The global battle to reduce inflation is well and truly on. One of the first casualties could be transatlantic competitiveness. The US Inflation Reduction Act has led to EU complaints that subsidies and tax credits discriminate against products imported into the US, to the potential detriment of EU companies. Could the EU now respond with legislation of its own? The EU has two broad complaints with the Inflation Reduction Act. First, they are concerned that European-produced products will be disadvantaged in the US. Secondly, they also note that US companies won’t be similarly disadvantaged in Europe. As such, US players can receive scale benefits through protection in their home markets and use these to drive market share gains in Europe too. The EU is reported to have noted “at least nine points” in the IRA which may be deemed a breach of international trade rules. It is important to note that the key concern appears to be with the domestic content requirements, rather than the subsidies per se. European green energy installations are lagging © 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: BNEF, Citi Research Estimates This issue is made even more potent by the EU’s dependence on the green transition in its industrial strategy. Europe has fallen behind in many industries of the future, with ‘green’ sectors such as wind turbines now one of the few where it holds something of a leadership position. Moreover, it still holds a disproportionate share of the legacy auto industry. Should the US and China steal a march on Europe here, it would be painful for the EU’s ambitions. The Inflation Reduction Act (IRA), through its subsidy largesse, has substantially shifted the playing field towards the USA in renewables development. Firstly, by making project returns so attractive, it makes renewables development more appealing in the US than the EU. Developers who are capacity-constrained are likely to direct their investment dollars to the US over Europe. Secondly, its domestic content provisions are a threat to European suppliers and supply chains. The nationality of the overall manufacturer is not a factor, but having a local supply chain is. The EU thus faces the risk that investment in manufacturing capacity, and thus jobs, may also become skewed to the USA. Under the IRA, wind projects meeting domestic content requirements can receive a 10% uplift to the tax credit they may receive. For projects starting construction before January 2026, this requirement is 45% of total content, rising to 50% for those starting before January 2027, and 55% for subsequent projects. BEV and PHEV monthly penetration rates in Europe since 2019 © 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research, S&P Global Mobility (IHS) For electric vehicles to be eligible for tax credits, they must meet two local content hurdles (Institut Montaigne, 15 Dec 22): At least 40% of the critical raw materials used in the battery must be extracted in the US or a country with which it has a free trade agreement, rising to 80% by 2026. At least 50% of battery components must be made or assembled in NAFTA countries, rising to 100% by 2029. Note that, for the purpose of the tax credits, manufacturing in Canada or Mexico counts towards local content requirements, which is helpful for non-US players. The inflation reduction act includes a number of measures aimed at supporting green technologies in the US. Key highlights include: Production tax credits (PTC) for generation of renewable energy, including wind and solar. These have been incorporated for the following 10 years, to 2032. For hydrogen, the IRA introduces a new tax credit of $3/kg for clean hydrogen production (i.e. production with >95% reduction in CO2 emissions compared to conventional hydrogen production using fossil fuels). For light-duty electric vehicles, the tax credit of up to $7,500 per vehicle was also extended to 2032. To qualify for the credit, vehicles must be below a certain price ($80k for SUVs, vans and pick-up trucks, $55k for other vehicles), and purchasers must be below a certain income. Heat pumps and heat pump water heaters are eligible for tax credits of up to 30%, with a cap of $2,000 per consumer. What can Europe do? The most likely response by the EU is to look to pass legislation mimicking the US’s support to its companies, in order to level the playing field between the two regions. Citi Research analysts say WTO arbitration is unlikely to achieve a rapid and meaningful resolution of the situation, while the chances of the US allowing EU-produced products to qualify for its products seem remote. Instead, the most likely scenario seems to be an ‘EU Clean Tech Act’, under which state-aid rules are relaxed, enabling more subsidies. The European Chips Act may be a blueprint for the EU’s response. Efforts to make a ‘Buy Europe Act’ may be hindered by fears of retaliation by China though. For more information on this subject, please see European Industrials - Implications from a potential EU “Inflation Reduction Act” Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

The global battle to reduce inflation is well and truly on. One of the first casualties could be transatlantic competitiveness.
The US Inflation Reduction Act has led to EU complaints that subsidies and tax credits discriminate against products imported into the US, to the potential detriment of EU companies. Could the EU now respond with legislation of its own?
The EU has two broad complaints with the Inflation Reduction Act.
First, they are concerned that European-produced products will be disadvantaged in the US. Secondly, they also note that US companies won&rsquo;t be similarly disadvantaged in Europe. As such, US players can receive scale benefits through protection in their home markets and use these to drive market share gains in Europe too.
The EU is reported to have noted &ldquo;at least nine points&rdquo; in the IRA which may be deemed a breach of international trade rules. It is important to note that the key concern appears to be with the domestic content requirements, rather than the subsidies per se.
&nbsp;
<table style="border-collapse: collapse; width: 100%; border-color: white;" border="1">
<tbody>
<tr>
<td style="width: 99.2853%;">
<h3>European green energy installations are lagging </h3>
</td>
</tr>
<tr>
<td style="width: 99.2853%;"><img src="https://www.citivelocity.com/rendition/eppublic/akpublic/documents/output/30127792/fgImages/image5.emf.svg?ts=1673897420387&amp;version=0" alt="Figure 3. European green energy installations are lagging Source: BNEF, Citi Research Estimates If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788." width="851" height="606" /></td>
</tr>
<tr>
<td style="width: 99.2853%;">
&copy; 2022 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
Source: BNEF, Citi Research Estimates
</td>
</tr>
</tbody>
</table>
&nbsp;
This issue is made even more potent by the EU&rsquo;s dependence on the green transition in its industrial strategy. Europe has fallen behind in many industries of the future, with &lsquo;green&rsquo; sectors such as wind turbines now one of the few where it holds something of a leadership position. Moreover, it still holds a disproportionate share of the legacy auto industry. Should the US and China steal a march on Europe here, it would be painful for the EU&rsquo;s ambitions.
The Inflation Reduction Act (IRA), through its subsidy largesse, has substantially shifted the playing field towards the USA in renewables development. Firstly, by making project returns so attractive, it makes renewables development more appealing in the US than the EU. Developers who are capacity-constrained are likely to direct their investment dollars to the US over Europe.
Secondly, its domestic content provisions are a threat to European suppliers and supply chains.
The nationality of the overall manufacturer is not a factor, but having a local supply chain is. The EU thus faces the risk that investment in manufacturing capacity, and thus jobs, may also become skewed to the USA.
Under the IRA, wind projects meeting domestic content requirements can receive a 10% uplift to the tax credit they may receive. For projects starting construction before January 2026, this requirement is 45% of total content, rising to 50% for those starting before January 2027, and 55% for subsequent projects.
&nbsp;
<table style="border-collapse: collapse; width: 100%; border-color: white;" border="1">
<tbody>
<tr>
<td style="width: 99.2853%;">
<h3>BEV and PHEV monthly penetration rates in Europe since 2019 </h3>
</td>
</tr>
<tr>
<td style="width: 99.2853%;"><img src="https://www.citivelocity.com/rendition/eppublic/akpublic/documents/output/30127792/fgImages/image3.emf.svg?ts=1673897420387&amp;version=0" alt="Figure 1. BEV and PHEV monthly penetration rates in Europe since 2019 Source: Citi Research, S&amp;P Global Mobility (IHS) If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788." width="877" height="455" /> </td>
</tr>
<tr>
<td style="width: 99.2853%;">
&copy; 2022 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
Source: Citi Research, S&amp;P Global Mobility (IHS)
</td>
</tr>
</tbody>
</table>
&nbsp;
For <a href="https://www.institutmontaigne.org/en/analysis/real-reasons-why-europe-concerned-us-inflation-reduction-act" target="_blank" rel="noopener">electric vehicles to be eligible</a> for tax credits, they must meet two local content hurdles (Institut Montaigne, 15 Dec 22):
<ul>
<li>At least 40% of the critical raw materials used in the battery must be extracted in the US or a country with which it has a free trade agreement, rising to 80% by 2026.</li>
<li>At least 50% of battery components must be made or assembled in NAFTA countries, rising to 100% by 2029.</li>
</ul>
Note that, for the purpose of the tax credits, manufacturing in Canada or Mexico counts towards local content requirements, which is helpful for non-US players.
The inflation reduction act includes a number of measures aimed at supporting green technologies in the US. Key highlights include:
<ul>
<li>Production tax credits (PTC) for generation of renewable energy, including wind and solar. These have been incorporated for the following 10 years, to 2032.</li>
<li>For hydrogen, the IRA introduces a new tax credit of $3/kg for clean hydrogen production (i.e. production with &gt;95% reduction in CO2 emissions compared to conventional hydrogen production using fossil fuels).</li>
<li>For light-duty electric vehicles, the tax credit of up to $7,500 per vehicle was also extended to 2032. To qualify for the credit, vehicles must be below a certain price ($80k for SUVs, vans and pick-up trucks, $55k for other vehicles), and purchasers must be below a certain income.</li>
<li>Heat pumps and heat pump water heaters are eligible for tax credits of up to 30%, with a cap of $2,000 per consumer.</li>
</ul>
&nbsp;
<h3>What can Europe do?</h3>
The most likely response by the EU is to look to pass legislation mimicking the US&rsquo;s support to its companies, in order to level the playing field between the two regions. Citi Research analysts say WTO arbitration is unlikely to achieve a rapid and meaningful resolution of the situation, while the chances of the US allowing EU-produced products to qualify for its products seem remote. Instead, the most likely scenario seems to be an &lsquo;EU Clean Tech Act&rsquo;, under which state-aid rules are relaxed, enabling more subsidies. The European Chips Act may be a blueprint for the EU&rsquo;s response. Efforts to make a &lsquo;Buy Europe Act&rsquo; may be hindered by fears of retaliation by China though. For more information on this subject, please see <a href="https://www.citivelocity.com/t/r/eppublic/2ZWB7" target="_blank" rel="noopener">European Industrials - Implications from a potential EU &ldquo;Inflation Reduction Act&rdquo;</a>
Citi Global Insights (CGI) is Citi&rsquo;s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click <a href="https://ir.citi.com/6A3IURUaezPxFLppsgdBkqidjLaLn558JwHISYaDZcTfE9XMRB1isDDDVorqrxpR%2fTnEi4RUCl8%3d" target="_blank" rel="noopener">here</a>.
&nbsp;

A new report from Citi Research’s Martin Wilkie looks at the potential fallout from the US inflation Reduction Act, which is causing consternation in the EU over its perceived anti-competitiveness. 

Protectionism and the US Inflation Reduction Act

Tech and sport are converging. For some sports, the importance of technology is perfectly obvious. Take Formula 1 motor racing, for example. It’s seen by some as more of a technological and engineering arms race than sporting contest. Elsewhere, the unstoppable march of tech is perhaps less obvious. But it’s no less profound. Wear a device that measures your every movement. Use virtual reality to help you see the game more clearly – as a spectator or player. Use augmented reality to view data and analysis in real time superimposed on the field of play and in your normal field of vision. Build a golf club that meets your every ball flight, forgiveness and power need while also providing feedback on your ball striking in real time or to analyze later. Or smash through the two-hour barrier for the marathon wearing running shoes developed in a lab that give you that all important extra pep in your step. With technology improving all the time, the growth of the business of sports tech looks assured. The full report looks into four areas of sports tech in more detail: Wearable devices Virtual Reality Augmented Reality Custom sporting equipment All four are interesting for what’s already going on within them but also for the potential for future growth and development. The report says that that taken as a whole, the sports tech market is well placed to benefit from societies and economies that increasingly put data at their heart. And a post- pandemic focus on health, wellness and playing sport provides added impetus. The following Total Addressable Market (TAM) table, based on 45 underlying estimates, underscores the growth potential across sports tech areas. TAM Table: Robust Growth Potential ($ billion) Theme 2022 2030 CAGR Sports VR 4.0 38.4 32.5% Sports Analytics 2.5 16.5 26.6% Sports AI 2.1 19.2 32.1% Sports Tech 21.1 66.0 15.3% Sports Merchandising 30.9 53.8 7.2% © 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Global Insights Sport and technology might seem like an unlikely pairing. One pushes the boundaries of human performance. The other the bounds of ingenuity. But there is a nexus- at least a couple in fact. Pushing our performance to ever greater levels is the essence of what makes sport compelling for most of us. But now, as performance increments are ever harder to come by with advanced training techniques available to all, technology is becoming a differentiator. Integrating technology into training regimes is already happening at the highest levels of global sport. The trickle-down effect is real and visible. And in terms of audience engagement, the value of technology looks just as clear. As competition for viewing rights gets ever fiercer, broadcasters are searching for an edge over the competition. Tech provides a potential point of differentiation and several broadcasters have already entered the fray. Price points and the details of the individual offerings vary but all are designed to increase the attractiveness and depth of the fan experience and keep them coming back for more. As part of the full report we modelled the use of virtual reality and augmented reality in particular sports. For the full methodology and more detailed analysis, see the full report, but here’s a little more on what we found for virtual reality. Given the strong match between VR suitability and the highest revenue sports, incremental revenue opportunities could be significant. The model indicated that the total incremental revenue VR viewing could bring to the sports market by 2030 is estimated to be around $31 billion (yes, $31billion!), an 88% increment to the ticketing revenue and 17% to the sports market. Incremental Revenue Contribution (in $mns) Association football 15,069 American Football 9,296 Basketball 2,507 Auto Racing 2,198 Baseball 1,154 Ice hockey 846 Mixed Martial Arts 261 Tennis 41 Total 31,371 © 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Global Insights And for augmented reality, the incremental revenue for each sport modelled under the base case scenario is shown in the table below. The model indicates that the total incremental revenue AR spectating could bring to the sports market by 2030 is estimated to be around $207 million. Although AR will become more ubiquitous than VR by 2030, VR is expected to bring higher incremental revenue stream to the global sports market. That’s because: 1) VR is more suitable for at-home viewing and will therefore appeal to a larger audience base; 2) VR content usually enjoys a higher price by offering a larger experiential enhancement to TV viewing than AR to in-stadium spectating. Incremental Revenue Contribution (in $mns) NFL (American Football) 9.62 NHL (Ice Hockey) 11.22 NBA (Basketball) 11.04 MLB (Baseball) 35.14 UFC (Mixed Martial Arts) 0.02 Formula 1 4.16 The Big Five (Soccer) 27.96 The Majors (Golf) 1.15 Horse Racing 0.94 FIS World Cup (Alpine Skiing) 0.01 Sailing 5.13 Abbott World Majors (Marathon) 2.98 World Rowing Championships 0.02 Distance Cycling 6.70 The Grand Slam (Tennis) 0.26 © 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Global Insights To access it, if you are a Velocity subscriber, please log in here. Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

Tech and sport are converging.
For some sports, the importance of technology is perfectly obvious. Take Formula 1 motor racing, for example. It&rsquo;s seen by some as more of a technological and engineering arms race than sporting contest.
Elsewhere, the unstoppable march of tech is perhaps less obvious. But it&rsquo;s no less profound.
Wear a device that measures your every movement. Use virtual reality to help you see the game more clearly &ndash; as a spectator or player. Use augmented reality to view data and analysis in real time superimposed on the field of play and in your normal field of vision. Build a golf club that meets your every ball flight, forgiveness and power need while also providing feedback on your ball striking in real time or to analyze later. Or smash through the two-hour barrier for the marathon wearing running shoes developed in a lab that give you that all important extra pep in your step.
With technology improving all the time, the growth of the business of sports tech looks assured. The full report looks into four areas of sports tech in more detail:
<ol>
<li>Wearable devices</li>
<li>Virtual Reality</li>
<li>Augmented Reality</li>
<li>Custom sporting equipment</li>
</ol>
All four are interesting for what&rsquo;s already going on within them but also for the potential for future growth and development.
The report says that that taken as a whole, the sports tech market is well placed to benefit from societies and economies that increasingly put data at their heart. And a post- pandemic focus on health, wellness and playing sport provides added impetus.
The following Total Addressable Market (TAM) table, based on 45 underlying estimates, underscores the growth potential across sports tech areas.&nbsp;
<table style="border-collapse: collapse; border-color: white;" border="1" cellspacing="0" cellpadding="0">
<tbody>
<tr>
<td style="width: 4.65in;" valign="top">
<h3>TAM Table: Robust Growth Potential ($ billion)</h3>
</td>
</tr>
<tr>
<td style="width: 4.65in;" valign="top">
<table border="0" cellspacing="0" cellpadding="0">
<tbody>
<tr style="height: 15.0pt;">
<td style="width: 130.45pt;" valign="bottom" nowrap="nowrap">
Theme
</td>
<td style="width: 69.2pt;" valign="bottom" nowrap="nowrap">
2022
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
2030
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
CAGR
</td>
</tr>
<tr style="height: 15.0pt;">
<td style="width: 130.45pt;" valign="bottom" nowrap="nowrap">
Sports VR
</td>
<td style="width: 69.2pt;" valign="bottom" nowrap="nowrap">
4.0
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
38.4
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
32.5%
</td>
</tr>
<tr style="height: 15.0pt;">
<td style="width: 130.45pt;" valign="bottom" nowrap="nowrap">
Sports Analytics
</td>
<td style="width: 69.2pt;" valign="bottom" nowrap="nowrap">
2.5
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
16.5
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
26.6%
</td>
</tr>
<tr style="height: 15.0pt;">
<td style="width: 130.45pt;" valign="bottom" nowrap="nowrap">
Sports AI
</td>
<td style="width: 69.2pt;" valign="bottom" nowrap="nowrap">
2.1
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
19.2
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
32.1%
</td>
</tr>
<tr style="height: 15.0pt;">
<td style="width: 130.45pt;" valign="bottom" nowrap="nowrap">
Sports Tech
</td>
<td style="width: 69.2pt;" valign="bottom" nowrap="nowrap">
21.1
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
66.0
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
15.3%
</td>
</tr>
<tr style="height: 15.0pt;">
<td style="width: 130.45pt;" valign="bottom" nowrap="nowrap">
Sports Merchandising
</td>
<td style="width: 69.2pt;" valign="bottom" nowrap="nowrap">
30.9
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
53.8
</td>
<td style="width: 69.25pt;" valign="bottom" nowrap="nowrap">
7.2%
</td>
</tr>
</tbody>
</table>
&copy; 2022 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
Source: Citi Global Insights
</td>
</tr>
</tbody>
</table>
Sport and technology might seem like an unlikely pairing. One pushes the boundaries of human performance. The other the bounds of ingenuity. But there is a nexus- at least a couple in fact.
Pushing our performance to ever greater levels is the essence of what makes sport compelling for most of us.
But now, as performance increments are ever harder to come by with advanced training techniques available to all, technology is becoming a differentiator. Integrating technology into training regimes is already happening at the highest levels of global sport. The trickle-down effect is real and visible.
And in terms of audience engagement, the value of technology looks just as clear. As competition for viewing rights gets ever fiercer, broadcasters are searching for an edge over the competition. Tech provides a potential point of differentiation and several broadcasters have already entered the fray.
Price points and the details of the individual offerings vary but all are designed to increase the attractiveness and depth of the fan experience and keep them coming back for more.
As part of the full report we modelled the use of virtual reality and augmented reality in particular sports.
For the full methodology and more detailed analysis, see the full report, but here&rsquo;s a little more on what we found for virtual reality.
Given the strong match between VR suitability and the highest revenue sports, incremental revenue opportunities could be significant. The model indicated that the total incremental revenue VR viewing could bring to the sports market by 2030 is estimated to be around $31 billion (yes, $31billion!), an 88% increment to the ticketing revenue and 17% to the sports market.
<table style="border-collapse: collapse; border-color: white; height: 491px; width: 58.8467%;" border="1" cellspacing="0" cellpadding="0">
<tbody>
<tr style="height: 75px;">
<td style="width: 0%; height: 75px;" valign="top">
<h3>Incremental Revenue Contribution (in $mns)</h3>
</td>
</tr>
<tr style="height: 467px;">
<td style="width: 0%; height: 416px;" valign="top">
<div align="center">
<table style="border-collapse: collapse; border-color: white;" border="1" cellspacing="0" cellpadding="0">
<tbody>
<tr>
<td style="width: 164.4pt;" valign="top">
Association football
</td>
<td style="width: 164.4pt;" valign="top">
15,069
</td>
</tr>
<tr>
<td style="width: 164.4pt;" valign="top">
American Football
</td>
<td style="width: 164.4pt;" valign="top">
9,296
</td>
</tr>
<tr>
<td style="width: 164.4pt;" valign="top">
Basketball
</td>
<td style="width: 164.4pt;" valign="top">
2,507
</td>
</tr>
<tr>
<td style="width: 164.4pt;" valign="top">
Auto Racing
</td>
<td style="width: 164.4pt;" valign="top">
2,198
</td>
</tr>
<tr>
<td style="width: 164.4pt;" valign="top">
Baseball
</td>
<td style="width: 164.4pt;" valign="top">
1,154
</td>
</tr>
<tr>
<td style="width: 164.4pt;" valign="top">
Ice hockey
</td>
<td style="width: 164.4pt;" valign="top">
846
</td>
</tr>
<tr>
<td style="width: 164.4pt;" valign="top">
Mixed Martial Arts
</td>
<td style="width: 164.4pt;" valign="top">
261
</td>
</tr>
<tr>
<td style="width: 164.4pt;" valign="top">
Tennis
</td>
<td style="width: 164.4pt;" valign="top">
41
</td>
</tr>
<tr>
<td style="width: 164.4pt;" valign="top">
Total
</td>
<td style="width: 164.4pt;" valign="top">
31,371
</td>
</tr>
</tbody>
</table>
</div>
&copy; 2022 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
Source: Citi Global Insights
</td>
</tr>
</tbody>
</table>
And for augmented reality, the incremental revenue for each sport modelled under the base case scenario is shown in the table below.&nbsp; The model indicates that the total incremental revenue AR spectating could bring to the sports market by 2030 is estimated to be around $207 million.
Although AR will become more ubiquitous than VR by 2030, VR is expected to bring higher incremental revenue stream to the global sports market. That&rsquo;s because: 1) VR is more suitable for at-home viewing and will therefore appeal to a larger audience base; 2) VR content usually enjoys a higher price by offering a larger experiential enhancement to TV viewing than AR to in-stadium spectating.
<h3>Incremental Revenue Contribution (in $mns)</h3>
<table style="border-collapse: collapse; width: 55.9677%; border-color: white;" border="1" cellspacing="0" cellpadding="0">
<tbody>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
NFL (American Football)
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
9.62
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
NHL (Ice Hockey)
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
11.22
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
NBA (Basketball)
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
11.04
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
MLB (Baseball)
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
35.14
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
UFC (Mixed Martial Arts)
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
0.02
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
Formula 1
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
4.16
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
The Big Five (Soccer)
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
27.96
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
The Majors (Golf)
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
1.15
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;">
Horse Racing
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
0.94
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
FIS World Cup (Alpine Skiing)
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
0.01
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
Sailing
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
5.13
</td>
</tr>
<tr style="height: 67px;">
<td style="width: 48.0094%; height: 67px;" valign="bottom">
Abbott World Majors (Marathon)
</td>
<td style="width: 8.97595%; height: 67px;" valign="bottom">
2.98
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
World Rowing Championships
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
0.02
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;" valign="bottom">
Distance Cycling
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
6.70
</td>
</tr>
<tr style="height: 49px;">
<td style="width: 48.0094%; height: 49px;">
The Grand Slam (Tennis)
</td>
<td style="width: 8.97595%; height: 49px;" valign="bottom">
0.26
</td>
</tr>
</tbody>
</table>
&copy; 2022 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
Source: Citi Global Insights
&nbsp;
To access it, if you are a Velocity subscriber, please <a href="https://www.citivelocity.com/cv2/go/MarketBuzz/X19GUl9fqntvl02g8ken" target="_blank" rel="noopener" data-link-source="tiny">log in here</a>.
Citi Global Insights (CGI) is Citi&rsquo;s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click <a href="https://ir.citi.com/6A3IURUaezPxFLppsgdBkqidjLaLn558JwHISYaDZcTfE9XMRB1isDDDVorqrxpR%2fTnEi4RUCl8%3d" target="_blank" rel="noopener" data-link-source="tiny">here</a>.
&nbsp;

A new report by Anuj Gangahar from Citi Global Insights looks at how wearable devices, virtual reality and augmented reality are having a broad-based and profound impact on how we train for, play and watch sport. 

Sports: How Tech is Changing the Game

As the Middle East/North Africa (MENA) region looks set to strengthen its position in global energy this decade, a new report highlights three key themes: Deeper petrochemical integration An accelerating shift to renewables Mega-scale green hydrogen exports, with MENA the most competitive supply source The region supplies nearly a third of global fossil-fuel output. Now a cross region effort to decarbonize the power system will lead to greater use of renewables alongside green-hydrogen export capacity, the report says. The authors note that virtually all MENA investment before the pandemic was focused on hydrocarbons, of which 60% was oil. But oil’s spending’s share is expected to fall to just over a third of the total by 2030, as gas, petrochemicals and renewables advance. Renewable energy is expected to lead that expansion. MENA Plays A Key Role In Global Primary Energy Supply © 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research, BP Statistical Review 2022, *primary energy = oil, gas and coal In the past 30 years the Middle East has on average supplied almost a third of the world’s oil . That’s equivalent to just over 10% of the total energy needs of the world. That’s made MENA a key player in global economic growth and driven economic prosperity across the region. In recent years, OPEC’s aggressive production cuts have forced it to cede market share. But the report points out that the need for higher prices isn’t a question of cost competitiveness but one of fiscal balance. Middle Eastern gas, meanwhile, has gone from a by-product to a prized export commodity since the late 1980s. More than a third of global gas reserves sit in the Middle East- mostly held by Iran and Qatar. And the decarbonzation agenda is driving more gas generation. Saudi Arabia, for example is aiming for a 50-50 gas-renewable mix buy the end of this decade. Global gas investment is likely to focus on new LNG supply, particularly as Europe seeks to replace some 120 million tons of Russian gas per year. The authors see the Middle East, led by Qatar, as playing a key role in delivering the LNG buildout needed. Renewables Nearly 95% of MENA’s power demand is met by oil, gas and coal. But the drive for deeper decarbonization is poised to change this. Scaling up renewables will be pivotal in achieving the region’s net-zero targets. The shift to electrification will free up capacity to export hydrocarbons and bring economic viability to energy exports in the form of green hydrogen or ammonia. The authors call the pursuit of renewables “a lightning rod for change” across MENA, with many countries seeking to localize supply chains. While China is the engine of global clean-energy manufacturing today, the authors think MENA has the labor supply and resources to build a meaningful local supply chain. Green Hydrogen The authors see MENA as key also to meeting expected global growth in green hydrogen and say MENA is by far the most advanced region in terms of achieving scale this decade. The authors think MENA could meet virtually all of Europe’s green-hydrogen import target of 10 million tons per year by 2030. Commodity Chemicals As with oil, Saudi Arabia holds a dominant position in the region. Since the mid-2010s, the advent of U.S. shale and a drive for chemical self-sufficiency in Asia has led to some retreat in market share, but the industry remains an important economic driver. The push for oil and gas growth is a key factor for the petrochemicals sector. Another area of interest is improving chemical yields from oil: Today petrochemical yields are around 45%, but it’s hoped that can be raised to 70% over time. For more information on this subject, please see MENA Energy - A Decade Of Energy Growth (23 Jan 23) Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

As the Middle East/North Africa (MENA) region looks set to strengthen its position in global energy this decade, a new report highlights three key themes:
<ol>
<li>Deeper petrochemical integration</li>
<li>An accelerating shift to renewables</li>
<li>Mega-scale green hydrogen exports, with MENA the most competitive supply source</li>
</ol>
The region supplies nearly a third of global fossil-fuel output.
Now a cross region effort to decarbonize the power system will lead to greater use of renewables alongside green-hydrogen export capacity, the report says.
The authors note that virtually all MENA investment before the pandemic was focused on hydrocarbons, of which 60% was oil. But oil&rsquo;s spending&rsquo;s share is expected to fall to just over a third of the total by 2030, as gas, petrochemicals and renewables advance.
Renewable energy is expected to lead that expansion.
&nbsp;
<table style="border-collapse: collapse; border-color: white;" border="1" cellspacing="0" cellpadding="0">
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<h3>MENA Plays A Key Role In Global Primary Energy Supply</h3>
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<img src="https://www.citivelocity.com/rendition/eppublic/akpublic/documents/output/30128690/fgImages/image4.emf.svg?ts=1674450088854&amp;version=1" alt="Figure 1. MENA Plays A Key Role In Global Primary Energy Supply Source: Citi Research, BP Statistical Review 2022, *primary energy = oil, gas and coal If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788." />
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&copy; 2022 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
Source: Citi Research, BP Statistical Review 2022, *primary energy = oil, gas and coal
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In the past 30 years the Middle East has on average supplied almost a third of the world&rsquo;s oil . That&rsquo;s equivalent to just over 10% of the total energy needs of the world. That&rsquo;s made MENA a key player in global economic growth and driven economic prosperity across the region.
In recent years, OPEC&rsquo;s aggressive production cuts have forced it to cede market share. But the report points out that the need for higher prices isn&rsquo;t a question of cost competitiveness but one of fiscal balance.
Middle Eastern gas, meanwhile, has gone from a by-product to a prized export commodity since the late 1980s.
More than a third of global gas reserves sit in the Middle East- mostly held by Iran and Qatar.
And the decarbonzation agenda is driving more gas generation. &nbsp;Saudi Arabia, for example is aiming for a 50-50 gas-renewable mix buy the end of this decade. &nbsp;
Global gas investment is likely to focus on new LNG supply, particularly as Europe seeks to replace some 120 million tons of Russian gas per year.
The authors see the Middle East, led by Qatar, as playing a key role in delivering the LNG buildout needed. &nbsp;
<h3>Renewables </h3>
Nearly 95% of MENA&rsquo;s power demand is met by oil, gas and coal. But the drive for deeper decarbonization is poised to change this. Scaling up renewables will be pivotal in achieving the region&rsquo;s net-zero targets.
The shift to electrification will free up capacity to export hydrocarbons and bring economic viability to energy exports in the form of green hydrogen or ammonia. The authors call the pursuit of renewables &ldquo;a lightning rod for change&rdquo; across MENA, with many countries seeking to localize supply chains.
While China is the engine of global clean-energy manufacturing today, the authors think MENA has the labor supply and resources to build a meaningful local supply chain.
&nbsp;
<h3>Green Hydrogen </h3>
The authors see MENA as key also to meeting expected global growth in green hydrogen and say MENA is by far the most advanced region in terms of achieving scale this decade. The authors think MENA could meet virtually all of Europe&rsquo;s green-hydrogen import target of 10 million tons per year by 2030.
&nbsp;
<h3>Commodity Chemicals </h3>
As with oil, Saudi Arabia holds a dominant position in the region. Since the mid-2010s, the advent of U.S. shale and a drive for chemical self-sufficiency in Asia has led to some retreat in market share, but the industry remains an important economic driver.
The push for oil and gas growth is a key factor for the petrochemicals sector.
Another area of interest is improving chemical yields from oil: Today petrochemical yields are around 45%, but it&rsquo;s hoped that can be raised to 70% over time. For more information on this subject, please see <a href="https://www.citivelocity.com/t/r/eppublic/2Zm9f" target="_blank" rel="noopener" data-link-source="tiny">MENA Energy - A Decade Of Energy Growth</a> (23 Jan 23)
Citi Global Insights (CGI) is Citi&rsquo;s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click <a href="https://ir.citi.com/6A3IURUaezPxFLppsgdBkqidjLaLn558JwHISYaDZcTfE9XMRB1isDDDVorqrxpR%2fTnEi4RUCl8%3d" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

In a new report by Citi Research’s Oliver Connor explores the diversification of MENA’s energy investment and how it’s affecting the region’s standing in a lower-cost, lower-carbon global system. 

MENA Energy: Renewables Rising

What can we all learn from Latam’s recent history in dealing with inflation? Here’s a few lessons: #1 – Inflation can stabilize above the target This might be the most important lesson Latam’s recent inflation journey has to offer. That’s not to say inflation is unanchored, but rather it moves in a different range than authorities are aiming for. Even if that’s the case, the authorities may submit to that above target range because they’ll often conclude that the cost of bringing inflation back target is just too high. The Citi Research note points out that this is important because it shows that higher inflation can become persistent. Past inflation matters for future inflation, the note says. That’s why some countries operate with inflation rates outside their formal targets for long periods. This topic is of course particularly relevant against the backdrop of global inflation. The note says that persistent high inflation usually emerges from a combination of limited central banks’ credibility and a shock that pushes inflation higher. This then ends up being self- perpetuating due precisely to the lack of central bank credibility. On the other hand, when a central bank is credible, a specific shock often has only a temporary effect on inflation, as inflation expectations remain anchored for longer periods. In LatAm, most central banks have inflation controlled within the target range. However, Citi Research analysts pick out two cases that are interesting to look at: Uruguay – Inflation has been consistently above the target range. Only in a fraction of the period from Jan-10 and Dec-22 has inflation stayed within the target. Average inflation for 2010-2019 has not been in the target range during that period (between 3% and 7%) but at 8.3%. And Uruguay’s inflation target is rather high in the first place. México – Although the midpoint inflation target is 3%, the de facto objective is more like 4%. In 2010-2015, inflation fluctuated around 4%. But rather than hiking to bring average inflation to 3%, authorities instead acted as though 4% was the midpoint target. Only when inflation was consistently above 4% did a substantial hiking cycle begin around 2017. Mexico and Uruguay are usually above the target range Source: Citi Research In short, these cases serve as a warning to countries with limited credibility inflation targeting regimes. #2 – Central banks are slow to cut after inflation spikes The Citi Research note says that Brazil and Colombia, between 2015 and 2017, offer comparable episodes to the present, in which inflation went significantly outside the central bank target range. Importantly in these episodes, one year ahead inflation expectations also moved above the upper bound of the range. #3 – When monetary policy turns procyclical It is interesting to note, the analysts say, that monetary policy remained expansionary when economies recovered from the pandemic and the output gaps turned positive again. Put another way, central banks have fallen behind the curve. In Chile, the monetary policy tightened last year even as the economy cooled off. The conclusion, they say, is that monetary policy in LatAm is turning more procyclical. #4 – On the ‘structural’ drivers of inflation Inflation can accelerate due to ‘structural’ reasons. As we’ve mentioned, curbing inflation can become too costly with structural’ factors potentially fueling inflation and making policymakers tradeoffs more challenging. Inflation expectations have been mostly anchored in LatAm’s big inflation targeters Source: Citi Research, Haver Analytics In fact analysts found that relative prices have changed markedly in the last couple of years especially in Chile and Colombia and to a lesser extent in Brazil and Peru, something that could create inflationary pressures if these relative prices gaps start normalizing. The main conclusion is that central banks tend to be prudent when easing after an episode of high inflation and unanchored expectations For more information on this subject as inflation remains front of mind for many, please see Latin America Economic Outlook & Strategy – Experienced in inflation: lessons from LatAm first published on January 24th. Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

What can we all learn from Latam&rsquo;s recent history in dealing with inflation?
Here&rsquo;s a few lessons:
#1 &ndash; Inflation can stabilize above the target
This might be the most important lesson Latam&rsquo;s recent inflation journey has to offer.
That&rsquo;s not to say inflation is unanchored, but rather it moves in a different range than authorities are aiming for.
Even if that&rsquo;s the case, the authorities may submit to that above target range because they&rsquo;ll often conclude that the cost of bringing inflation back target is just too high.
The Citi Research note points out that this is important because it shows that higher inflation can become persistent.
Past inflation matters for future inflation, the note says. That&rsquo;s why some countries operate with inflation rates outside their formal targets for long periods.
This topic is of course particularly relevant against the backdrop of global inflation.
The note says that persistent high inflation usually emerges from a combination of limited central banks&rsquo; credibility and a shock that pushes inflation higher. This then ends up being self- perpetuating due precisely to the lack of central bank credibility.
On the other hand, when a central bank is credible, a specific shock often has only a temporary effect on inflation, as inflation expectations remain anchored for longer periods.
In LatAm, most central banks have inflation controlled within the target range.
However, Citi Research analysts pick out two cases that are interesting to look at:
<ul type="disc">
<li>Uruguay&nbsp;&ndash;&nbsp;Inflation has been consistently above the target range. Only in a fraction of the period from Jan-10 and Dec-22 has inflation stayed within the target. Average inflation for 2010-2019 has not been in the target range during that period (between 3% and 7%) but at 8.3%. And Uruguay&rsquo;s inflation target is rather high in the first place.</li>
</ul>
<ul type="disc">
<li>M&eacute;xico&nbsp;&ndash;&nbsp;Although the midpoint inflation target is 3%, the&nbsp;de facto&nbsp;objective is more like 4%.&nbsp; In 2010-2015, inflation fluctuated around 4%. But rather than hiking to bring average inflation to 3%, authorities instead acted as though 4% was the midpoint target. Only when inflation was consistently above 4% did a substantial hiking cycle begin around 2017.</li>
</ul>
&nbsp;
Mexico and Uruguay are usually above the target range 
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/63ee09e8784b4b184cc9f6a3.png" width="683" height="432" />
Source: Citi Research
&nbsp;
In short, these cases serve as a warning to countries with limited credibility inflation targeting regimes.
#2 &ndash; Central banks are slow to cut after inflation spikes
The Citi Research note says that Brazil and Colombia, between 2015 and 2017, offer comparable episodes to the present, in which inflation went significantly outside the central bank target range. Importantly in these episodes, one year ahead inflation expectations also moved above the upper bound of the range.
#3 &ndash; When monetary policy turns procyclical
It is interesting to note, the analysts say, that monetary policy remained expansionary when economies recovered from the pandemic and the output gaps turned positive again. Put another way, central banks have fallen behind the curve. In Chile, the monetary policy tightened last year even as the economy cooled off. The conclusion, they say, is that monetary policy in LatAm is turning more procyclical.
#4 &ndash; On the &lsquo;structural&rsquo; drivers of inflation
Inflation can accelerate due to &lsquo;structural&rsquo; reasons.&nbsp;As we&rsquo;ve mentioned, curbing inflation can become too costly with structural&rsquo; factors potentially fueling inflation and making policymakers tradeoffs more challenging.&nbsp;
&nbsp;
Inflation expectations have been mostly anchored in LatAm&rsquo;s big inflation targeters
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/63ee0a464d322b1f94a6c8b4.png" />
Source: Citi Research, Haver Analytics
&nbsp;
In fact analysts found that relative prices have changed markedly in the last couple of years especially in Chile and Colombia and to a lesser extent in Brazil and Peru, something that could create inflationary pressures if these relative prices gaps start normalizing.
The main conclusion is that central banks tend to be prudent when easing after an episode of high inflation and unanchored expectations For more information on this subject as inflation remains front of mind for many, please see <a href="https://www.citivelocity.com/t/r/eppublic/2bfXK" target="_blank" rel="noopener" data-link-source="tiny">Latin America Economic Outlook &amp; Strategy &ndash; Experienced in inflation: lessons from LatAm</a> first published on January 24th.
Citi Global Insights (CGI) is Citi&rsquo;s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click <a href="https://ir.citi.com/6A3IURUaezPxFLppsgdBkqidjLaLn558JwHISYaDZcTfE9XMRB1isDDDVorqrxpR%2fTnEi4RUCl8%3d" target="_blank" rel="noopener" data-link-source="tiny">here</a>.
&nbsp;
&nbsp;
&nbsp;

A Citi Research note from Ernesto Revilla looks at some of the important lessons that can be learned from Latam’s recent inflation history, both for the region itself and the rest of the world. 

Latam: Lessons in Inflation

India is advancing. Last year it accounted for 3.4% of global nominal GDP. That’s up from 1.1% in 1993. That means India is now the world’s 5th largest economy at $3.5trillion. It will become the third largest by 2027, accounting for ~4.0% of global GDP, according to the IMF. India’s real GDP growth has been on average approximately 80bps higher than global growth over the preceeding four decades. This growth is based on multiple factors. These include demographics, healthy corporate balance sheets, public capex, investment in cleantech and digitization. Citi Research analysts reckon that medium-term growth of at least 6% is achievable even with more conservative assumptions. India’s recent structural shifts include: - Policymaking: The introduction of an inflation targeting on the monetary side and from FRBM on the fiscal side. - Inflation and interest rates: Inflation in India averages 6% over the last two decades vs. 9-10% in the two previous decades. And it averages 4% between 2015-19 vs. 9% in the 7 years leading up to that period. The difference between India’s inflation and the rest of the world has moderated. -External sector: Structural improvements in external balances helped by the resilience of software services exports Decadal Index Performance in USD MF AUM to GDP in India <20% but has rising sharply over the last two decades Source: Citi Research, Bloomberg Source: AMFI, Citi Research, Bloomberg The report says that the upward mobility in income levels of Indian households will likely lead to a shift from a pyramid (c60% lower-income and lower-middle income households) to a diamond structure (c60% middle-income households). Key trends include: Premiumization across categories Higher per-capita consumption A higher quality digital ecosystem from discovery to distribution New specialized categories In financials, Citi Research analysts note bank credit penetration in India surged from 31% in 2000 to 50%+ by 2022,. That’s a 16% CAGR but still well below the average for developed markets, which is over 75%. Private banks are gaining market share from public-sector banks. Within the sector, spending on technology has become key. For corporates in India more broadly, cash flow remain healthy and balance-sheet indicators are supportive of acceleration in capex. Meanwhile India’s regulatory environment for approvals of infrastructure projects has significantly improved. That said, India’s infrastructure lags behind most of its Asian peers. Citi Research analysts expect infrastructure capex in India to grow at a 9-11% CAGR over the next few years. FMCG Consumption Per Capita (US$) vs. GDP Per Capita (US$) Across Key Asian Markets Number Of Households In India – Segmented By Income Levels (Mn, %) © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Company Reports quoting IMRB, Nielson data, World Bank, Citi Research Source: Company Reports quoting RedSeer research and analysis Clean energy The energy mix in India is set for a “clean” overhaul, with renewables set to increase its shares by 3-6x over the next 3 decades. And large Indian firms have also announced forays into green hydrogen production and the associated ecosystem. Clearly, there are multiple secular growth opportunities in India. The full note presents Citi’s best thematic picks and detailed analysis of the overall macro picture and individual sectors. For more information on this subject, please see India Equity Strategy / Economics Views - Multiple Secular Equity Opportunities in Fast Growing Economy (2 Feb 2023) Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

India is on track to become the world’s third largest economy in five years. A new report by Citi Research’s Surendra Goyal takes a closer look at what’s driving this growth. 

India’s Inexorable Ascent

Money is getting costlier. After the cost of capital for the S&P 500 fell to a historic low in 2021, monetary policy normalization last year created a sharp valuation reset, and the cost of capital has risen. In the last year, the cost of equity and debt for the S&P 500 has quickly hit levels not seen since the 1990s, as the chart below shows. And Scott says the cost is likely to settle and endure somewhere close to those 1990s levels. S&P Cost of Capital, 50 years © 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research, FactSet, Bloomberg, Haver Analytics One important factor to consider is how higher capital costs effect the supply of equities. Buyback volume historically has mirrored the cost of equity: when the cost of equity increases, so buyback activity picks up. Valuations are implicitly lower as the cost of equity rises. Another component is tied to the trade-off between reinvestment opportunities and return of capital. As the cost of capital rises, the set of profitable reinvestment options gets smaller. Management may elect to return capital to shareholders in preference to retaining earnings. Capex and M&A As we’ve discussed, in theory a higher cost of debt cuts the available set of profitable capex opportunities. Over a longer period, this can weigh on earnings growth. In M&A, things are a bit blurrier, the Citi Research note said. A volatile cost of capital seemingly hampers M&A activity. But a higher cost of capital doesn’t necessarily dampen M&A activity. Announced M&A Volume vs Cost of Capital © 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research, Bloomberg, FactSet, Haver Analytics As the cost of capital rises, consistent European equity outflows versus the US have contributed to a historically wide valuation gap between the two markets according to a recent report by Citi Research’s Robert Buckland Global Equity Strategy - Fund Outflows: US More Vulnerable Than Europe, first published on January 20th. The MSCI Europe index now trades at a 25% discount to the MSCI US, well above the long run average of 15%. Europe vs US valuation gaps are widest in the Energy, Food & Staples Retail and Tech Hardware sectors. US Valuations Have Partly Responded to Improving Returns, but in Europe Valuations Have Barely Moved © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research Energy, with a 40% value-gap, is the sector with the biggest value-gap according to a report, first published on January 25th by Alastair Syme entitled The Role of Trans-Atlantic M&A in Closing Oil’s Value-Gap. In both markets energy equities decoupled from rising oil prices in 2022, but the decoupling of Europe has been even more pronounced. Part of this delta can be explained by portfolio differences, with the US pivoting to shale and Europe to low carbon-- and the latter coming under pressure from rising rates. But Citi analysts see the biggest driver coming from a widening CoE as European investors feel increasing pressure on owning energy equities. Citi analysts see little scope for the political backdrop in Europe to change in a way that would re-align the CoE between the two markets. If anything, European energy policy’s stance against fossil fuels has become more entrenched, they say. Global oil companies have famously consolidated before. But the drivers of the late 1990s consolidation do not look applicable today, the note said. For more information on this subject, please see the full report on the rising cost of capital, first published on January 20th, here US Equity Strategy - New Era for the Cost of Capital: Equity Market Implications Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

A new report by Citi Research’s Scott Chronert takes a detailed look at the rising cost of capital and its implications. 

No More Easy Money: Implications of the Rising Cost of Capital

EU leaders searching for a response to the IRA are grappling with how to match foreign incentives while not upending the playing field in the EU itself. The IRA sets out plans for $369 billion in subsidies for green industry and energy over a decade. It has led to complaints of discrimination against EU companies. Implications of the European Response to the US Inflation Reduction Act Source: Citi Research The EU is expected to respond to the IRA. But what options are available to it? The new Citi Research report explores that question. The team expects a political agreement to emerge that loosens state aid rules for clean technology and repurposes some 300 billion euros of existing funding lines to help governments with less fiscal firepower compete with the US. Scaled-up subsidies and increasingly protectionist policies add to the risks of higher inflation in the medium term, the authors warn. The EU’s dilemma The report describes the EU’s “business model” as promoting free trade, strict competition rules, and soft power. But doubts about that model now abound given the economic fallout from the Russia-Ukraine conflict and the need to accelerate Europe’s energy transition. The pain of Europe weaning itself off Russian gas has raised concerns about other critical economic dependencies. EU leaders have discussed how to respond, but the authors suspect that response will prove modest due to the EU’s own complexities. Trade restrictions imposed since 2008 (Global, number) Source: Citi Research, Global Trade Alert, IMF How much the IRA accelerates green investments may depend on the extent to which subsidies lead to additive investment at the global level rather than diverting investment to the US from elsewhere. The EU has criticized these discriminatory provisions as giving US manufacturers an unfair advantage, as well as for going against global trade rules and diverting industrial plants away from Europe. For the EU, the risk is twofold: IRA subsidies may drive key industrial sectors away from the EU when its industrial competitiveness is already suffering; and a US turn to protectionism poses a more fundamental challenge to core tenets of the EU business model. Potential responses Discussions under way about an EU “Green Deal Industrial Plan” are likely to extend into the spring. The authors think a political agreement is likely in the first half of this year, one that would outline a short-term response. The authors cite three reasons the response might be muted: The EU must balance its own internal cohesion with its strategic interaction with the rest of the world. A response in kind to US subsidies intended to keep EU industries ashore would almost certainly allow large, deep-pocketed EU members to outspend smaller, more fiscally constrained ones, which could spur industrial relocations within the EU. Access to joint EU funds comes with strings attached, making them less attractive for EU governments. While the IRA is envisioned as fully funded by tax increases, the EU hasn’t achieved clarity on how larger-scale industrial subsidies would be paid for. Challenges for the UK The report notes the challenges faced by the UK, where broader political disruptions in recent months have left policymakers “on the back foot.” The UK seems particularly exposed to domestic US economic changes associated with the IRA. It also seems likely to be hurt by the broad consequences for international trade. And unlike the EU, the UK is in a particularly weak position in terms of a response. The authors summarize their argument saying that being “a small open economy in an increasingly protectionist global economy is bad news,” adding that the UK is at risk both because of changes in the US economy driven by the IRA and because of the medium-term reaction from the EU. For more information on this subject, please see: EMEA Equity Research - Macro to Micro: Implications of the European response to the US Inflation Reduction Act Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

A new report from Citi Research’s Dorothee Rouzet looks at some of the ways in which the EU might respond to the US Inflation Reduction Act (IRA). 

US Inflation Reduction Act: The EU Response

Even as geopolitical tensions keep investors off balance, signs are appearing that certain economic tailwinds may be gathering strength. Take the January US payrolls report. It showed booming job creation, led by the services sectors. That’s a reversal of the early days of the pandemic, when US and global consumers rotated their spending away from services - ostensibly to avoid face-to-face contact - toward goods. Now, as the pandemic broadly recedes, consumers are returning to services. Citi Research’s Nathan Sheets and team reckon this rotation back to services still has a way to go. Real Consumption by Expenditure © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research, Bureau of Economic Analysis, Haver Analytics Consistent with this, the chart above displays the major components of consumption, all of which fell sharply early in the pandemic. But goods spending quickly bounced back up, surpassing previous levels. The strength of durables spending, in particular, reflected the rotation away from services discussed above, as well as sizable fiscal stimulus payments to consumers. By mid-2021 the surge in goods had played out with spending on durable goods plateauing at about 25% above pre-pandemic levels and non-durables up 11%. In contrast, services spending recovered from the pandemic much more gradually, but it has continued to rise through the past 18 months as goods expenditures have leveled off. Services spending matched its pre-pandemic level in the fall of 2021 and is now up a further 4%. Some of this means that inflationary pressures are currently being driven by services, potentially posing a challenge for central banks. Much of this is easy to reconcile with some of the key features of Citi Research’s broader economic forecast, which points to relatively desynchronized cycles across the major economies. Citi Research economists still see “rolling” country-level recessions impacting various countries and regions different times over the next year or so. They also reckon central banks ultimately will win their battle with services-led inflation although it’s a fight that will likely continue through the end of this year, with meaningful signs of improvement emerging only in 2024. Meanwhile, the US personal saving rate, which surged during the pandemic and remained highly elevated for several quarters, is back in the spotlight. In recent quarters these funds have been drawn down to support consumption against a backdrop of higher inflation and tightening monetary policy. A new report from Citi Research’s Robert Sockin focuses on the question of how much remains and what that does to the outlook for consumption. The benchmark estimates for excess saving come from a recent paper by economists at the Federal Reserve. They found that excess savings peaked at around $2.3trn in mid-2021 and are currently around $1.2trn. US Saving Rate © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research, Bureau of Economic Analysis, Haver Analytics The amount of “excess saving” on household balance sheets remains a pivotal factor for the US outlook. The Fed’s estimate assumes households (in the absence of other shocks) would now be expected to save near 9% of their income — almost all monthly saving rates from 1990-2019 were below this level. Less aggressive assumptions for underlying saving behavior raises the Fed’s estimate of excess saving substantially. For example, a framework that puts underlying desired saving in the mid-8% range today increases excess saving to $1.7trn. Saving rates in the 7% range could increase excess saving to near $2trn. That’s to say excess savings could be materially larger than currently believed. For more information on this subject, please see: Global Economics - The Surge in Services Spending—Still Room to Run? (10 February 2023) Global Economics - How Much Firepower Does the US Consumer Have Left? (13 February 2023) Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

Even as geopolitical tensions keep investors off balance, signs are appearing that certain economic tailwinds may be gathering strength. Take the January US payrolls report. It showed booming job creation, led by the services sectors. That&rsquo;s a reversal of the early days of the pandemic, when US and global consumers rotated their spending away from services - ostensibly to avoid face-to-face contact - toward goods. Now, as the pandemic broadly recedes, consumers are returning to services.
Citi Research&rsquo;s Nathan Sheets and team reckon this rotation back to services still has a way to go.
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Real Consumption by Expenditure
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<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6400c174a3653d5f1436c1f9.png" width="561" height="435" />
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&copy; 2023 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
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Source: Citi Research, Bureau of Economic Analysis, Haver Analytics
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&nbsp;
Consistent with this, the chart above displays the major components of consumption, all of which fell sharply early in the pandemic. But goods spending quickly bounced back up, surpassing previous levels. The strength of durables spending, in particular, reflected the rotation away from services discussed above, as well as sizable fiscal stimulus payments to consumers. By mid-2021 the surge in goods had played out with spending on durable goods plateauing at about 25% above pre-pandemic levels and non-durables up 11%.
In contrast, services spending recovered from the pandemic much more gradually, but it has continued to rise through the past 18 months as goods expenditures have leveled off. Services spending matched its pre-pandemic level in the fall of 2021 and is now up a further 4%.
Some of this means that inflationary pressures are currently being driven by services, potentially posing a challenge for central banks.
Much of this is easy to reconcile with some of the key features of Citi Research&rsquo;s broader economic forecast, which points to relatively desynchronized cycles across the major economies.
Citi Research economists still see &ldquo;rolling&rdquo; country-level recessions impacting various countries and regions different times over the next year or so. They also reckon central banks ultimately will win their battle with services-led inflation although it&rsquo;s a fight that will likely continue through the end of this year, with meaningful signs of improvement emerging only in 2024.
Meanwhile, the US personal saving rate, which surged during the pandemic and remained highly elevated for several quarters, is back in the spotlight.
In recent quarters these funds have been drawn down to support consumption against a backdrop of higher inflation and tightening monetary policy. A new report from Citi Research&rsquo;s Robert Sockin focuses on the question of how much remains and what that does to the outlook for consumption.
The benchmark estimates for excess saving come from a recent paper by economists at the Federal Reserve. They found that excess savings peaked at around $2.3trn in mid-2021 and are currently around $1.2trn.
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US Saving Rate
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<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6400c1934cea3d68f51836ce.png" />
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&copy; 2023 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
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Source: Citi Research, Bureau of Economic Analysis, Haver Analytics
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&nbsp;
The amount of &ldquo;excess saving&rdquo; on household balance sheets remains a pivotal factor for the US outlook.
The Fed&rsquo;s estimate assumes households (in the absence of other shocks) would now be expected to save near 9% of their income &mdash; almost all monthly saving rates from 1990-2019 were below this level. Less aggressive assumptions for underlying saving behavior raises the Fed&rsquo;s estimate of excess saving substantially. For example, a framework that puts underlying desired saving in the mid-8% range today increases excess saving to $1.7trn. Saving rates in the 7% range could increase excess saving to near $2trn. That&rsquo;s to say excess savings could be materially larger than currently believed.
For more information on this subject, please see: 
<a href="https://www.citivelocity.com/t/r/eppublic/2bqhf" target="_blank" rel="noopener" data-link-source="tiny">Global Economics - The Surge in Services Spending&mdash;Still Room to Run? (10 February 2023)</a>
<a href="https://www.citivelocity.com/t/r/eppublic/2bqh3" target="_blank" rel="noopener" data-link-source="tiny">Global Economics - How Much Firepower Does the US Consumer Have Left? (13 February 2023)</a>
Citi Global Insights (CGI) is Citi&rsquo;s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click <a href="https://ir.citi.com/6A3IURUaezPxFLppsgdBkqidjLaLn558JwHISYaDZcTfE9XMRB1isDDDVorqrxpR%2fTnEi4RUCl8%3d" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Economic uncertainty has become a stubborn constant as geopolitical tensions persist. Against this backdrop, are green shoots appearing? Citi Research’s Nathan Sheets and team look at these themes in recent reports.

As Geopolitical Strife Endures, Tailwinds Develop

The new Citi Research report sketches out several wildcard scenarios that could impact commodities, from supply chains to stockpiling, a new gold rush to central bank policy machinations. Wildcard Scenarios © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research Here we’ll present a quick run through of the top five of these wildcards- for the full analysis and details of the rest, see the full report. To be clear- these aren’t predictions but scenarios to be mindful of and inform thought. Wildcard 1: A 180 degree turn in weather year on year would lower energy prices If weather patterns were to flip completely vs. last year, the potential for more reliable renewable generation, fewer hurricanes over the Atlantic and less coal production disruption would lead to lower natural gas and coal prices and perhaps even diesel prices too. Renewable power generation in Europe is now much above last year’s level Source: Citi Research, Bloomberg And along with warmer weather and consumers cutting back on demand, natural gas-fired generation has fallen. This could continue throughout the year, as shown below. Source: Citi Research, Bloomberg Wildcard 2: Global Supply Chains Pressures Reignite Supply chain pressures abated in the second half of last year and are now only somewhat higher than pre-covid levels. Pressures will most likely continue to ease further in 2023, but unexpected shocks could halt progress or even reverse it. If supply chains were to become impaired again, Citi Research analysts reckon it could have material economic implications—most notably for goods inflation which would likely accelerate once more. Renewed goods inflation would make it tougher for central banks to bring inflation back to target levels and lead to tighter than expected policy moves. Citi Global Supply Chain Pressure Index Source: Citi Research, Bloomberg Supply chain disruptions earlier in this cycle were driven by a surge in the demand for goods caused by the pandemic and supply shocks such as lockdowns in China and the war in Ukraine. Any reignition of supply chain issues would probably arise from issues like covid getting worse (particularly in China), a recovery in spending on goods, a conflict on a major trading route—or some combination of these. Wildcard 3: Countries move aggressively to stockpile key materials and dramatically accelerate investment in domestic manufacturing and mining Security of raw materials is of increasing importance to policy makers as they look for ways to enable global growth as well as the energy transition. This focus on raw materials is perhaps no surprise given developments in Russia/Ukraine, the worlds high exposure to Taiwanese semi-conductor chips, and an increasing global dependence Chinese EV battery, solar and wind components. Any aggressive stockpiling by regions of materials, including oil and gas, battery metals, EV batteries, semi-conductor chips coupled with accelerating investment in domestic manufacturing and mining--a partial reversal of globalization—could impact global commodity markets over the coming year. Wildcard 4: Gold trading posts fresh nominal price record, clearing $2,100/oz over the next 9-12M Gold’s ~$425/oz peak-to-trough decline from March-October last year was meaningful, Citi Research analysts say, but the yellow metal actually did well to outstrip its historical beta. If physical demand (e.g. jewelry) stays high, a dovish Fed pivot in the first half could send bullion prices higher later in the year. Gold flows could benefit from a US recession later in 2023, underlining its safe-haven credentials. Wildcard 5: Further deterioration of US-China relations, leading to more sanctions and trade and supply chain disruptions In a worst-case scenario, US-China trade and/or tech conflict could lead to significant disruptions to global trade flows and supply chains. While the degree of damage to the world economy would depend on the scope of such tariffs/sanctions, they would nevertheless likely lead to heightened goods inflation and widespread recessions. Combined with fractured Chinese commodities demand due to lower exports of manufactured goods, and broad risk-off sentiment, this would appear to be a perfect storm for global commodity markets. For the full rundown of Citi research’s 15 commodities wildcards, see the full report here Global Commodities - Wildcards 2023: Global and domestic shifts could make 2023 a banner year for the unexpected (6 Feb 2023) Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

Uncertainty abounds where commodities are concerned. A new report from, Citi Research’s Ed Morse looks at some of the potential wildcard scenarios. 

The Wildcards of Global Commodities

It has been a decade since corporate governance was introduced into Japan’s national growth strategy as part of the Japan Revitalization Strategy. Since then, revisions and updates have been made and there has been some progress. For example, compared with 2015 there has been a big uptick in the proportion of companies with independent or outside directors. Indeed, almost 82% of prime market companies had an independent director share of at least one-third as of 2022 (see chart below). But the fact remains that Japanese firms are still lagging compared with international firms. Ratio of listed companies in Japan with independent directors, nomination committees, and remuneration committees © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: JPX, Citi Research The proportion of female directors is rising but was still only 11% in 2021 compared with 30%-40% for the US and Europe. Cross shareholdings are a particular feature in Japan, and they count as negative in ESG index governance items. Modest progress has seen the average number of names held fall from 65 in 2010 to 43 in 2019, but sales have been limited to small holdings. Meanwhile, the Bloomberg governance scores show improvement for Japanese companies but persistently low levels compared with US and European counterparts. Japanese ESG scores are generally comparatively low but particularly so for governance (see chart below). Comparison of Bloomberg E, S, and G scores in Japan, the US, and Europe © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Bloomberg, Citi Research Citi Research analysts highlight the TSE’s Council of Experts Concerning the Follow-up of Market Restructuring as a vehicle with the potential to make more progress. On January 30, the TSE published a summary of its discussions over recent months including how steps should be taken to make the “comply or explain” provision of the Corporate Governance Code (CGC) widely known and highlight instances of inadequate explanations, among other measures. At a February meeting, the Council of Experts released its specific requirements for initiatives to improve capital efficiency and stock prices, the details of which are outlined in the full report. Ideas discussed included promoting competition among companies by including a PBR benchmark of 1.0x in the standards for listing on the prime market and restricting the number of stocks in the TOPIX. International comparison of 12m forward PER (by RoE level) © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Note: Compiled using stocks for which data items are available. RoE on a 12m trailing basis. Source: Bloomberg, Citi Research Japanese companies suffer discounts despite high RoE The earnings multiples of Japanese companies are lower than those in the West across the board, and this tendency also affects companies with RoE in excess of 15% (see chart below). One reason companies with high RoE are discounted relative to overseas peers is that the sheer number of companies with RoE below the cost of capital makes the Japanese equity market less attractive overall, thereby hindering the inflow of funds. International comparison of 12m forward PER: median (by RoE level) © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Note: Compiled using stocks for which data items are available. RoE on a 12m trailing basis. Source: Bloomberg, Citi Research If the latest initiatives by the JPX promote capital policy reviews and business model reforms at companies with low RoE, it could lead to the medium- to long-term re-rating of Japanese equities and the rectification of the current discount, the analysts note. For more information on this subject, please see: Japan Equity Strategy - Japan’s corporate governance reforms about to enter new phase (21 February 2023) Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

It has been a decade since corporate governance was introduced into Japan&rsquo;s national growth strategy as part of the Japan Revitalization Strategy.
Since then, revisions and updates have been made and there has been some progress. For example, compared with 2015 there has been a big uptick in the proportion of companies with independent or outside directors. Indeed, almost 82% of prime market companies had an independent director share of at least one-third as of 2022 (see chart below).
But the fact remains that Japanese firms are still lagging compared with international firms. &nbsp;
Ratio of listed companies in Japan with independent directors, nomination committees, and remuneration committees
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6409a8b87f880b38d666f561.png" width="766" height="442" />
&copy; 2023 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission. Source: JPX, Citi Research 
The proportion of female directors is rising but was still only 11% in 2021 compared with 30%-40% for the US and Europe.
Cross shareholdings are a particular feature in Japan, and they count as negative in ESG index governance items. Modest progress has seen the average number of names held fall from 65 in 2010 to 43 in 2019, but sales have been limited to small holdings.
Meanwhile, the Bloomberg governance scores show improvement for Japanese companies but persistently low levels compared with US and European counterparts.
Japanese ESG scores are generally comparatively low but particularly so for governance (see chart below).
Comparison of Bloomberg E, S, and G scores in Japan, the US, and Europe
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6409a9227f880b38d666f564.png" width="775" height="678" />
&copy; 2023 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission. Source: Bloomberg, Citi Research
Citi Research analysts highlight the TSE&rsquo;s Council of Experts Concerning the Follow-up of Market Restructuring as a vehicle with the potential to make more progress.
On January 30, the TSE published a summary of its discussions over recent months including how steps should be taken to make the &ldquo;comply or explain&rdquo; provision of the Corporate Governance Code (CGC) widely known and highlight instances of inadequate explanations, among other measures.
At a February meeting, the Council of Experts released its specific requirements for initiatives to improve capital efficiency and stock prices, the details of which are outlined in the full report. Ideas discussed included promoting competition among companies by including a PBR benchmark of 1.0x in the standards for listing on the prime market and restricting the number of stocks in the TOPIX.
International comparison of 12m forward PER (by RoE level)
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6409a97c8dd0b46aa609bda8.png" width="779" height="382" />
&copy; 2023 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission. Note: Compiled using stocks for which data items are available. RoE on a 12m trailing basis. Source: Bloomberg, Citi Research
Japanese companies suffer discounts despite high RoE
The earnings multiples of Japanese companies are lower than those in the West across the board, and this tendency also affects companies with RoE in excess of 15% (see chart below).
One reason companies with high RoE are discounted relative to overseas peers is that the sheer number of companies with RoE below the cost of capital makes the Japanese equity market less attractive overall, thereby hindering the inflow of funds.
International comparison of 12m forward PER: median (by RoE level)
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6409a9ec7f880b38d666f568.png" width="793" height="390" />
&copy; 2023 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission. Note: Compiled using stocks for which data items are available. RoE on a 12m trailing basis. Source: Bloomberg, Citi Research
If the latest initiatives by the JPX promote capital policy reviews and business model reforms at companies with low RoE, it could lead to the medium- to long-term re-rating of Japanese equities and the rectification of the current discount, the analysts note. 
For more information on this subject, please see: <a style="text-decoration: underline;" href="https://www.citivelocity.com/t/r/eppublic/2cFv7" target="_blank" rel="noopener" data-link-source="tiny">Japan Equity Strategy - Japan&rsquo;s corporate governance reforms about to enter new phase</a> (21 February 2023)
Citi Global Insights (CGI) is Citi&rsquo;s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click <a style="text-decoration: underline;" href="https://ir.citi.com/6A3IURUaezPxFLppsgdBkqidjLaLn558JwHISYaDZcTfE9XMRB1isDDDVorqrxpR%2fTnEi4RUCl8%3d" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

A new report from Citi Research’s Ryota Sakagami looks at the long-standing issue of corporate governance standards in Japan - finding progress but also more work to be done. 

Japan’s Corporate Governance Enters New Phase 

The health of the global economy continues to offer food for thought. The growth outlook in China is stronger and less uncertain than Citi analysts envisioned a few months ago. And the euro area, rather than a full-on contraction, is seeing something more like stagnation. Recent data from the US also suggests resilience. That said, the global campaign against inflation still has a long way to go. Specifically, consumer spending on services—and the resultant tight labor markets and services inflation—have momentum. Global Growth Forecasts Source: Citi Research © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission Citi Research economists now see a “less hard” landing for the global economy. They see global growth slowing this year to a below-trend 2.2% pace, from 3% in 2022. This projection is up more than 0.25 of a percentage point from late last year. Even with that upgrade, global growth would remain in the bottom quartile of performance during the past forty years, for context. Next year, Citi Research economists see overall growth rising to 2.6% as the global economy bounces back, albeit slowly. And they recently marked down their probability of a synchronized global recession to 30%. But they still project “rolling” country-level recessions and weakness through the year ahead. Specifically, outright recessions are expected in the United States, Canada, Mexico, Brazil, Chile, Germany, Italy, the United Kingdom, Korea, and Russia. But the timing and trajectory of these downturns is likely to vary. In China, the re-opening from Covid is proceeding full steam ahead. The data indicate strong household spending through Chinese New Year. For example, despite the public health challenges that prevailed, movie ticket sales exceeded levels posted both last year and in 2019. In the US, recent data have generally pointed to economic resilience. The January payrolls report showed booming job creation of 517,000; the unemployment rate fell to 3.4%. In the Euro area, gas prices have fallen from peaks six months ago, and measures of economic sentiment are climbing back. Fourth-quarter real GDP growth came in at 0.4% (annualized). Germany, in contrast, saw a mild contraction. Accordingly, growth this year is poised to run at 1%, up from our forecast of -0.4% at the end of last year. Central banks—Focused on Subduing Inflation DM central banks are in the midst of a vigorous tightening cycle. The Federal Reserve over the past year has lifted rates by 450 basis points. Going forward, Citi expects 25 basis point rate increases at each of the Fed’s next three meetings. Similarly, Citi Research expects the ECB to push the deposit rate to 3½%, its highest setting in two decades, and sees it holding that well into 2024, until inflation is clearly on its way back to the 2% target. In the UK, Australia, and Canada, policy has also tightened appreciably—and is likely to remain tight. The Bank of Japan remains an important outlier among the DM central banks, with its policy rate still in negative territory. For the EM economies, policy is historically tight among many in Latin America and some in emerging Europe. These central banks began their hiking cycles in 2021 and have remained aggressive, as they have faced domestic as well as global price pressures. In contrast, central banks in emerging Asia have been less vigorous, as domestic inflation has been more muted. As DM central banks eventually pause their tightening, and global inflationary pressures ebb, the EM central banks where policy is particularly tight should have scope for rate cuts. For more information on this subject, please see Global Economic Outlook & Strategy - Inflation Is Not Yet Defeated (21 Feb ’23) Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

The health of the global economy continues to offer food for thought. &nbsp;
The growth outlook in China is stronger and less uncertain than Citi analysts envisioned a few months ago. And the euro area, rather than a full-on contraction, is seeing something more like stagnation. Recent data from the US also suggests resilience.
That said, the global campaign against inflation still has a long way to go. Specifically, consumer spending on services&mdash;and the resultant tight labor markets and services inflation&mdash;have momentum.
&nbsp;
<h3>Global Growth Forecasts </h3>
<img src="https://www.citivelocity.com/rendition/eppublic/akpublic/documents/output/30135883/fgImages/image4.emf.svg?ts=1677040146791&amp;version=1" alt="Figure 1. Global Growth Forecasts Source: Citi Research If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788." width="498" height="388" />
Source: Citi Research &copy; 2023 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission
&nbsp;
Citi Research economists now see a &ldquo;less hard&rdquo; landing for the global economy. They see global growth slowing this year to a below-trend 2.2% pace, from 3% in 2022. This projection is up more than 0.25 of a percentage point from late last year. Even with that upgrade, global growth would remain in the bottom quartile of performance during the past forty years, for context.
Next year, Citi Research economists see overall growth rising to 2.6% as the global economy bounces back, albeit slowly. And they recently marked down their probability of a synchronized global recession to 30%. But they still project &ldquo;rolling&rdquo; country-level recessions and weakness through the year ahead.
Specifically, outright recessions are expected in the United States, Canada, Mexico, Brazil, Chile, Germany, Italy, the United Kingdom, Korea, and Russia.
But the timing and trajectory of these downturns is likely to vary.
In China, the re-opening from Covid is proceeding full steam ahead. The data indicate strong household spending through Chinese New Year. For example, despite the public health challenges that prevailed, movie ticket sales exceeded levels posted both last year and in 2019.
In the US, recent data have generally pointed to economic resilience. The January payrolls report showed booming job creation of 517,000; the unemployment rate fell to 3.4%.
In the Euro area, gas prices have fallen from peaks six months ago, and measures of economic sentiment are climbing back. Fourth-quarter real GDP growth came in at 0.4% (annualized). Germany, in contrast, saw a mild contraction. Accordingly, growth this year is poised to run at 1%, up from our forecast&nbsp;of -0.4% at the end of last year.
&nbsp;
<h3>Central banks&mdash;Focused on Subduing Inflation&nbsp;</h3>
DM central banks are in the midst of a vigorous tightening cycle. The Federal Reserve over the past year has lifted rates by 450 basis points. Going forward, Citi expects 25 basis point rate increases at each of the Fed&rsquo;s next three meetings. &nbsp;
Similarly, Citi Research expects the ECB to push the deposit rate to 3&frac12;%, its highest setting in two decades, and sees it holding that well into 2024, until inflation is clearly on its way back to the 2% target. In the UK, Australia, and Canada, policy has also tightened appreciably&mdash;and is likely to remain tight.
The Bank of Japan remains an important outlier among the DM central banks, with its policy rate still in negative territory.
For the EM economies, policy is historically tight among many in Latin America and some in emerging Europe. These central banks began their hiking cycles in 2021 and have remained aggressive, as they have faced domestic as well as global price pressures.
In contrast, central banks in emerging Asia have been less vigorous, as domestic inflation has been more muted. &nbsp;
As DM central banks eventually pause their tightening, and global inflationary pressures ebb, the EM central banks where policy is particularly tight should have scope for rate cuts. For more information on this subject, please see <a href="https://www.citivelocity.com/t/r/eppublic/2d4OQ" target="_blank" rel="noopener" data-link-source="tiny">Global Economic Outlook &amp; Strategy - Inflation Is Not Yet Defeated</a> (21 Feb &rsquo;23)
&nbsp;
Citi Global Insights (CGI) is Citi&rsquo;s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click <a href="https://ir.citi.com/6A3IURUaezPxFLppsgdBkqidjLaLn558JwHISYaDZcTfE9XMRB1isDDDVorqrxpR%2fTnEi4RUCl8%3d" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

A recent report from Citi Research’s Nathan Sheets, finds pockets of positivity in the global economy, against a backdrop of a continuing battle with inflation. 

Inflation: Not Vanquished Yet

Citi Research’s Global Theme Machine is now in its second decade. This year’s annual rebalance introduces eight new themes. The Theme Machine has morphed over the past decade to take account of emerging innovations and changes in society, as well as geopolitical and economic challenges. With an enriched set of data, the Theme Machine can further our understanding of the relative appeal of thematic investing, how this investment style has evolved over time, and how it compares to more traditional investment approaches. For 2023, the Theme Machine maps almost 6,000 stocks to 93 themes. That is more than 32,000 mappings in total. For a full write-up on how the Theme Machine works and how it can help, see the full report. But here’s just a little more on the eight new themes that have been added this year. What’s New? The 2023 rebalance of the Global Theme Machine includes eight new themes to the full suite of, now, 93 themes. These include Beautiful People (a Consumption theme), PropTech (a Financial theme), Feminine Health & FemTech, Fighting Obesity, and Mental Wellness, which all relate to Health Care. Then there is one new Industrial/Environment Trends theme – Greening The Home. And lastly come two IT-focused themes: Smart Home and Creator Economy. These are laid out in a bit more detail in the following figure: New Themes for 2023 and Definitions © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research The mappings are new for this year, but the cumulative performance of these stocks aggregated at the exposure level over the past three years are shown in the next figure: Past 3-year Cumulative Returns for New Themes for 2023 © 2023 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research, MSCI From a performance perspective, the theme Creator Economy generated impressive returns following the drop in the market in February 2020; this is probably in part a consequence of changes related to working from home and greater dependence on digital products and services during lockdowns. It is also a consequence of growth-type sectors -- a style which outperformed during the first year of the pandemic. Three of the new themes have delivered decent returns on an absolute basis and in excess of a global market index since January 2020. Greening The Home, for example, outperformed the MSCI World Index by 3.7% with slightly lower volatility. The new Health Care-related themes have not fared quite as well. Greening The Home, PropTech, and Smart Home all have notably lower price/book ratios. From an EPS growth perspective – which analysts have noted in the past is a typical driver of theme performance in the future – several of the themes are an improvement versus MSCI World: Beautiful People, Creator Economy, Feminine Health & FemTech, and Greening The Home stand out. For a calculation of investment styles, performance analysis, return correlations, and more around the Global Theme Machine, please see the full report, first published on February 28, here: Global Theme Machine - Decoding Thematic Investing: Entering a New Decade of the Theme Machine Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.

Citi Research&rsquo;s Global Theme Machine is now in its second decade. This year&rsquo;s annual rebalance introduces eight new themes. The Theme Machine has morphed over the past decade to take account of emerging innovations and changes in society, as well as geopolitical and economic challenges.
With an enriched set of data, the Theme Machine can further our understanding of the relative appeal of thematic investing, how this investment style has evolved over time, and how it compares to more traditional investment approaches. For 2023, the Theme Machine maps almost 6,000 stocks to 93 themes. That is more than 32,000 mappings in total.
For a full write-up on how the Theme Machine works and how it can help, see the full report. But here&rsquo;s just a little more on the eight new themes that have been added this year.
What&rsquo;s New?
The 2023 rebalance of the Global Theme Machine includes eight new themes to the full suite of, now, 93 themes. These include Beautiful People (a Consumption theme), PropTech (a Financial theme), Feminine Health &amp; FemTech, Fighting Obesity, and Mental Wellness, which all relate to Health Care. Then there is one new Industrial/Environment Trends theme &ndash; Greening The Home. And lastly come two IT-focused themes: Smart Home and Creator Economy. These are laid out in a bit more detail in the following figure:
New Themes for 2023 and Definitions
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6412e3eaf56dcf7624103d97.png" width="848" height="576" />
&copy; 2023 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission. Source: Citi Research
The mappings are new for this year, but the cumulative performance of these stocks aggregated at the exposure level over the past three years are shown in the next figure:
Past 3-year Cumulative Returns for New Themes for 2023
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6412e43518f9eb2dcb48d049.png" />
&copy; 2023 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission. Source: Citi Research, MSCI
From a performance perspective, the theme Creator Economy generated impressive returns following the drop in the market in February 2020; this is probably in part a consequence of changes related to working from home and greater dependence on digital products and services during lockdowns. It is also a consequence of growth-type sectors -- a style which outperformed during the first year of the pandemic.
Three of the new themes have delivered decent returns on an absolute basis and in excess of a global market index since January 2020. Greening The Home, for example, outperformed the MSCI World Index by 3.7% with slightly lower volatility. The new Health Care-related themes have not fared quite as well.
Greening The Home, PropTech, and Smart Home all have notably lower price/book ratios.
From an EPS growth perspective &ndash; which analysts have noted in the past is a typical driver of theme performance in the future &ndash; several of the themes are an improvement versus MSCI World: Beautiful People, Creator Economy, Feminine Health &amp; FemTech, and Greening The Home stand out.
For a calculation of investment styles, performance analysis, return correlations, and more around the Global Theme Machine, please see the full report, first published on February 28, here: <a href="https://www.citivelocity.com/t/r/eppublic/2ch0d" target="_blank" rel="noopener" data-link-source="tiny">Global Theme Machine - Decoding Thematic Investing: Entering a New Decade of the Theme Machine</a>
Citi Global Insights (CGI) is Citi&rsquo;s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click <a href="https://ir.citi.com/6A3IURUaezPxFLppsgdBkqidjLaLn558JwHISYaDZcTfE9XMRB1isDDDVorqrxpR%2fTnEi4RUCl8%3d" target="_blank" rel="noopener" data-link-source="tiny">here</a>.
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A new report from Citi Research’s Josie Gerken presents the latest iteration of Citi’s Global Theme Machine, an increasingly rich data set offering powerful research capabilities in understanding thematic investing. 

Citi’s Global Theme Machine: What’s New for 2023? 

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