Fixed Income

In August, the US Treasury (UST) curve flattened. Near-term yields rose due to expectations of a September Federal Reserve (Fed) rate hike, while mid to long-dated yields fell. Escalating US-China trade tensions and the weaker-than-expected July US jobs report pushed UST yields lower at the start of the month.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was up 0.81% over the month. The yield curve flattened as the spread between long-term and short-term bond yields narrowed.

We entered the year optimistic, and with the knowledge of the last six months, we are pleased that most of our expectations worked out.

In March 2018, Bloomberg announced a conditional decision to include Chinese bonds in its flagship bond index: Bloomberg Barclays Global Aggregate, starting from April 2019.

Our London-based Emerging Market fixed income portfolio manager provides an update for Latin American markets in the midst of a hectic election schedule. Despite the risks, pro-market reforms should still progress to varying degrees across the region.

The ECB recently celebrated its 20-year anniversary and instead of a birthday cake, DB research released a compelling chart about how different asset classes have performed over this time period.

Despite uninspiring global equity performance in the last three months, at least for USD-based investors, Nikko AM’s Global Investment Committee continues to be positive on global equities on a one-year view, particularly those in Japan, Europe and the Asia Pacific, but remain unenthusiastic on global bonds.

Many economists and currency analysts, after years of ignoring such “old fashioned” indicators, are now talking about the massive trade surplus that the Eurozone enjoys with the world, but in particular with the US.

Our London-based Emerging Market fixed income analyst predicts increased volatility ahead for Latin American markets due to the threat of Leftist election victories this year, but that pro-market reforms will still progress.

Our updated view remains positive on the global economy and equity markets even as global bond yields rise a bit further. Our SPX target remains near 3000 by year end, with impressive gains elsewhere too.

Poor economic and fiscal policies are, and will likely be, a recurring theme in Italian politics. However, from a trade perspective, we see Italy to remain a good carry/spread trade for at least the next twelve months against a backdrop of improving GDP growth in 2018 and 2019.

Our Senior Portfolio Manager for Emerging Markets in London forecasts that in 2018, this asset class could well match 2017’s achievement.

For 2018 and beyond, we see a story of central bank policy normalization and foresee the global economy growing in a similar fashion to how it did in 2017: low growth coupled with comparatively low inflation data.

We see the key investment themes to drive performance in Global Credit in 2018 to be similar to last year. We have developed our investment themes: Long US High Yield, Long Chinese Tier1 SOEs, Long European Hybrids, Long European Financials, Long Rising Stars.

Low global inflation and, until recently, a strong Kiwi dollar have kept New Zealand’s inflation rate low over many years, however things may be about to change.

The imminent party election will be crucial in determining this major Emerging Market’s future.

From an economic perspective Canada and Australia share some common features, but we would caution that the performance of the two economies is substantially different than generalisations would suggest.

Even as the situation in Germany to form a new government is difficult, financial markets have reacted very mildly to the uncertainties.

We think it is unlikely that May will be replaced within her own party. This is because there is a lack of an heir-apparent, and the Conservative Party would be extremely reluctant to even slightly increase the risk of another election.

Just as politics in other developed countries have recently taken on a more populist and/or anti-capitalist tone, so too has New Zealand’s.

To help bridge the gap between the perceived unreliability of Chinese statistics and the importance of analysing the world’s second largest economy, we look for measures which have less potential to be manipulated.

Most bond index providers have started to recognize China’s financial market liberalisation and reform efforts. We think it is only a question of time before they are included in the main benchmark indices.

A separate allocation to Asia IG offers European investors a way to mitigate risk within their EMD exposure.

Our senior fixed income portfolio manager in Singapore explains why he is bullish on ASEAN currencies for the long-term.

Despite geopolitical risks and less dovish central banks, the Global Investment Committee remains moderately optimistic about the global economy and equity markets, while being cautious on global bonds.

Despite the uncertainty surrounding the time it will take before the formation of a new government, we do not think there is risk of major policy change in Germany. The election outcome, however, will likely weigh on the aspirations of France’s Macron for deeper Eurozone integration.

Our London-based Global Credit Portfolio Manager lays out the scenarios of the upcoming German election and its ramifications for select German credits.

China’s dual goals of deleveraging and maintaining strong growth may not necessarily conflict, but they certainly pose a delicate balancing act for the government.

The rapid development of the Asia Credit markets provides new opportunities to improve the risk and return profile for investors.

The Global Investment Committee remains moderately optimistic about the global economy and equity markets, while being cautious on global bonds.

Changing perception of ESG’s performance impact: An active ESG approach is now regarded as a catalyst for outperformance.

While highly unlikely, we examine the potential impact on Japan of a major crisis on the Korean Peninsula.

We believe that Abenomics is working, however we feel that its success cannot be determined by viewing government policy frameworks in isolation.

Steve Williams, the Portfolio Manager responsible for Green Bonds in Nikko AM’s London office, examines how this burgeoning asset class is likely to develop into a mainstream part of global fixed income portfolios.

“Any major crisis in the Northeast Asian region, especially one involving a crisis within Japan’s borders, is likely to be handled very aggressively by the Bank of Japan (BOJ), with it bending the rule-book as much as the Fed did during the Global Financial Crisis or as the ECB has done in the past five years.”

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

Our Tokyo Fixed Income team explains its view on the Japanese labor market and its effect on consumer inflation and Bank of Japan policy.

“We all have heard of the term 'interest rate repression' for how central banks have kept rates at ultra-low levels, but this has only been successfully maintained due to what I call 'inflation repression.'”

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

As commodity prices have risen, the Australian economy is set to benefit from these continuing gains.

The Global Investment Committee remains optimistic about global economy and equity markets despite their recent strong equity rallies and increased political risks.

Asia’s Credit market has come a long way since the Asian Financial Crisis of 1998, having evolved into a large, deep and liquid market.

Global economic, credit and interest rate cycles are becoming desynchronised. In this paper, we introduce Nikko AM’s first generation default probability model for corporates.

In-depth report: Economic growth in Asia is expected to remain broadly stable in 2017. While there will be greater external uncertainties as well as country-specific challenges, Asian economies are, on balance, better equipped to deal with external pressures compared to a few years back.

Our Senior Portfolio Manager for Emerging Market Debt in London forecasts that in 2017, this asset class could well match 2016’s achievement.

As rates could rise further in 2017, we expect that a broad range of investment themes will help generate enough alpha performance to offset the rates impact.

Why Asia Credit should stand alone from Global Emerging Market Debt.

Nikko AM's Global Investment Committee's 2017 Outlook — More Economic and Equity Reflation, Despite Less Dovish Central Banks

Our China Fixed Income expert in Singapore expounds upon how the Trump election is forcing China into taking specific economic policies.

Following the US election, we have seen bond rates continuing to increase, a stronger US dollar, firmer commodity prices, and a US stock market at all-time highs. Is optimism around the US President-elect’s fiscal expansion masking the true deflationary picture?

We expect Italian assets to underperform until it becomes clear who will be able to form and lead a new government. Nevertheless the outcome of the referendum was already priced into financial markets.