Evolving Markets

One cannot turn on a financial news programme at present without hearing some talking-head or other discussing the outlook for interest rates, almost as though they are the only thing that matters to markets or the economy. We suspect that the matter to a degree to the latter, and much less to the former than is generally accepted.

As an undergraduate economist, the subject of foreign exchange reserves and reserve currencies garnered scant attention because we were in a world of floating currencies in which FX intervention, when it did occur, was only ever modest and temporary. It was only in the mid-1980s, when a number of overtly mercantilist economies in Asia began linking their (frequently undervalued) currencies to the USD and acquiring specie that global reserves became a “topic”. During the 1990s, New Zealand operated without reserves.

I think that it was Henry Kissinger that once said that "academic politics is so vicious because the stakes are so low". However, when academic politics affects economic policymaking, the stakes are far from low.

Although recent headline-grabbing events within the banking system have moved the topic of a potential credit crunch centre-stage in the markets’ consciousness, the fact is that a credit crunch within the Global Financial System began a year ago, while that in the US domestic economy began late last year. More recently, Europe looks to have moved down the same path. Admittedly, the global situation did improve during December and early January, when global financial conditions eased for a variety of primarily technical reasons, but this has proved to have been only a false dawn.

Our Gravity Index for China has made only a very modest recovery so far this year.

We expect fairly rough sailing for the global economy, financial system and markets in the next two quarters, but we do not expect disasters and there should be major relief for stocks later in 2023 as central banks begin to ease policy.

A regular debate between the older and younger members of the Hunt-household revolves around whether old suspenseful Black-and-White horrors are actually more scary than vivid technicolour gore modern films. We suspect that for the Federal Reserve, what you can’t see in black and white may be the scarier concept…

We don’t expect smooth sailing for the global economy and markets, but there should be great relief for both stocks and bonds in 2023, with pockets of strong outperformance due to idiosyncratic advantages. Notably, Europe and Developed Pacific-ex Japan should be overweighed for equites for the next six months, but Japan should perform the best by next December.

We have little (in fact, virtually no) doubt that the opening salvos of the monetary response to the Pandemic were driven by a sense of panic rather than by calculated analysis. The Federal Reserve appeared to be downplaying internally as well as externally the impact of the Pandemic as late as on the 11th March 2020, but by lunch time on the 12th March it was in full crisis mode.

Pundits need to be careful about scaring people regarding Japan and, thus, harming its economic future. This is especially true regarding recent high profile, wildly exaggerated tweets about demographics, a decades-old theme; clearly, this is a challenging theme, but Japan is certainly not going to disappear.

Going back to India for a month after two long years of not being able to visit my family, I was pleasantly surprised by the new normal. While there has been much adversity, COVID-19 has also sparked positive change, especially on technology adoption.

Grace Yan, a Senior Portfolio Manager and a member of the Nikko AM Asian Equity Team, talks about the underlying reasons behind her recent success in winning Citywire Asia’s Best Fund Manager award and her passion about uncovering hidden gems in the Asian small-cap equity arena.

"Nowadays people know the price of everything and the value of nothing", quipped Oscar Wilde.

We gauge Japan’s slow vaccine rollout from an economic perspective and assess the shift in work styles that occurred during the pandemic and its potential impact on real estate prices.

We provide our view on the Bank of Japan’s latest policy review, under which the central bank decided to allow long-term rates to fluctuate in a wider band and removed its annual target for ETF purchases. We also assess the barring of foreign spectators from the Olympic games.

We assess the factors that enabled the Nikkei to rise above the 30,000 threshold for the first time since 1990; we also view the recent Robinhood frenzy from a Japanese market perspective.

In 2020 the COVID-19 pandemic negatively affected a wide variety of Japanese assets, including the real estate investment trust (J-REIT) market. J-REITs have bounced back since, but their recovery has been sluggish compared to the Japanese equity market’s rebound. Despite the slower recovery, we believe J-REITs have ample upside room once the rise gathers pace.

We discuss Japan’s robust manufacturing sector and why it is not about reclaiming the past; we also take a look at the BOJ’s ETF purchases amid the current rally by equities.

We look into the potential economic impact of Japan’s attempt to become carbon neutral. We also analyse why Japan’s fiscal condition draws little attention although the country is on course to spend a record amount in its upcoming budget.

The Japanese equity market has posted impressive gains as 2020 draws to a close, with the Nikkei Stock Average reaching a near three-decade high, and we assess the rise from a long-term perspective. We also analyse how Japanese equities have managed to defy a stronger yen.

Japan struggles with an aging and shrinking population and it is important for the country, both from an economic and social perspective, to improve its relatively low labour productivity by efficiently utilising its human resources.

During his now quite famous Jackson Hole session this year, the Fed Chairman outlined what at face value looks to be a profound shift in the Fed’s way of thinking about the economy.

For October, on a seasonally adjusted YoY basis, Japan’s October YoY Industrial Production (IP) result was better than both US Manufacturing IP and US Total IP. It likely surpassed Europe’s too.

Although the coronavirus outbreak has caused major disruptions and geopolitical risk is on the rise, markets are looking forward to recovery. In what appears to be a rapidly changing world, many things remain the same and indeed, may be changing for the better.

Clearly, it remains difficult to predict events in this volatile environment, but in the interest of our clients, we do our best and fortunately this time, we had virtually unanimous agreement on a similar scenario as in June, both politically and economically.