Aurelia Butler

As per BCA Research, recent revisions to U.S. economic data suggest that the odds of a recession have decreased, and the economy is stronger than previously assumed. This outlook demands a pivot from defensive sectors like Utilities and Telecoms, which typically provide downside protection in a downturn, to more growth-oriented and economically sensitive sectors that tend to thrive when economic momentum persists.BCA Research recommends increasing exposure to sectors that benefit from economic strength, such as Energy and Technology, while reducing allocations in sectors that are traditionally favored during economic slowdowns. The strategic emphasis is on positioning for a “no-landing” scenario where economic growth is sustained and monetary easing could potentially lead to overheating, rather than a recession.Defensive sectors such as Utilities and Telecoms were favored over the past quarters as investors anticipated a slowdown or recession. However, given the stronger-than-expected economic data, the value proposition of these sectors is now less compelling. BCA suggests booking profits in these areas and shifting to sectors with higher potential upside.The brokerage has upgraded Energy to a tactical overweight position. This decision is based on a combination of geopolitical factors, such as heightened tensions in the Middle East, and an expectation of a resurgence in demand driven by sustained economic activity. Moreover, recent increases in oil prices and a firm dollar also support this call.While Technology faced headwinds earlier in the year due to high valuations, BCA now sees value in this sector, especially given its recent underperformance relative to other cyclical areas. With a neutral stance, they flag opportunities within Software and Hardware segments, which appear oversold and may benefit from a renewed growth outlook.Consumer Discretionary and Industrials, which typically benefit from strong consumer spending and business investment, are positioned to outperform in a sustained growth scenario. This includes segments like retail and travel, which are tied to consumer strength and services demand.The backdrop of stronger-than-expected economic data, alongside easing measures and a steady labor market, suggests that investors should be prepared for the possibility of higher inflation and upward pressure on bond yields. This environment favors sectors that are positively correlated with rising economic activity and commodity prices.However, the shift in strategy comes with caveats. BCA warns that a “no-landing” scenario could eventually morph into an overheated economy, requiring a rapid reversal in monetary policy stance. This would potentially introduce volatility into growth sectors. As a result, they advise tactical rather than long-term overweights in these areas, particularly Energy, and to remain nimble in adjusting positions as new data emerges. More

TOKYO (Reuters) – Japanese Prime Minister Shigeru Ishiba said on Saturday he would not intervene in monetary policy affairs, as the central bank is mandated to achieve price stability.”It’s important to avoid vocally intervening” in monetary policy affairs, or appear as if he was doing so, Ishiba said in a news conference gathering leaders of major parties ahead of the Oct. 27 general election.”Whatever the government has to say, the Bank of Japan makes an individual decision on policy,” Ishiba said. “I believe the BOJ’s governor and staff have a strong sense of responsibility over achieving price stability.”Ishiba also said strength in consumption is key to achieving a sustained exit from deflation, calling for the need for measures to boost real wages.The former defence minister became Japan’s prime minister on Oct. 1 after winning the ruling party’s leadership race.A day after assuming the role, Ishiba stunned markets by saying the economy was not ready for further interest rate hikes, an apparent about-face from his previous support for the BOJ unwinding decades of extreme monetary stimulus.The surprisingly blunt remarks pushed the yen lower against the dollar and cast fresh doubts over how aggressive the BOJ would be in raising rates.It is historically rare for the country’s leader to comment directly on the BOJ’s interest rate policy in public, as it would infringe upon the central bank’s independence – stipulated by law – in setting monetary policy.The BOJ ended negative interest rates in March and raised the short-term benchmark to 0.25% in July on the view Japan was making progress towards durably achieving its 2% inflation target.Governor Kazuo Ueda has signalled the bank’s readiness to keep raising interest rates if economic and price developments move in line with its forecast.While politics is unlikely to derail the longer-term case for rate hikes, analysts say uncertainty on Ishiba’s stance on monetary policy and the outcome of the Oct. 27 election could complicate the BOJ’s decision on how soon to raise borrowing costs. More

“The working age population in the euro area is projected to fall by 6.4% by 2040,” Morgan Stanley in its Future of Europe Bluepaper published Oct. 9, estimating a 4% hit to euro area GDP by 2040.As a country or region’s working age population declines, there are fewer individuals contributing to its economic output and productivity, marking a blow to GDP, or gross domestic output, particularly when coupled with a aging population. But some euro-area countries are likely to feel more pain than others: Italy, with a working age population expected to shrink by as much as 10% between 2025 and 2040, faces the steepest challenges. While France, given its relatively stronger demographic outlook, would likely be the least affected among major economies.The demographic crisis in Europe isn’t a new phenomenon. Japan and South Korea have faced these challenges for decades. These Asian economies, which have been at the sharp end of dealing with aging populations and declining birth rates, can offer a window into this problem and valuable insight into how effective, or not, the solutions have proved along the way.     Japan has implemented a myriad policies to address its demographic challenges, including efforts to increase female labor force participation, raise the retirement age, and cautiously open up to more immigration.These measures, however, have had limited success, as cultural norms and economic pressures continue to discourage higher birth rates. For the past three decades, Japan’s fertility rate has been below 1.5, and the most recent statistics in 2022 recorded the lowest level, 1.26, according to data from the Center for Strategic and International Studies. Still, Europe’s hopes for addressing these demographic headwind may involve a mix of the policies implemented in the East, Morgan Stanley said. Three potential policy options could counteract these headwinds in Europe: increasing net migration, raising the effective retirement age, and closing the gap between male and female labor force participation rates.These policies could add between 1.3% and 2.5% to baseline GDP for the euro area by 2040, according to Morgan Stanley’s scenario modelling. But the degree of success of these policies in addressing the demographic problem will vary from country to country as some may have a head start having pursued these policies early than others. Germany, the UK, and Spain, would “see the greatest impact from increased net migration, while Italy, could benefit most from closing the gender participation gap in the workforce,” Morgan Stanley said.Increasing net migration by one standard deviation relative to each country’s historical levels could boost euro area GDP by 1.8% by 2040.Closing the gap between male and female labor force participation rates could also have a significant impact, potentially increasing euro area GDP by 2.5% by 2040, Morgan Stanley estimates. Italy, which has a male vs. female labor force participation 8% below the euro area average, could see meaningful increases in its labour force if it were to reduce this gap.Raising the effective retirement age by one year could increase euro area GDP by 1.3% by 2040. France and Spain, where the effective retirement age remains 2 years to 3 years below the European average, stand out as the countries that would benefit most from this policy. This demographic challenge is already impacting European corporate outlooks. And if allowed to exacerbate without policy action, Morgan Stanley estimates, could lower companies’ long-term earnings growth from 5.1% to 4.2% by 2030.This theme is already emerging a hot topic of conversation in European C-suite commentary, with quarterly transcripts showing a notable rise in mentions of “aging population,” especially compared to US companies, it added.The estimated hit to corporate earnings in Europe, however, assumes no increase in margins or gains in productivity from AI or automation, which “could potentially offset some negative impacts,” Morgan Stanley said.The productivity boost from widespread use of AI and automation tools is likely to become more evident as companies begin to see the fruits of their AI investments and adoption efforts as soon as next year.”2024 is the year of AI investment and adoption; in 2025, we think corporate gains should be more evident,” Morgan Stanley said.Automation will also have an increasing role to play to plug the productivity gap from a decline in the working age in Europe, which is relatively under-penetrated by automation technologies. Industrial robot density in South Korea, for instance, was just over 1,000 per 10,000 people employed in the manufacturing in 2022, compared with less than half that number in Germany. As Europe grapples with this demographic shift, the race is on to find solutions that can mitigate its economic toll and ensure sustainable growth in the decades to come. While the experiences of Japan and South Korea offer valuable lessons; Europe will need to tailor its approach to its unique social, political, and economic landscape.The challenge is clear: Europe must implement effective policies that address its declining working-age population. While policies aimed at increasing migration, lifting the statutory retirement age, increasing female workforce participation will help cushion the impact, Europe must embrace technological advancements including AI and automation to help bridge the productivity gap. The key to successfully counteracting the impact on growth and safeguarding Europe’s economic future requires effectively implementing these strategies while ensuring they align with societal values and economic goals. More

Higher interest rates since June last year have reduced economic imbalances and revived confidence, the IMF said on Saturday, adding that improved market sentiment had prompted foreign and domestic investors to shift into lira-denominated assets.The central bank has hiked its main policy rate to 50% from 8.5% to battle high inflation. The government raised taxes and some fees to boost income, while implementing fiscal measures to balance risks in the economy. More

The ministry said at a press conference that it would “significantly” increase government debt issuance to provide subsidies to low-income households, support the property market, and replenish state banks’ capital as part of efforts to jumpstart economic growth.The much-anticipated briefing comes after the central bank and other regulators in late September announced the most aggressive monetary stimulus measures since COVID-19, including steps to revive the ailing property market such as mortgage rate cuts. Reuters reported last month that China plans to issue special sovereign bonds worth about 2 trillion yuan ($283.02 billion) this year as part of fresh fiscal stimulus. Below are the key measures announced by Finance Minister Lan Foan, at a news conference, where he was joined by Vice Finance Ministers Liao Min, Wang Dongwei, and Guo Tingting.LOCAL DEBT RESOLUTION China will increase support for local governments to address hidden debt risks, enhancing their capacity to support the economy. The government has allocated 1.2 trillion yuan ($169.81 billion) in local bond quotas this year to help resolve existing hidden debts and settle government arrears to firms.China plans a large-scale debt swap program, alongside continued use of bond quotas for debt resolution, described as the “biggest” policy measure in recent years. Detailed policies will be announced after the necessary legal procedures are completed.BANK RECAPITALISATION China will expand the use of local government bond proceeds to support the property market and recapitalise large state-owned banks. Special treasury bonds will be issued to bolster the core Tier-1 capital of major state-owned commercial banks, improving their ability to withstand risks and provide credit to the real economy.PROPERTY MARKET SUPPORTLocal governments will be allowed to use special bonds to purchase unused land, enhancing their ability to manage land supply and alleviating liquidity and debt pressures on both local governments and property developers. China will also support the purchase of existing commercial housing for use as affordable housing and continue funding affordable housing projects.The government is studying policies on value-added taxes that are linked to residential properties, and is looking at other tax policies to support the property market.SUPPORT FOR LOW-INCOME HOUSEHOLDS AND STUDENTSThe government will increase support for low-income individuals and students to boost consumption. The number of national scholarships for undergraduates will be doubled from 60,000 to 120,000 annually, with the value of each scholarship rising from 8,000 yuan to 10,000 yuan per student per year.Lan also noted that the central government has “relatively large room” to raise debt and increase the budget deficit, though he did not provide details. China has set this year’s budget deficit at 3% of GDP, down from a revised 3.8% last year. The issuance of 1 trillion yuan in special ultra-long treasury bonds this year is not included in the budget. Local governments will issue 3.9 trillion yuan in special bonds in 2024, compared to 3.8 trillion yuan last year.($1 = 7.0666 Chinese yuan renminbi) More

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The lenders, including China Construction Bank (OTC:CICHF) Corp and Bank of China, said in statements they would cut the rates to as low as 30 basis points below the benchmark Loan Prime Rate.The actions are in line with a central bank order late last month aimed at easing homeowners’ mortgage burden to boost the property market and weak domestic demand. More

LONDON (Reuters) – Britain’s new Labour government may need to increase taxes by 20 billion pounds ($26 billion) in its first budget on Oct. 30 to avoid real-terms cuts across public services, the Resolution Foundation said on Saturday. The think tank also said revising budget rules to use an alternative definition of public debt could allow finance minister Rachel Reeves to finance long-term investment while sticking to a pre-election pledge to bring down debt.”The budget should set a new course for the parliament with a long-term and large-scale capital investment programme, enabled by a new fiscal rule that takes account of the benefits, as well as the costs, of that investment,” James Smith, the Resolution Foundation’s research director, said.Labour should define debt in terms of public sector net worth, a broad measure that offsets the value of a wide range of public assets against past borrowing, creating room for an extra 50 billion pounds for investment, the think tank advised.”The short-term reaction to such an approach may be concern about tax rises and extra borrowing, but the long-term prize of restored public services, new infrastructure and stronger growth is what Britain needs,” Smith said.Official figures on Friday showed economic output expanded by 0.2% in August after stagnating for two consecutive months. But business and consumer confidence surveys have pointed to lower sentiment and concerns about potential tax hikes. The Institute for Fiscal Studies think tank earlier this week estimated Reeves would need to raise taxes by 25 billion pounds to end a squeeze on public services in the last budget of former Prime Minister Rishi Sunak’s Conservative government. Reeves said the Conservatives had left a 22 billion pound hole in the public finances and has warned that some taxes will have to rise.The Resolution Foundation said Reeves could increase tax revenues by 20 billion pounds – about 0.7% of gross domestic product – by scrapping exemptions from inheritance tax, raising capital gains tax and charging a social security levy on employers’ contributions to workers’ pensions.Labour has said it will not raise taxes on “working people” and has ruled out increases to the main rates of income tax, value-added tax, National Insurance and corporation tax, which provide around three quarters of current tax revenue.($1 = 0.7654 pounds) More