Nikko AM Insights

One major “plotline” central to the recent series of tariff moves is the tense trade relationship between the US and China. In this issue, we will explore how Chinese bonds have historically offered defensive characteristics and their portfolio roles moving forward.

Understandably much of the popular market commentary has centred around the possible “Repatriation Trade” and in particular is has focussed on possible flows out of the UST by foreign investors. There have also been stories of some selling of US equities and private credit instruments, all of which sound quite alarming given the USA’s hefty net Foreign Liabilities Position and reliance on foreign capital to cover its deficits.

China’s focus on boosting domestic consumption as their top policy priority in 2025 sets a positive trajectory. The ability of individual countries to provide domestic stimulus is going to be crucial in limiting the impact of global growth slowdown brought on by US policy uncertainty.

The Global Investment Committee (GIC) held an extraordinary session to review the macroeconomic and market impact of tariffs announced by the US on 2 April, as well as subsequent actions and market reactions. The GIC’s verdict is that while the US may avoid a recession, risks of slower growth loom large.

The US markets have dominated global portfolio flows, but investors may seek alternative investment destinations if the ongoing change in trade dynamics results in an extended period of elevated US risk premiums. With US tariff policies setting in motion significant fundamental changes, Asia emerges as a potential destination for capital reallocation.

Amid the challenges facing China's property market, work is well under way to restore confidence in the housing sector. It remains an uphill task for both Beijing and the country's property groups, but there are signs of renewed investor interest in the Chinese property bond market as the housing sector's outlook is expected to improve.

Against this more challenging but still benign macroeconomic backdrop, we expect Asian corporate and bank credit fundamentals to stay　resilient, aside from a few sectors and specific credits which may be affected by tariff threats or geopolitical dynamics.

In a key development for New Zealand’s fixed income market, official figures suggest that the Reserve Bank of New Zealand has won its fight against inflation. We feel that the victory has come at a cost, however, given the significant impact interest rate rises have had on consumers and businesses.

The "Liberation Day" US tariffs are expected to strongly impact Asia, where most countries run a trade surplus with the US. Although significant uncertainty is likely to linger, our base case is for most of the region's economies to negotiate with the US and thus mitigate much of the impact from the initial announcement. Regarding Asian local government bonds, we retain a positive outlook for several countries that have the capacity to pre-emptively implement monetary and fiscal policy responses. Most Asian corporates and banks also entered 2025 with strong balance sheets and rating buffers, which could cushion them during this period of high volatility.

New Zealand’s equity market struggled in the first three months of 2025 amid global uncertainty due to trade tariffs imposed by the Trump administration. Although the market news flow was quiet in March overall, some notable developments occurred in the area of renewable energy generation.