,323

2,366

2,230

2,260

1,992

1,892

2,366

2,380
1,030

MSCI EM ($)

990

989

953

1,024

960

980

1,232

956

1,024

Currency

USD/EUR

1.09

1.09

1.06

1.10

1.09

1.08

1.14

1.07

1.10

1.11

(End of Period)

JPY/USD

133.1

144.5

149.2

141.0

142.0

138.0

115.2

131.9

141.0

133.0

JPY/EUR

144.6

157.7

158.0

155.7

155.0

149.0

131.0

140.8

155.7

148.0

RMB/USD

6.87

7.26

7.30

7.09

7.20

7.20

6.37

6.95

7.09

7.10

2021

2022

2023

2024

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

83.2
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
5.00
9.00
9.00
7.50

Turkey *6

14.00

9.04

42.50

35.00

F
Currency(Per USD,
End of Period)

Policy Interest Rate(%)

Note: Forecast as of December 18, 2023. 1) YoY, 2) GDP weighted average of US, 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 Management25Index Hedge Clause
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