As a virtuous inflation cycle helps boost stocks, this month we focus on how labour shortages could nudge Japan away from a deflationary mindset; we also assess the BOJ under a new governor, who has said that monetary policy surprises could be unavoidable.
Japan’s corporate governance reform started nearly a decade ago is an ongoing process, but it received a boost from the Tokyo Stock Exchange’s latest initiative in January. The latest chapter in corporate governance reform coupled with Japan’s break from a deflationary mindset and the full re-opening of the economy after the pandemic are expected to create a more favourable investment environment for Japanese equities.
We expect occasionally quite volatile, but positive trends for the global economy, financial system and markets in each of the next four quarters. Regionally, we prefer the European market for the next two quarters, and also include Japan’s on a 9–12-month view.
As the green bond market diversifies, sustainability-linked bonds (SLBs), which are linked to an issuer’s broader sustainability performance, have garnered significant investor attention and scrutiny. We believe structural improvements will help make SLBs a more attractive sustainable investment class within the ESG universe.
The divergence in growth outlook reflected in equities continues to widen, as secular growth in the form of tech and artificial intelligence (AI) developments appears to have the upper hand in determining the overall market direction. This is evident with the tech sector being up (and Japan, for different reasons) while most other sectors and geographies are down over the month. This defies conventional wisdom—that earnings can continue to grow into a recession, but these disruptive developments are indeed significant, and perhaps this is the right directional prognosis should a recession prove to be shallow.
We remain constructive on relatively higher-yielding Philippine, Indian and Indonesian government bonds, on the back of the relatively supportive macro backdrop for these countries. As for currencies, we expect the Thai baht and Indonesian rupiah to continue outperforming regional peers.
A recent trip to China offered first-hand observations of the country’s technological advancement, changing consumer patterns and new social norms as the world’s second largest economy moves on from the pandemic.
As the developed world continues to struggle with inflation and a lack of growth, Asia stands out as the bright spot, with inflation well in check and monetary cycles peaking ahead of the West. Growth in Asia is also expected to outperform the West over the next few years, reversing a decade-long trend of developed world growth outperformance.
This month we discuss the factors behind the Nikkei’s rise to a 33-year high; we also assess Japan’s opportunity to re-invent itself as a technology hub with leading global chipmakers bringing investments and manufacturing to its shores.
At times of stress, we believe that it makes sense for investors to reach for something that has recently provided comfort. Our view is that that is exactly what we have seen in Q1, as banking stock volatility has led investors back into the technology sector. Q1 is now behind us though and is often a time of the year characterised by mean reversion such as we saw in 2022.