A broad-based synchronised recovery continues to gain traction. Following the strongest year of global growth since 2010 (estimated at 3%) the consensus forecast for the current year looks to be even rosier.
As widely expected, the US Federal Reserve (Fed) raised interest rates by 25bps in December, its third rate hike this year. It also raised its GDP forecast for 2018.
The MSCI AC Asia ex Japan (AxJ) Index returned 2.7% in USD terms in December.
We see the key investment themes to drive performance in Global Credit in 2018 to be similar to last year. Using the output of our initial market assessment, we have developed our investment themes: Long US High Yield, Long Chinese Tier1 SOEs, Long European Hybrids, Long European Financials, Long Rising Stars.
For 2018 and beyond, we see a story of central bank policy normalization and foresee the global economy growing in a similar fashion to how it did in 2017: low growth coupled with comparatively low inflation data.
We expect the economic backdrop for Asian credits to remain constructive in 2018, but remain cognizant of several risks including rising interest rates, robust supply, unexpected weakness in China, geopolitical developments and cross-asset volatility.
The global recovery is expected to continue, albeit at a more moderate pace. Meanwhile, we see policy normalisation and an acceleration of inflation in Asia. Political action will move to South Asia in the wake of upcoming elections there.
Going forward, a robust global economy and well telegraphed withdrawal of monetary stimulus in advanced economies provides a good back-drop for export-oriented Asian economies.
US Treasury (UST) yields declined during the month. The nomination of Jerome Powell as the next US Federal Reserve (Fed) chairman overshadowed stronger US economic data, but was subsequently offset by increased geopolitical risks in the Middle East and a setback to US tax reform.
The MSCI AC Asia ex Japan (AxJ) Index returned 0.6% in USD terms in November.
The Japanese equity market rose in October, with the TOPIX (w/dividends) climbing 5.45% and the Nikkei 225 (w/dividends) rising 8.16%.
US Treasuries (USTs) fell in October, as prospects of higher growth and inflation increased after the US Senate approved the Republican-backed budget for 2018.
The MSCI AC Asia ex Japan (AxJ) Index returned 4.7% in USD terms in October, outperforming the MSCI World Index which returned 1.9%.
The Japanese equity market moved upwards in September, with the TOPIX (w/dividends) climbing 4.34% on-month and the Nikkei 225 (w/dividends) rising 4.28%.
US Treasuries declined in September, prompted by the possibility of a rate hike by the Federal Reserve in December and Trump's tax reform bill being passed by Congress.
The MSCI AC Asia ex Japan (AxJ) Index fell by 0.1% in US dollar (USD) terms, underperforming the MSCI AC World Index which returned 2.2%. Profit-taking and currency weakness relative to the USD pressured returns in September.
The US Treasury (UST) market grinded higher in August. Rising tensions in the Korean peninsula and a lack of direction from the US Federal Reserve and the European Central Bank on the outlook for monetary policy put pressure on US Treasury yields.
The MSCI AC Asia ex Japan (AxJ) Index rose by 1.3% in US dollar (USD) terms, outperforming the MSCI AC World Index and bringing year-to-date returns to 31.1%. This was the eighth straight month of positive returns.
US Treasury (UST) yields ended largely unchanged in July following soft US inflation print, dovish comments from the Federal Reserve and expectations of an autumn policy shift from the European Central Bank. Overall, 10-year UST yields ended the month at 2.30%, about 0.9 basis points (bps) lower compared to the previous month.
The MSCI AC Asia ex Japan Index rose by 5.3% in US dollar terms, outperforming the MSCI AC World index and bringing year-to-date returns to 29.4%. This was the seventh straight month of positive returns.
In a survey conducted by the Nikkei in March 2017, 80% of respondent companies indicated that they were either planning or considering the implementation of productivity enhancing investments. Furthermore, more than 70% of respondent companies indicated that they would invest in productivity enhancing technology to address excessively long employee working hours.
US Treasury (UST) yields were range-bound for the most part of June, before surging in the last few days of the month. The US Federal Reserve (Fed) raised interest rates by 25 basis points (bps), despite soft inflation data. Overall, 10-year UST yields ended the month at 2.30%, about 10 bps higher compared to the previous month.
The MSCI Asia ex Japan (AxJ) Index rose by 1.6% in US dollar (USD) terms. Year-to-date (YTD), the index returned 22.8%, outperforming MSCI World by over 12%.
In the Japanese equities market, high dividend strategies have significantly outperformed other strategies. We believe that – in a low growth, low interest rate environment where investors yearn for yield – these strategies will continue to outperform.
Following four years of intense consultation and three failed attempts, MSCI has just added China A-Shares into its international indices. We view this as expected and in some ways, long overdue. Although the initial size of the inclusion is symbolic in nature, the implications are far reaching.
MSCI Asia ex Japan (AxJ) gained 4.7% in USD terms, outperforming the MSCI AC World and MSCI Emerging Markets Indices. The results of the French presidential elections buoyed sentiment and outweighed patchy economic growth data.
Better-than-expected US non-farm payroll figures and a more favourable FOMC statement were offset by political uncertainties in Washington. FBI director James Comey's firing and investigations into possible ties between Trump's election campaign and Russia increased concerns of a set-back in the president's economic agenda. 10-year UST yields ended the month at 2.20%, about 8 basis points (bps) lower compared to end-April levels.
The European Central Bank (ECB) has taken its first step towards reducing its stimulus programme by omitting the mention of "lower levels" for interest rates in its forward guidance, even as ECB President Mario Draghi denied that there was any discussion of tapering in the latest policy session.
Asia Credit is significant enough as an asset class to be considered separately, and its high grade segment could be a relative safe haven if EMD flows reverse.
We believe inflation will pick up gradually in the second half of 2017, in which case the rational expectations of Japanese consumers are likely to shift towards anticipation of even higher inflation. Higher inflation expectations are precisely what BOJ Governor Kuroda has been seeking to achieve. Therefore such a development would be positive for the Japanese equity market.
On 19 May 2017, S&P upgraded Indonesia’ sovereign rating to BBB- with a stable outlook from BB+ with a positive outlook. In the longer term, the market is expecting that this rating upgrade will result in inflows of as much as USD 5bn into the bond market, particularly from Japanese investors who require a full investment grade rating from the three rating agencies.
MSCI Asia ex Japan (AxJ) was up another 2.2% in USD terms, outperforming the MSCI AC World. All AxJ markets ended higher in April. Robust economic data from China offset concerns over President's Trump's ability to pass through sweeping corporate tax cuts in the US.
10-year US Treasury (UST) yields ended the month at 2.28%, about 11 basis points (bps) lower compared to end-March levels. Mixed economic data and rising geopolitical tensions drove sentiment over the month. Towards the month-end, market sentiment improved after pro-euro French presidential candidate Emmanuel Macron secured the most number of votes in the first round of elections.
MSCI Asia ex Japan (AxJ) was up 3.3% in USD terms, outperforming MSCI AC World. All Asian markets rose over the month, with gains led by India and Korea. The Indian Rupee was also the best-performing currency in March. The US Federal Reserve raised interest rates by 25 basis points (bps), as widely expected.
US Treasury (UST) yields rose in the first half of the month buoyed by hawkish comments from the Federal Reserve (Fed), a solid US jobs report and possible scale back of quantitative easing (QE) by the European Central Bank (ECB). While the Fed raised short-term interest rates, as expected, the absence of a more hawkish tone from the central bank triggered a drop in UST yields.
The Trump reflation trade may have lost some of its shine during the quarter, but any disappointment was more than overshadowed by strong global data as exports and production continued to gather pace. In fact, fading enthusiasm for Trump’s ability to execute has arguably served as a tailwind for Emerging Market (EM) assets in the form of a weaker dollar and moderating long term rates.
MSCI Asia ex Japan (AxJ) was up 3.4% in USD terms, marginally outperforming MSCI AC World. Absolute returns were positive for all AxJ markets except the Philippines. The Taiwan Dollar (TWD) was the best performing currency in AxJ followed by the Korean Won and Indian Rupee. Buoyed by the partial unwind of the post-election Trump-trade, gold was the best performing commodity.
US Treasury (UST) yields traded in a tight range in February. Risk assets rallied and UST yields rose in the first half of the month, on the back of the prospect of tax cuts and a Dodd-Frank overhaul in the US. Subsequently, yields were pressured lower by concerns about a possible victory by Marine Le Pen in France’s presidential elections. Overall, the 2-year and 10-year points on the UST curve ended the month about 6 basis points (bps) higher and 6bps lower respectively.
With President Trump announcing that he will be releasing his tax plans in the coming weeks, we have shifted to a more cautious position on US duration. The risk is that President Trump announces a sizeable stimulus package, with the backing of the broad Republican base. This would raise fears that the US Federal Reserve would need to act more quickly than expected, and with markets only pricing in two or three rate hikes in 2017, we believe that markets are under-pricing the risks of this announcement.
Asia ex-Japan (AxJ) equities returned 6.2% in US Dollar (USD) terms, outperforming MSCI World. Singapore, Hong Kong and Chinese equities outperformed while Indonesia, Malaysia and Thailand lagged. Asian currencies generally strengthened against the USD over the month.
US Treasury (UST) yields ended higher in January as weaker-than-expected payroll data led markets to moderate their forecasts for Federal Reserve (Fed) rate hikes in 2017. Overall, 2-year and 10-year UST yields rose about 2 and 1 basis points (bps) respectively in the month.
Donald Trump winning the US presidential election delivered a big surprise, defying poll predictions but ringing consistent with the wave of populism sweeping the developed world. First witnessed early last summer with the Brexit vote, the rise of populism remains a key risk in Europe, while the implications for the shift in US policy are more likely to be mixed.
Credit markets are expected to have another positive year. We expect economic growth in Asia to be stable but see some potential downside risks. In Europe, political risk remains high for 2017. Some of our key themes are: hybrid bonds, financials, oil/emerging markets and High Yield.
Economic growth in Asia is expected to remain broadly stable in 2017. While there will be greater external uncertainties as well as country-specific challenges, Asian economies are, on balance, better equipped to deal with external pressures compared to a few years back.
Asia ex-Japan (AxJ) equities returned -2.0% in US Dollar (USD) terms, underperforming MSCI World and MSCI Emerging Markets (EM). Currencies across AxJ generally weakened against the dollar following the Federal Reserve's (Fed’s) decision to hike rates. Meanwhile, Gold declined 2.2% while oil jumped 8.66% month-on-month.
USTs weakened further in December, as caution prevailed following the November sell-off. As widely expected, the US Federal Reserve (Fed) raised interest rates by 25 basis points (bps). 10-year UST yields ended the month at 2.44%, about 6 basis points (bps) higher compared to end-November levels.
We are currently in a position where we are facing more questions than answers regarding Trump's policy stance as he comes into office and how it will affect the market.
Global Equity - Asia ex-Japan Equity - Japan equity
This PDF is a compilation of 2017 market outlook reports by three of our equity teams.
We believe that in an increasingly uncertain world, Japan’s less uncertain market will provide a compelling opportunity for serious investors.
The phrase “lower for longer” could well become unfashionable very quickly after years of central banks combating the forces of deflation and wishing for inflation instead.