As geopolitical risks and globalisation are reassessed in the wake of the COVID-19 pandemic and war in Europe, we believe that Japan stands to benefit as more companies refocus on their home markets.
The just-released 3Q CY22 data on aggregate corporate profits in Japan was very positive, with the overall corporate recurring pre-tax profit margin hitting a record high on a four quarter average.
China’s bond market is exhibiting low correlation to other asset classes, displaying historically lower volatility, enjoying continued internationalisation of the renminbi and benefitting from the country being included in globally recognised indices.
This month, Fed Chair Powell seemed hellbent on quashing any last hope of a pivot or at least slowing the pace of rate hikes sometime soon. But this crushing blow to hope helped sow the seeds of an eyewatering rally when one inflation print showed some promise—hence, the manic cycle continues.
The ASEAN region fared better on the whole in October thanks to gains by the Philippines and Malaysia; Hong Kong and Taiwan stocks were volatile while the China market continued sliding.
We discuss Japan’s recent currency market interventions from an equity market perspective; we also share our thoughts on steadily rising inflation after a surge in the September core CPI.
Yields have moved significantly this year, challenging the assumption that the relationship between a bond’s price and yield is linear. We discuss convexity, which measures how sensitive a bond’s duration is to yield changes, and its importance under the current conditions.
As Japanese Prime Minister Fumio Kishida focuses on various economic initiatives to shore up his support ratings, the revival of inbound tourism is seen as a measure that can provide the economy with an immediate boost.
China’s 20th Party Congress ended on 23 October with President Xi Jinping winning an unprecedented third term as expected. We provide a brief analysis of the Congress and the impact it could have on China’s zero-COVID policy and the capital markets.
We present our Q4 2022 outlook for the Global Unconstrained Bond Strategy which incorporates our core markets, emerging markets and global credit views.
Asia continues to offer opportunities in terms of attractive companies; on a relative basis, Asian markets look set to outperform as the region becomes an even more important part of the global economy.
The low for this bear market could be a lot closer at hand now than it was, with equity valuations having fallen considerably. We remain focused upon assessing our companies’ ability to deliver earnings expectations and cash generation. These give us confidence in the long-term, even if shorter-term developments remain volatile.
Going forward, despite some expected moderation amidst the slowdown in global growth, we believe that growth and corporate credit fundamentals will remain sufficiently robust to prevent a meaningful widening of credit spreads. However, some modest widening may be expected in the near term, with the benchmark spread level at the tighter end of the expected medium-term range and given the plethora of global market risks.
Central bank tightening is beginning to have an impact, but less evidently in terms of easing inflationary pressures than in causing strains on the global financial system. Policymakers are beginning to blink—first with Japan intervening to support the yen for the first time since 1998, followed by the Bank of England (BOE) returning to quantitative easing (and postponing planned quantitative tightening) to ease pressures on the UK pension system following an ill-advised fiscal easing by new UK government leadership.
Rising interest rates and inflation woes continued to weigh on regional and global markets. US consumer prices registered above expectations with the August consumer price index (CPI) jumping 8.3% year-on-year (YoY). The tight labour market made further case for a rate hike, culminating in a 75-basis-point (bps) interest rate hike by the US Federal Reserve (Fed).
Between still high levels of inflation, fast-tightening central banks, a growing energy crisis in Europe and slow growth in China, it is easy to imagine a bleak growth outlook. But these difficult dynamics also harbour opportunities often masked in exaggerated mispricing based on fear and confusion.
This month we analyse what immediate impact the full reopening of Japan could have on the economy and markets; we also review the factors that may make Prime Minister Kishida’s “asset-income doubling plan” more effective in the long term.
The current environment in fixed income is definitely challenging for investors as the rate cycle has turned. However, we believe that by unlocking the full performance potential of the different credit asset classes achieving positive absolute performance is still possible.
Our scenario is fairly ugly for the 4Q, but has a strong silver lining thereafter. We are not optimistic about the global economy and investor returns reverting to normal for an extended period, but there should be clear intermediate term relief and pockets of strong outperformance due to idiosyncratic advantages.
The world is fast entering the adjustment phase as deglobalisation is accelerating, requiring new solutions and investment to clear new imbalances from energy supply to labour and eventually normalise inflation.
In recent years, the increased focus on ESG has validated our beliefs. Yet, the complex and fast-changing economies and societies that make up Asia continue to be a challenge confronting investors looking to apply ESG analysis across Asian asset classes. This is a good thing, as investors who can do this successfully will likely add even more value to alpha generation.
Inflationary pressures continued to remain elevated in July, as the headline CPI numbers in South Korea, Singapore, Indonesia and the Philippines increased, while those of Thailand and India moderated. During the month, the central banks of Thailand, Indonesia, the Philippines, South Korea and India raised their key policy rates.
The regional index of the MSCI AC Asia ex Japan in August was flat at 0.0% in US dollar terms, recovering after falling into negative territory earlier. The North Asian region was weighed down by foreign currency effects, trailing behind its ASEAN counterpart. India benefitted from its rate hike and lower oil prices.
This month we discuss the factors behind Japan’s high level of share buybacks; we also look at the economic implications of COVID in the wake of a particularly large infection wave.
Utilising and regenerating Japan’s ample forest resources by promoting a “wood cycle” could contribute to the creation of economic wealth and a net-zero carbon future.
The just-released 2Q CY22 data on aggregate corporate profits in Japan was very positive, with the overall corporate recurring pre-tax profit margin hitting a record high on a four quarter average.
Our belief is that we have moved into a new regime where inflation will be structurally higher despite the anchors of high debt burdens, ageing societies and ongoing technological disruption.
We are taking a more constructive view in duration overall, as we believe that the markets have largely priced in hawkish Fed expectations. Among the low-yielding countries, we prefer Singapore and Hong Kong, while we like Malaysia and India among the mid- to high-yielding countries. On currencies, we maintain our preference for the Singapore dollar.
It may be easy to become gloomy after the drawdown of the last few months. But we believe that there are plenty of reasons to be optimistic about the prospects for compounding your future capital from today’s levels, if you take into account the following three steps: 1) recognise that that we have shifted to a different road type, and it is rougher and more variable; 2) realise that this new road may be best travelled with different vehicles; and 3) improve your probabilities by sticking to a few enduring principles.
The shift in market narratives continues to gather pace, matching the increase in volatility of the economic cycle seen since the beginning of the pandemic. Central banks are generally aiming to smooth the economic cycle, but this time they may be adding to the volatility of the cycle instead.
Higher commodity prices impacted returns in Asia, while a slip in prices of crude oil and metals benefitted many Asian nations. We expect the future trajectory of inflation to dictate the path of interest rates, which in turn is seen determining economic growth globally.
Asia high yield credit had a tough start to 2022, succumbing to heavy selling pressure . Apart from geopolitical tensions, tighter financial conditions and rising recession risk in major developed economies, sentiment toward Asia HY has been heavily weighed down by sustained stress in China’s property sector. Going forward, we believe the pace of correction will moderate.
We present our Q3 2022 outlook for the Global Unconstrained Bond Strategy which incorporates our core markets, emerging markets and global credit views.
We explain why we are more positive on Asia bonds than we were at the beginning of 2022. To begin with, inflation in Asia is less severe compared to other regions, lessening the need for Asian central banks to tighten aggressively. This makes Asia bonds attractive from a real yield perspective.
The East and West appear to be headed in different directions. The East may benefit from China’s easing and supportive growth characteristics. Meanwhile, the West is mired in slowing growth, excessive levels of inflation and central banks ever more eager to take down inflation through conventional tool kits designed to slow demand.
Inflationary pressures accelerated in May across the region, due to higher transport and food prices. We maintain our preference for Malaysian bonds, as we believe that inflation will be better contained in Malaysia compared to other countries.
As it often is when Japan’s Liberal Democratic Party wins an election by an impressive amount, the initial equity market reaction was positive. But the ramifications of the ruling party’s upper house election victory will in the intermediate term be a function of what happens to the global economy and geopolitics in the months and quarters ahead.
We take a look at why the Bank of Japan is likely to stick to its easy monetary policy even as other central banks embark on policy tightening; we also highlight the signs of a full-fledged capex recovery taking place in Japan.
There has been remarkable progress in electric vehicle (EV) technology and its acceptance globally. We believe that Chinese EVs are set to lead the world in this area as technological innovation, demand, government policy and consumer behaviour have put China ahead of Europe and the US.
Fears of a recession and the US CPI hitting a four-decade high of 8.6% year-on-year in May rippled through various economies. Asian markets took heed from the multiple headwinds in the US, with inflation being a common theme across the region. For the month, the MSCI AC Asia ex Japan Index fell by 4.5% in US dollar terms.
Amid today’s incessant chatter of rising inflation and global recession fears, we identify three high conviction themes driving a growth renaissance in ASEAN: electric vehicles (EVs), digitalisation and a revival by the old industrial economy.
“Stagflation-lite” coupled with a severe geopolitical crisis was much worse for equities than we expected, but most of the bad news is priced in, so the prospect for global economies and equities in aggregate should improve. While we expect global GDP to moderately underperform consensus, it should skirt recession and positively surprise equity markets, which increasingly have priced in recessionary conditions.
Defined as negative growth for two consecutive quarters, a recession is certainly in the realm of possibilities (if not probable). However, it may be more a reflection of continued extreme economic volatility following the COVID-19 pandemic, rather than a conventional recession that follows an extended period of economic expansion.
We review the “new form of capitalism”, a government plan to boost economic growth initiated by Japanese Prime Minister Fumio Kishida, who is enjoying a high public approval rating ahead of a closely watched upper house election.
This month we explain why losses by Japanese equities so far in 2022 have been limited relative to their peers; we also assess the positive impact a return of inbound tourism could have on Japan’s economy and markets.
The just-released 1Q CY22 data on aggregate corporate profits in Japan was positive, with the overall corporate recurring pre-tax profit margin hitting a record high on a four quarter average. Both the non-financial service and manufacturing sectors contributed, with the latter surging to another record high. Note that the strong results occurred despite quite weak GDP, further proving the long-held theme of this report that profit margins remain on a structural uptrend despite sluggish domestic GDP growth, as shown in the charts below. Increased pricing power, coupled with improving corporate technological prowess and efficiency, should be credited for this, but improving global economic growth certainly was also a major factor.
For the last two centuries energy revolutions have created extensive platforms for subsequent technologies to drive wealth creation and raise living standards across the world. And this decade heralds the start of an energy revolution providing investors with lots of opportunities—the beginning of an energy broadband infrastructure boom.
Change is both more prevalent and significant in Asian markets. We believe that seeking to understand it is essential to deliver sustainable returns.
The outlook is increasingly clouded as markets come to terms with a Fed that may do “whatever it takes” to contain inflation. Given that current inflationary pressures appear to be mainly driven by supply-side constraints and rising energy prices, it follows that the Fed would need to be willing to take the economy into a recession to meet its mandate.