Insights

We retained both our overweight to growth assets and our neutral position on defensives. The outlook for growth remains positive as global central banks have started monetary easing, with Europe and Canada leading the way by cutting their interest rates.

Japan, a nation of “cash-rich” companies, is undergoing corporate reforms aimed at raising valuation of companies by improving their capital efficiency. The reforms, along with cash-rich companies' historical outperformance and strategic options due to their ample cash holdings, make these firms well worth exploring.

In China, we await confirmation of real, positive fundamental change before increasing our confidence towards the country, and we maintain a highly selective approach. Elsewhere, a combination of AI-induced excitement and positive structural reforms has driven Asian markets higher, particularly in Taiwan, South Korea and India.

We favour South Korean, Indian and Philippine government bonds and have adopted a neutral stance on Indonesian bonds. Meanwhile, the fundamentals backdrop for Asian credit remains supportive.

This month we focus on the surge in long-term JGB yields and whether it poses a threat to equities; we also discuss the potential upside for Japan’s small- and mid-cap stocks.

Asian small caps, ranging from “indie” cosmetics brands to bicycle manufacturers, present a chance to get involved with the future economic powerhouses of the world. The strategic positioning, high growth potential, adaptability, and innovation of Asian small caps make them a compelling choice.

Our central scenario is for positive GDP growth in most major economies, with mild upside risks to growth in all regions but Europe. Within this central scenario, we anticipate range-bound inflation with a gradual disinflationary trend in the US and Europe. We expect reflation to continue in Japan and also to pick up in China.

Recently, China has been frequently appearing in global headlines, although many of these stories are not particularly encouraging. Amidst a fixation with the slowdown in the world’s second-largest economy, global markets may be missing the obvious, quieter China trade.

Markets have continued their strong growth through 2024, as odds continue to grow that central banks are able to walk the tight rope and avoid any real slowdown of global growth. US inflation has remained above expectations. However, some marginal softness is now appearing to flow through consumer spending and employment.

The early economic cycle dynamics and cheap valuations in Asia contrast starkly with the expensive late cycle dynamics in the West, and we expect this to provide good diversification options for global investors.

We have shifted to a mildly positive stance on overall duration, preferring high-yield markets such as India, Indonesia and the Philippines. We expect Asia credit to remain well-supported due to subdued net new supply as issuers continue to access cheaper onshore funding.

The Bank of Japan maintained interest rates at its June meeting, disappointing market participants who expected a reduction in monthly bond purchases. The BOJ signalled a future reduction in bond purchases but only at the next policy meeting in July, without providing further guidance on possible rate hikes or balance sheet reductions.

In the 2024 Indian parliamentary elections, Prime Minister Narendra Modi's BJP won fewer seats than expected. However, with support from pre-alliance partners, Prime Minister Modi will lead a coalition government for a third term, indicating a public desire for policy continuity and reform. While economic fundamentals are strong, the election results also reflect rural distress and the need for job creation, suggesting the government may focus on expanding the manufacturing sector, infrastructure development and digitalisation.

This month we look beyond Japan’s impressive dividends and share buybacks from the perspective of corporate governance reform; we also explain how the “quantity effect” associated with exports may reduce the relevance of currency levels.

As the market comes to grips with the US rate structure potentially remaining high, we expect to see increased market volatility and a potential return of the positive correlation between bond and equities that was evident in the market through 2022.

The ongoing weakness in the yen has led to intense debate over whether Japan can cope with further challenges to its global purchasing power. Although it is a matter of concern, a weak currency isn't necessarily undermining Japan's economic recovery. That said, a prolonged downtrend for the yen warrants vigilance as it could destabilise the economic recovery by triggering inflation.

In terms of duration exposure, we maintain a positive outlook for medium-term duration, finding the current yield levels attractive. We expect Asia credit to remain well-supported due to subdued net new supply as issuers continue to access cheaper onshore funding.

What a difference a month can make. Discussions have pivoted from interest rate cuts in the US to the possibility of an increase, while Chinese equities have rallied sharply on a combination of attractive value and hopes of effective policy implementation.

The US presidential election in November continues to cast a long shadow, and as the race between the 45th (Donald Trump) and 46th (incumbent Joe Biden) presidents quickens, divisions have only widened. The investment world is no exception, and one particularly troubling battleground is the growing regulatory divide regarding ESG reporting.

This month we analyse why the influence of capex and wages on spending behaviour are key to gauging whether an inflationary mindset is taking hold among households; amid an adjustment by Japanese stocks from record highs, we also look for growth narratives to sustain a long term uptrend.

Naomi Fink recently joined Nikko Asset Management as a Global Strategist based in Tokyo. We sat down with Naomi to discuss her personal relationship with Japan, and to hear her views on arguably the most talked-about investment region in the world at present.

Dreams have a place in the world. However, in stock markets, cashflows often serve as gravity when share prices display dream-like behaviour. Fortunately, our Future Quality philosophy, coupled with our consistent process of reviewing the portfolio and ranking stocks, will help us separate dreams from reality. As a result, the portfolio is performing well, especially due to stock selection outside of AI and across all sectors.

The Bank of Japan kept interest rates steady as expected while upping its CPI forecast, paving the way for future rate hikes. Any further hawkish stance by the BOJ may depend on the persistence of positive real wages and inflation's impact on consumer purchasing power.

Inflation uncertainty seems increasingly entrenched, which is less kind to developed market sovereign bonds. The US fiscal deficit is very large, and the Federal Reserve (Fed) is now in the challenging position of deciding when to cut rates. Energy remains a good hedge in this environment, and gold is increasingly being recognised as a store of value.

The Chinese economy and its equity market continue to be significant focal points in broader Asia. Additional support measures, combined with a recalibration of market expectations, have helped Chinese equities recover from the panic selling witnessed towards the end of 2023 and into January. As a result, fundamental strengths are being recognised in certain areas.