Insights

While regional markets understandably retained its focus on the economic weakness in China, we believe that the fear gripping the markets belies the region’s long-term sustainable return and positive change opportunities. The challenges that China must overcome are not insurmountable and certainly do not translate to systematic or social instability risk, in our view.

There’s more to Japan’s renaissance than relatively inexpensive valuations. Companies have become more receptive to corporate reform and shareholder engagement; Japan’s services sector is benefitting from a resumption in tourism; and, in Japan, inflation is settling at supportive levels after years of deflation.

Structural reforms, investments in energy transition, rising consumption and vast improvement in India’s infrastructure, productivity and manufacturing sector are expected to bolster the country’s next phase of economic growth and development.

The climate change crisis we are witnessing presents both challenges and opportunities. Focusing on the latter from an investment perspective, in our view asset managers are in a position to help facilitate society’s goals of reducing GHG emissions and decarbonising.energy

This month we take a closer look at Japan’s 2Q GDP surge and analyse the factors that could offset a potential slowdown in exports; we also assess why the markets are less perturbed by a weak yen compared to a year ago and discuss the prospects of the currency strengthening in the months ahead.

The just-released 2Q CY23 data on aggregate corporate profits in Japan was somewhat mixed, but the overall corporate recurring pre-tax profit margin rebounded near its record high on a four-quarter average.

The economic wheels continue to turn forward, surprising many given that the Federal Reserve lifted the overnight target rate to 5.5%, a level not seen since 2001. It is also above the top rate of 5.25% seen back in 2006–2007, before rate cuts ultimately failed to prevent the Global Financial Crisis. This time around, balance sheets are much stronger in the private sector and so are regulations. And now, the combined fiscal impulse and investment wave may keep pushing recession risk further away.

We retain our preference for Indonesian government bonds and for currencies, we believe that greater support for the renminbi from Chinese policymakers should remove a near-term headwind for currencies in the region. We take a more cautious view towards risk in the near-term due to a slightly weaker macro backdrop and uncertainties ahead which make the valuation of Asia investment grade credit look slightly stretched versus both historical levels as well as developed market spreads.

With the Chinese economy on the brink of deflation, the timing of the Chinese government’s recent pro-growth directives was a very welcome signal. If carried out, they can lead to structural changes that can potentially lead to an improvement in consumer confidence and growth in the Chinese economy, in our view.

Although the Bank of Japan tweaked its policy in July, we discuss why the move may have been a compromise given expectations the central bank will wait for more concrete signs of inflation before taking a more significant step; we also describe why the rise by Japanese equities could have “legs” this time.