Insights

In 2025, US economic growth is expected to continue due to fiscal stimulus, despite above-target inflation. Meanwhile, the strong dollar could face disruptions, the Bank of Japan may keep raising interest rates and China is seen balancing domestic stimulus with potential US tariffs. European growth may recover slowly due to US tariff risks, and global central banks' policies will likely diverge to manage these challenges.

With Japan overcoming deflation and ushering in a period of progress and consolidation despite market volatility and political upheaval, we expect Japanese companies to make strategic decisions in 2025 that attract global investors in larger numbers.

Throughout history, equity investors have benefitted from maintaining a long-term view and an optimistic outlook on humanity's ability to prevail in the face of adversity. This might once again be the case, meaning that the biggest risk might be not having exposure to the highest quality earnings streams through a diversified portfolio of global equities.

While 2024 was characterised by broad market gains (or “beta” returns) in Singapore, we expect 2025 to be more centred on generating excess returns (or “alpha”). We believe the service economy, represented by financial services and transportation, will continue to contain key sectors which offer high sustainable returns, positive fundamental change and growth.

Our outlook for 2025 is relatively positive. We expect the business-friendly stance of the Republican Party, coupled with easier monetary policy, will be supportive for risk assets, particularly in the US market. While we hold various views, we rely on our strategic asset allocation to guide our long-term outlook—with healthy equities, short-dated credit, the US dollar and gold forming our backbone for the medium term.

We believe that a changing political environment could present opportunities across asset classes in 2025, with fixed income in particular poised to benefit as markets adjust to more realistic inflation expectations.

As we head into 2025, we have picked three key elements that we believe will have the greatest influence over market behaviour and performance: interest rates, the strength of the New Zealand dollar and geopolitical uncertainty.

Asian local government bonds are poised to perform well in 2025 thanks to accommodative policies by central banks amid benign inflation and moderating growth. The global easing cycle is expected to lower global yields, thereby providing additional support to Asian bond markets.

New Zealand's economy is faced with challenges including a weak currency, low productivity growth and slowed immigration. However, there are potential posi'tives, such as declining interest rates and possible gains in longer maturity bonds. Ultimately, recovery will require time and effort, with the central bank playing a crucial role.

We believe that investors should strive for a diversified global portfolio of quality companies that can thrive in an environment where the cost of capital may be higher than previously expected. Our collective experience of the pandemic reminds us that such an approach is a good idea.

We increased the overweight to growth assets given that economic data remains resilient against falling inflation and as global central banks lower interest rates. Regarding defensive assets, we have been relatively negative on sovereign bonds, and despite the rate-cutting cycle underway, we maintain this view.

During the first Trump presidency, China outperformed the S&P 500 and all the perceived beneficiaries of "China Plus One". While history may not be repeated, it is clear that China's domestic policy and market environment will become significant factors during Trump's second presidency.

We have adopted a more cautious stance on Thai bonds with the Bank of Thailand not expected to ease policy further following its interest rate cut in October. Elsewhere in the region, the reappointment of Sri Mulyani Indrawati as Indonesia's finance minister provides a positive medium-term outlook for Indonesian government bonds

The highly anticipated Global Plastics Treaty carries high hopes as it will be the first attempt at forming a global legally binding instrument to address plastic pollution across its entire lifecycle. Tackling plastic pollution will be a long, bumpy road requiring international cooperation, stringent policies and significant financial investment to drive effective solutions.

The Federal Reserve's interest rate cut in November was largely expected. However, Fed Chair Powell's comments pointed to changes in language, suggesting a shift towards a more uncertain policy, with inflation and employment trends influencing future rate adjustments.

As with the other markets, Japanese equities reacted immediately to Donald Trump's US presidential election win. The immediate election impact is expected to fade relatively quickly, with market focus turning to the trade policies Trump may pursue upon his return to the White House.

Volatility dominated risk markets in the early part of the July-September quarter, while perceptions of the US employment environment also had an impact. Over the quarter, we kept an overweight position on growth assets and maintained a neutral position on defensive assets.

Following Donald Trump's US presidential election win, in the near term we remain constructive on US growth and stocks, with the markets expecting corporate tax cuts and seeing a general penchant toward deregulation across industries as positive for earnings. In the longer term, we anticipate a rise in tail risks associated with fewer hurdles to fiscal expansion and higher US inflation.

The start of the Fed’s rate cut cycle was a boost to risk sentiment, with resilient US data and declining inflation placing the market in a goldilocks situation. Likewise, the start of a global rate cutting cycle sets up a positive environment for defensive assets.

In a move that reflected their disapproval of Japan's ruling coalition, voters deprived it of a lower house majority. While this outcome may not have a direct impact on the market, it is important to monitor the impact of political developments on economic policies in the short term.

The markets suggest that growth will stay at a premium in the short term. Hence, our focus on Future Quality companies, especially those capable of taking market share as the economic backdrop worsens, may prove beneficial.

The market expects more rate cuts from the Fed, giving Asian central banks room to lower rates, which is very supportive for domestic growth. Meanwhile, with more China stimulus measures anticipated, we see asset allocation into Chinese equities picking up pace and lift the entire market.

Japan’s long history of undercompensating equity investors, a legacy of deflation, is coming to an end with its risk premium now achieving parity with that of the US. This historic shift is being driven by rising dividend payouts ratios, strong earnings and reasonable valuation of underlying equities.

The start of the Fed’s rate cut cycle has created room for monetary easing across Asia. We expect Asian government bond yields, particularly high yielders like those of India, Indonesia and the Philippines, to trend lower.

This month we assess views in the market that the BOJ may have taken a dovish turn at its September policy meeting; we also point to further signs of a steady rise in wages and how that paves the way for a recovery in consumption and, ultimately, higher stocks.

The raft of stimuli recently unveiled in China is the most coordinated policy since the start of the country’s economic downturn. This, along with the start of the Fed’s monetary policy easing, represents key fundamental changes. However, as the old saying goes, the devil is in the details.

We perceive heightened risk to both growth (two-way) and inflation (upside) compared to our previous guidance. Nevertheless, our central near-term scenario remains for slowing but positive growth in the US, alongside slowly moderating prices.

As global equity investors, we are often asked how we have successfully navigated an evolving market landscape since the strategy’s inception in 2014. The truth can ultimately be attributed to three key factors: humility, collaboration with people who share the same core team values and a robust investment philosophy.

For August we maintained our overweight growth position and a neutral position on defensives. Several factors continue to support our optimism towards growth assets, including the first rate cut from the Fed, earnings surprises remaining above their historic average, US economic growth beating expectations, and large fiscal spending globally.

Perhaps there may be disappointment at the lack of money-spinning applications pertaining to AI which may cause investor sentiment to cool. Nevertheless, the improvements in earnings and cash flow appear sustainable so far and are certainly much more attractive than those being produced by many other parts of the economy.

The Federal Reserve’s 50 bps rate cut demonstrated the power of financial markets at present. As the markets had already priced in a significant probability of a 50 bps reduction, the Fed could have viewed such conditions as a good time to “buy insurance” and implement a half a percentage point cut while the markets were likely to absorb it well.

There is one major thing to keep in mind going into Japan’s upcoming leadership contest for the ruling Liberal Democratic Party (LDP)—the country’s looming general election. The ruling party’s chief concern is to select a candidate who can prevail at this election. This makes the candidacy of an incipient LDP leader more of a marathon than a sprint.

We believe that the biggest fundamental change for Asian markets in the medium term is a shift in the interest rates regime, notably that of the US.

In a positive bond market environment driven by global monetary easing expectations, we favour government bonds from India, Indonesia and the Philippines, where higher yields remain attractive to investors.

This month we assess why the market is unfazed by Japan’s upcoming leadership change; we also explain how a bid for a prominent Japanese convenience store operator has highlighted how affordable domestic firms now look in the eyes of their foreign counterparts.

The Global Equity Team answers the following questions related to the key trends they see emerging: 1)does the AI investment theme still offer significant long-term potential? 2) will the market leadership broaden beyond technology names into other sectors? and 3) what are the main risks and challenges equity investors may face in the remainder of 2024?

As the November 2024 US presidential elections draw ever closer, we explore the global trade, economic and geopolitical implications from an Asian equity perspective, focusing on the uncertainties and opportunities that could arise if Donald Trump secures a second term in office.

For August we reduced our overweight on growth assets amid volatility in the markets and maintained a neutral position on defensives. We expect volatility to be quelled, given that the markets have factored in the Fed cutting interest rates in September and with more easing anticipated over the following 12 months.

On 13 August, the Global Investment Committee held an extraordinary session to review the impact of recent volatile market movements. We maintain our central scenario for positive GDP growth in most major economies, although we see heightened downside risks to our US GDP growth outlook.

India remains the long-term growth story in Asia and continues to attract fresh investment flows. China, on the other hand, has become the value play waiting for positive catalysts to turnaround sentiment.

We expect the broader trend of easing global yields, prompted by expectations for the Fed to begin lowering interest rates, to support a downward bias in Asian bond yields. We continue to favour Indian and Philippine government bonds over their regional peers.

The weak yen has played a key role in Japan’s economic recovery by boosting its corporate profits, gross national income and current account surplus. However, it may be time to consider ways Japan can retain its recovery without help from a weak yen should the financial markets eventually change direction. The need for portfolio diversification and Japan’s structural reforms are some of the factors that could incentivise investors to trim their exposure abroad and reinvest domestically.

The Nikkei experienced its worst single-day fall early in August after reaching a record high just the previous month. Despite the recent slide, domestic factors supporting Japanese equities remain relatively unchanged, in our view. We believe that the narrative of Japan overcoming deflationary pressures due to increasing real wages is still intact.

We assess the extreme turbulence this week that rocked Japanese equities, which had reached record highs just last month. We discuss the factors that led to the sharp downturn at the start of the week and consider what could be in store for the market, including prospects for recovery.

Japan Equity Investment Director Junichi Takayama explains how active management can help identify opportunities, particularly within the small and mid-cap markets.

Although market volatility resurfaced in the early part of the April-June quarter as interest rate cuts in the US began to look less likely amid higher-than-expected inflation, risk assets bounced back and rallied strongly later in the quarter. This reflected signs of softness in the US economy, which made it more likely that the Fed would be able to cut interest rates.

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.

We maintain a positive outlook for Asian local government bonds, particularly those from India, Indonesia and the Philippines. In our view, the disinflation trends in these countries should provide their central banks with the flexibility to shift towards rate cuts later in the year.

We highlight the importance of making decisions based on probabilities and the best expected outcomes, assessing relevant information and acting ahead in constantly changing market conditions.

The Bank of Japan (BOJ) lifted interest rates for the first time in 17 years in March, making a historic departure from negative interest rates. We provide an overall evaluation of its decision, discuss how long accommodative monetary conditions could still last, analyse the yen’s potential policy impact and assess the BOJ’s options after halting ETF purchases.

The Global Investment Committee sees robust corporate earnings, firm employment and expectations for rate cuts keeping markets more buoyant than anticipated by average consensus estimates.

Japanese households, long under-invested in financial markets, are expected to play a significant part in the country’s “virtuous circle” of reflation as they seek returns capable of keeping up with inflation.

We remain very strong supporters of the healthcare sector. In addition to the well-known demographic drivers, innovation is enabling structural changes in healthcare delivery and in our view these changes will confer years of strong organic growth opportunities if we choose the right companies.

The stage is now set for a Biden versus Trump rematch in November. So, what does this mean for sustainable bonds?

Improving economic dynamics defy conventional logic of what one would expect from one of the most aggressive tightening cycles in history. However, if one considers the magnitude of the 2020 expansion in money supply, there is still significant excess liquidity, perhaps transmitting to resilient demand and cash flow that so far exceeds the headwinds of higher rates.

We think that there could be some short-term rebound in China as valuations are in extreme oversold territory. However, for the rally to be more sustainable, we are monitoring for a few drivers, including supply-side measures that can resolve China’s main housing issues.

We maintain a positive outlook for Asian local government bonds, particularly India, Indonesia and Philippine bonds. In our view, the disinflation trends in these countries should provide the Reserve Bank of India, Bank Indonesia and Bangko Sentral ng Pilipinas with the flexibility to shift towards rate cuts later in the year.

The Asian REIT market is the second-largest REIT market globally, but there is still plenty of room for growth. As REIT regulations and listing processes become increasingly market-friendly in newer REIT markets, we expect more asset owners to securitise their real estate into REIT products, driving greater investor interest.

The “trial balloons” of media announcements in advance of today’s interest rate hike by the Bank of Japan —its first in 17 years—apparently did their job, as the end of its negative interest rate policy, yield curve control and ETF purchases were smoothly digested by markets.

The green bond market has experienced tremendous growth since 2007, but despite its rapid success, there are still barriers to overcome. In particular, assessing the impact of green bonds continues to be a contentious topic.

Japan equity was the best-performing asset class in 2023, but despite the Nikkei reaching all-time highs in 2024, Japan also recently experienced economic contraction. Against that backdrop, Japan Equity Investment Director Junichi Takayama offers five reasons why Japan’s economic resurgence still has ample runway.

We visited Vietnam in February and found that business and economic prospects have turned around completely for the better from a year ago. Interest rates have normalised, and mortgage terms are the most favourable that we have ever seen in Vietnam.

This month we focus on the prospect of Japanese stocks sustaining their upward trajectory after reaching record highs; we also assess how the country’s Q4 GDP contraction sharpens the focus on consumption and wages in 2024.

One of Japan’s more recent economic releases made us sit up and take notice. Within the very resilient Q4 capital expenditure figures released this week was one important reinforcing indicator of Japan’s structural recovery, or in the Bank of Japan’s language, its “virtuous circle” of reflation. One near-term positive development for Japan is the very real possibility that the “technical recession” in Japan Q4 GDP (down 0.4% quarter-on-quarter) could be, thanks to unexpectedly strong Q4 capex, revised away.

This is the “swan song” of this report, which comes at an appropriate time because it was always meant to prove to readers that corporate governance, and the overall case for investing in Japanese equities, was sound. Now that the market’s performance and global enthusiasm for Japan has swelled, there is less need for the report, although it is useful to note the continuance of its impressive trend.

We explain how reflationary dynamics underpin the foundations of Japan’s incipient structural recovery and illustrate why we believe the country’s equity comeback should not be written off as another flash-in-the-pan cyclical upturn headed for an eventual return to deflationary dynamics.

The seemingly impossible soft landing on the back of one of the most aggressive monetary tightening cycles in history is looking not just possible, but increasingly probable. US data is coming in stronger and global demand is generally steady with increasing channels of potential upside.

Our economic system is based on a model of take, make and waste that consistently over-utilises and fails to replenish Earth’s valuable, but dwindling resources. The need to transform how we interact with nature creates a major opportunity for the green bond universe. So far, issuers have successfully embraced funding the transition toward carbon neutrality, but far fewer are looking at regenerative biodiversity projects or initiatives that seek to protect our ecosystems from loss.

Our Future Quality investment philosophy revolves around identifying companies that have pricing power, possess management teams that invest will appropriately, boast strong balance sheets and offer opportunities that are not yet priced in by the market. This approach will remain constant in 2024 although we are also acutely aware of the significant impact energy security will have on global decarbonisation efforts.

The Indian market remains attractive. It has the highest earnings growth in the Asian region, valuations that are in the middle of its historic range and an economy that is growing strongly with inflation under control.

We expect an anticipated decrease in developed market bond yields, coupled with enhanced foreign inflows, to bolster demand for Asian bonds. We see Asia credit remaining well supported with subdued net new supply as issuers continue to access cheaper onshore funding.

The emergence of AI has dramatically shifted the future pathway for the technology sector, and our research has found that this emerging structural trend chimes with our Future Quality principles.

While fixed income issuance has become a standard mechanism for governments and companies to raise finance, it often lacks a defined purpose. However, the growing trend of responsible investing is changing that. The need to tackle our planet’s many climate, environmental and societal challenges is reuniting fixed income with its sense of purpose.

This month we discuss how emerging growth narratives such as semiconductors may come into focus in 2024; we also assess the slightly hawkish turn the BOJ took at its January policy meeting.

Last year, global investors turned their attention firmly towards Japan as a way of increasing their Asia exposure while avoiding perceived geopolitical and regulatory risks linked to China, and amid the high inflation environment dominating western economies. But this year, Japan’s success is more based on its own merits.

The US economy continues to look robust, so we have stayed constructive on growth assets and short maturity global credit where yields are attractive. We still believe that the path to 2% inflation in the US is relatively unclear. If anything, our conviction on this point has increased because easier financial conditions may ultimately pave the way for the return of sticky inflation.