Nikko Asset Management says Donald Trump will deliver strong returns for stocks in 2017

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It’s safe to say that Nikko Asset Management thinks Donald Trump will deliver a much-needed boost to the global economy when he becomes US president in just under a month.

And that’s bullish for global stocks, it says, particularly in the United States.

“This is the most positive view that the Global Investment Committee has had on global equities in a long time,” Nikko wrote on Friday.

“Although the surprising Trump victory carries many uncertainties, the net effect for global economic growth and corporate profits has clearly improved. This justifies an overweight stance on global equities, particularly for the United States and the Developed Pacific ex-Japan region.”

The group is forecasting that the US S&P 500 index will close the first half of 2017 at 2,478, up 10.7% from its current level, before rising to 2,533 by this time next year.

If correct, that would mark a return of 12% in just 12 months.

US S&P 500 Weekly Chart

“Although there is uncertainty about how Trump will deliver, the GIC believes his goal is clear: to spur investment and create new jobs in the United States through lower corporate taxes and decreased regulation.”

As a result, Nikko is forecasting that the US Federal Reserve will lift rates once a quarter in the first nine months of the year, something that has made the group bullish on the outlook for the US dollar.

While it expects that gains will be limited in US dollar terms, Nikko says there will be positive spillover effects in other major markets such as Europe and Japan, forecasting some hefty gains for stocks in both regions in local currency terms.

“Both European and Japanese equities are expected to perform well in local currency terms, backed by strong US and global growth,” it says.

On Japan, it says that the outlook in yen terms is positive due to an expected improvement in corporate earnings, assisted by a weaker yen and stronger economic growth, both domestically and abroad.

“As the global economy continues to expand, the Japanese economy will likely grow well above its trend, driven by improved consumer and corporate sentiment, as well as improvements in net trade.”

Nikko sees the TOPIX index rising by 10.1% in local currency terms in the first half of 2017. It also expects the MSCI Europe index increasing by 8% in euro-denominated terms over the same period.

Perhaps underscoring the group’s bullish view, and signalling that the recent capital shift from bonds to stocks will continue into 2017, Nikko sees benchmark 10-year yields rising in the US, Japan and Eurozone.

“For US 10-year treasuries, the committee’s forecast for the end of June is 2.85%, while those for 10-year Japanese government bonds (JGB) and German bunds are 0.25% and 0.65%, respectively,” it says.

Nikko also expects a less dovish monetary policy stance from the Bank of Japan, forecasting that it will shift up its 10-year JGB yield target by 20 basis points in both the June and December quarters next year.

Although the view expressed by Nikko is not all that unusual — many groups expect US bond yields, the US dollar and US stocks to lift further in 2017 — it’s certainly on the more optimistic side of the forecasting spectrum.

Right now a lot of good news has already been priced in, potentially leading to disappointment should these lofty expectations not be delivered.

And that’s even before Trump’s foreign policies are considered, another area where the risks are almost certainly slanted to the downside.

Markets will receive greater clarity on these areas soon enough.

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