Viewpoint | Citi Research 12 Aug 2024 01:10:13 ET | 28 pages South Africa Economics and Equities Two-pot retirement reform to boost GDP with stock implications CITI'S TAKE We expect the two-pot retirement reform (effective 1 September 2024) to boost GDP growth to 2.0% by 2025. We see upside for South African equities given the expected positive impact on consumption, namely for consumer stocks, while the impact on banks is likely to be more nuanced given our expectation that the reform will lead to repaymen ...

Investment Rating - The report maintains an underweight rating on Consumer Cyclicals due to a shift towards non-discretionary spending among low and mid-income consumers [6]. Core Insights - The report highlights a focus on labor markets as a key determinant for economic cycles, with expectations of a soft landing despite weak July data [6]. - There is an anticipated increase in corporate actions in the second half of 2024, driven by elevated cash levels and lower back-end rates, with buybacks projected to exceed $1 trillion [6]. - Mentions of "AI" are at all-time highs, indicating a strong trend towards efficiency and adoption in various sectors [51]. Summary by Sections Key Takeaways - Underweight stance on Consumer Cyclicals due to increased non-discretionary spending [6]. - Labor market dynamics are crucial for economic outlook, with a soft landing expected [6]. - Corporate actions, including M&A and buybacks, are projected to rise in 2H24 [6]. Corporate Mentions - Mentions of "Inflation" are stabilizing, indicating a shift in corporate focus [11]. - Hiring intentions are decreasing, while mentions of layoffs remain consistent [12]. - Corporate mentions of "Free Cash Flow" have reached an all-time high, reflecting a focus on capital allocation [23]. Industry Breakdown - The report provides a sector heat map indicating varying levels of cost pressures and pricing power across industries [29]. - Mentions of "Labor Shortage" and "Labor Costs" are significant, highlighting ongoing challenges in workforce management [38]. - The transportation costs are increasingly being discussed, reflecting concerns over freight and shipping expenses [72]. Trends and Themes - Key themes for 2024 include AI, longevity, and decarbonization, indicating a forward-looking approach to investment strategies [26]. - The report notes a mixed consumer outlook, with both strength and weakness being reported by companies [19]. - Pricing power remains a critical topic, with various sectors experiencing different levels of cost inflation and margin pressures [64][73].

Industry Investment Rating - The report maintains an **In-Line** rating for the technology sector, with specific sub-sectors such as **Greater China Technology Semiconductors**, **Electronic Components Japan**, and **IT Hardware** also rated as **In-Line** [1] - The **North America Semiconductors** sector is rated as **Attractive**, indicating a positive outlook for semiconductor companies in this region [1] Core Report Insights - The report highlights a median expectation of **37% Y/Y growth** for NVIDIA-related stocks and **14% Y/Y growth** for non-NVIDIA-related stocks in 2025 [1] - Global cloud capex is expected to grow **20-25% Y/Y** in 2025, significantly higher than the current tracker of **8% growth** [1] - The report introduces a **4 X 4 Matrix** to map out 16 scenarios for cloud capex growth, helping investors assess upside and downside risks for 46 covered stocks [1] Cloud Capex and AI Investment - The report emphasizes the importance of **AI cloud investment**, particularly in areas like **networking**, **CPU servers**, and **utilities**, as the technology landscape evolves [1] - NVIDIA-related capex is projected to grow **37% Y/Y** in 2025, driven by strong demand for AI infrastructure, while non-NVIDIA capex is expected to grow **14% Y/Y** [1] - The report identifies **Wiwynn** and **Advantest** as outliers with significant growth potential in the AI supply chain [1] Key Companies and Stock Implications - **TSMC** is expected to see tight supply for leading-edge foundry capacity in 2025, with potential price hikes for CoWoS capacity by **20%** [9] - **MediaTek** is expanding its partnership with Arm to develop server CPUs, positioning itself as a competitor to NVIDIA in the AI chip market [10] - **Alchip** is projected to see **>50% Y/Y growth** in AWS project revenue, driven by 7nm projects [11] - **Aspeed** is highlighted as a key NVIDIA-related play, with its new AST2700 chip expected to gain traction due to its integration of the LTPI protocol [12] - **Dell Technologies** is positioned to benefit from AI server demand, with **50k HGX AI server builds** expected in 2024, potentially driving **$11B in AI server revenue** in FY25 [14] NVIDIA and Competitors - **NVIDIA** is expected to see **18% Y/Y growth** in datacenter revenue in 2025, driven by strong demand for its Blackwell and Rubin platforms [15] - **Broadcom** is projected to grow its AI exposure, with non-AI semis expected to rebound in late 2025 [16] - **Marvell** is seen as a beneficiary of AI growth but remains **Equal-Weight** due to valuation concerns [17] Networking and Infrastructure - **Cisco** is expected to benefit from networking growth, with a **$1bn FY25 AI order target** [19] - **Arista** is positioned to capture a growing portion of the AI networking opportunity, with an incremental **$5bn AI networking opportunity** by 2027 [21] - **Infinera** and **Ciena** are expected to benefit from increased inter-data center traffic, though growth is seen as a longer-term opportunity [22][20] European Data Center Growth - The European data center market is expected to grow **5x by 2035**, driven by increased cloudification and AI adoption [126] - Key investments include **AWS's $17bn investment** in Spain and **Microsoft's £2.5bn investment** in the UK [126] Conclusion - The report concludes that **cloud capex growth** in 2025 will be driven by both NVIDIA-related and non-NVIDIA-related investments, with significant upside potential for companies in the AI supply chain [1][33]

Investment Rating - The report indicates a mixed investment rating across various sectors, with 38% of stocks rated as Overweight, 46% as Equal-weight, and 16% as Underweight [12]. Core Insights - The report highlights significant volatility in global equity and fixed income markets, with the S&P 500 index dropping over 6% and Japan's Nikkei 225 index experiencing a 20% decline before recovering [2][3]. - The changing narrative around US economic growth is identified as a core factor driving market volatility, with recent employment data raising concerns about a potential hard landing [3][4]. - The Federal Reserve's monetary policy outlook has shifted dramatically, with market expectations now pricing in over five rate cuts this year, compared to under two a month ago [3]. - The Bank of Japan's recent hawkish stance has contributed to global market fluctuations, indicating a divergence in monetary policy between the Fed and BoJ [5][6]. - In credit markets, the report suggests that recent weakness in spread products is justified, particularly in high-yield single B bonds, and recommends hedging against hard-landing risks [6]. Summary by Sections Market Overview - The S&P 500 and Nikkei 225 indices experienced significant declines in early August, with subsequent recoveries of about half of those losses [2]. - Market volatility remains elevated, with measures such as the VIX and MOVE indices reflecting ongoing uncertainty [2]. Economic Outlook - Economists maintain a base case for a resilient economy achieving a soft landing, expecting continued declines in inflation and three 25bp rate cuts in 2024 [4]. - Labor market data will be closely monitored, with a need for positive indicators to support the soft-landing thesis [4]. Monetary Policy - The Fed's path for monetary policy is under scrutiny, with a notable shift in market expectations regarding rate cuts following recent employment data [3][4]. - The BoJ's hawkish comments have led to a significant unwind of JPY carry trades, impacting global markets [5][6]. Credit Market Analysis - The report suggests that investors should consider hedges against hard-landing risks rather than liquidating cash portfolios, particularly in high-yield credit [6]. - Emerging market sovereign credit is expected to outperform high-yield credit, leading to a shift in preference [6].

Investment Rating - The report maintains a defensive stance and suggests staying with UST curve steepeners [1] Core Insights - Better-than-expected US data has improved global risk sentiment, reversing some repricing in central bank policies and exchange rates [1][5] - The upcoming US general election is expected to impact the US dollar, with a potential Republican victory likely to strengthen the dollar [1][15] - The report emphasizes the importance of monitoring US unemployment claims data as it approaches the reference period for the US establishment survey [5][11] Summary by Sections Interest Rate Strategy - In the US, the strategy includes maintaining UST 2s20s steepeners and re-entering September/November FOMC OIS flatteners [1][30] - The report anticipates a 25bp rate cut by the Fed in September, with discussions around a potential 50bp cut [1][49] Currency & Foreign Exchange - The report expects the USD to strengthen if global growth risks become a focus, particularly related to Republican campaign policies [1][15] - It discusses the implications of upcoming central bank meetings in Sweden and Norway, predicting a cut from the Riksbank and a hold from Norges Bank [1][12] Global Macro Strategy - The report highlights the significance of the US general election polling and its potential impact on market dynamics [1][8] - It notes that the breadth of weakness across industries challenges optimism regarding the labor market, as indicated by the private payroll diffusion index [5][11] Short-Duration Strategy - The report discusses the recent decline in RRP balances and the implications for funding conditions in the money markets [1][182] - It suggests that the risk of reserve scarcity is low into year-end, with expectations for higher reserves [1][191] Market Positioning - The report recommends maintaining short CAD/JPY positions and highlights the potential for further JPY appreciation if US economic data weakens [1][94][157] - It also discusses the positioning of various currencies in response to global economic conditions, emphasizing the bearish outlook for EUR and CAD [1][181]

Investment Rating - The report maintains a cautious stance on the A-share market due to rising global volatility and uncertain domestic policies, indicating a negative sentiment shift [2][5][12]. Core Insights - A-share investor sentiment has significantly declined, with the MSASI dropping to 36% (weighted) and 28% (simple), reflecting a 12ppt and 13ppt decrease respectively compared to the previous cutoff date [3][6]. - Northbound capital flows have experienced accelerated net outflows of US$2.4 billion during the first week of August, while Southbound flows have continued to show positive inflows for 24 consecutive weeks, totaling YTD net inflows of US$56.8 billion [4][11]. - The report highlights the weak export data from China, with nominal exports growing at 7.0%, below the consensus estimate of 9.5%, and a month-on-month contraction of -3.2% [5][11]. - Domestic deflationary pressures persist, particularly in the housing market, where contracted sales of major developers fell 38% year-on-year and 28% month-on-month in July [5][11]. Summary by Sections Market Sentiment - The weighted and simple MSASI indicators have dropped to 36% and 28%, indicating a notable decline in investor sentiment [3][6]. - Average daily turnover for ChiNext decreased by 12%, while A-shares and Northbound flows saw increases of 8% and 3% respectively [3][4]. Capital Flows - Northbound net outflows reached US$2.4 billion in early August, while Southbound inflows amounted to US$3.3 billion during the same period [4][11]. - Year-to-date net inflows for Northbound have declined to US$0.9 billion, contrasting with the robust Southbound inflows [4][11]. Economic Indicators - China's nominal exports data missed expectations, with a growth rate of 7.0% and a month-on-month decline of -3.2% [5][11]. - The housing market remains under pressure, with significant declines in sales and prices across major cities [5][11]. Investment Recommendations - The report suggests focusing on single stock ideas and thematic investing, particularly in SOE reform beneficiaries and high-quality dividend plays [13]. - A-shares are preferred over offshore investments, with a cautionary note on valuation premiums that have risen to 26% compared to MSCI China [13].

M Idea Japan Macro and Equity Strategy | Japan August 8, 2024 06:46 PM GMT Japan Equities and the Yen We update our JPY and equity views on the back of the recent market volatility. We also answer frequently asked questions from both fixed income and equity investors. Key Takeaways Incoming economic data may drive a further unwinding of JPY carry trades/FX- hedged activity from overseas equity investors. We retain a bullish JPY skew. We believe roughly 60% of JPY carry trades unwound, but acknowledge wide e ...

Viewpoint | Citi Research 09 Aug 2024 16:10:46 ET | 25 pages US Economics Weekly Rising unemployment is not "transitory" CITI'S TAKE The rise in the unemployment rate is the clearest sign yet that rather than achieving a "soft landing" the US economy is more likely to slide into recession. Attempts to explain away softer labor market data as a weather- related distortion are reminiscent of claims that elevated inflation would prove to be "transitory." Standard macroeconomics provides a more straightforward ...

Investment Rating - The report maintains a positive outlook on Japan's equity market, suggesting that the recent correction has been overdone and expects a rebound in valuations [2][26]. Core Insights - The report indicates that Japan's reflation journey remains on track, with expectations for the Bank of Japan (BoJ) to raise rates at a measured pace [2][4]. - The recent appreciation of the yen is expected to have implications for Japan's inflation outlook, with forecasts suggesting a moderation in headline CPI [9][10]. - The report highlights that corporate wage growth is likely to be supported despite yen appreciation, as corporates have room to sustain wage increases [11][12]. - Consumption growth in Japan is anticipated to improve, driven by positive real wage trends and temporary income tax cuts [12]. - The sensitivity of yen movements to corporate profits is noted, with a weak yen supporting corporate profitability [13]. Summary by Sections Recent US Data - The report assesses that recent US economic data points to a slowing economy, but the base case remains that the US economy is resilient [3]. BoJ Policy Outlook - The BoJ's recent hawkish communication is viewed as potentially excessive, with expectations for a gradual rate hike rather than rapid increases [4][7]. FX Appreciation and Inflation - The report incorporates FX forecasts, suggesting that sustained yen appreciation could lead to a moderation in inflation forecasts, with headline CPI expected to reach 2% in Q4 2024 [9][10]. Corporate Sector and Wage Growth - Corporates are assuming an average USDJPY of 144.8 for FY2024, indicating sufficient room for wage growth despite potential risks from yen fluctuations [11]. Consumption Growth Outlook - Private consumption momentum is expected to improve, supported by rising nominal wage growth and tax cuts [12]. Sensitivity of Yen Movements - The report notes that a 1 JPY depreciation against the USD or EUR would boost operating profits across all industries by approximately 0.4% [13]. Equity Market Volatility - The report discusses the recent volatility in the equity market, indicating a record-fast bear market and high levels of margin-financed equity ownership [21][22]. Implications for Equity Market View - The report suggests that the recent correction in Japan's equity market is overdone, with expectations for a rebound in valuations driven by structural market drivers [26][27].

Viewpoint | Citi Research 12 Aug 2024 03:13:20 ET | 26 pages UK Economics July Inflation Preview – Undershoots now, further questions into August CITI'S TAKE We expect the slew of data this week to show UK disinflation to be broadly on track. Friday's growth data will we think indicate an ongoing, supply-led recovery. We expect the labour market to have continued to soften, although uncertainties around the LFS will still merit caution. On the inflation side, we expect a downside surprise, with services inf ...