Chart 28: The world economy is improving — broad-based recovery — Chart 29: EM cyclicals outperform as China’s NOMINAL GDP recovers. good for Asia/EMs More to go. 100 Based on 29 1200 === MSCI EM cyclicals/EM defensives price index, LS 180 === China Bloomberg Monthly GDP Estimate YoY +... 24 80 1100 160 Cyclicals = energy, materials, consumer 19 1000 140 14 60 900 120 9 a0 800 100 4 =———Percentage of Countries with J. ——MSCI EM, RS 80 , 1/11 1/12 1/13 1/14 1/15 1/16 SS SFPEETPFEPTEPPEPTPBttEE Source: BofA Merrill Lynch Global Research, Haver, Bloomberg Source: BofA Merrill Lynch Global Research, Bloomberg. Assumed GDP estimate for October-16 to be similar to that for September-16. The question then is whether the strong USD or trade tensions from the new Trump administration can outweigh the more positive macro backdrop. We are inclined to back the view of our strategists and think that it will, so we are sticking with our long EM Asia position. We are doing so with hedges via a long USD and a CNH put. Long Nikkei: target 20,000 We had previously paired our long EM position with a long US oil equity position, but with our US strategists downgrading the sector ahead of OPEC we removed it earlier this week. We were therefore looking for another pro-growth trade to run alongside our EM position. Long Japanese equities seemed the logical place to look. While we acknowledge we have missed the lows and that today’s entry point may not be ideal, we suspect investors are not particularly long Japan yet since it was still showing as modestly underweight in the last Fund Manager Survey. Chart 30: Net % AA say they are overweight Japanese equities Asset Allocation: JP Equities 60 140 40 130 WY | EE 120 20 110 O ALUEIEEIE Sg TTT AGE 100 -20 eee Os il eee || | eed | eee | || Gee ye be er es Ss OY 930 40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 80 Source: BofA Merrill Lynch Global Fund Manager Survey Our Japanese equity and FX strategist Shusuke Yamada has been arguing f