With banks using negative interest rates and their stocks plummeting, many are wondering if the world is headed into another recession. Though things may seem grim, the truth is that another recession seems to be unlikely.
Since 2011, Brazilian assets have re-priced to the downside. Given the size of the adjustment – both in commodities and assets – the question is whether Brazil is now presenting attractive investment opportunities.
Nikko Asset Management's Global Investment Committee met on March 29th and updated our intermediate-term house view on the global economic backdrop, central bank policies, financial markets and investment strategy advice.
We expect June and December Fed hikes, but only mild further easing ahead for the BOJ and ECB. Meanwhile, we expect oil prices to creep higher through 2016 despite the stronger USD due to relatively firm economic developments in China and the G-3.
We expect that global equity and bond investing will be positive for Yen based investors due to Yen weakness, but for USD based investors, we are taking only a neutral stance on global equities due to a cautious forecast for US equities, whereas we are positive on Asia-Pac ex Japan, Japan and Europe. Meanwhile, we are moderately negative on bonds in each region when measured in USD terms, so we underweight them.
Despite seemingly a multitude of worries over the potential for a slowdown in US growth, the growing signs of weakness in Japan, the arrival of an industrial recession in Europe and the uncertainty over BREXIT, financial markets have arguably performed remarkably well over recent months.
On March 10, the European Central Bank (ECB) delivered what is commonly referred to in market parlance as the ‘bazooka’ – a stimulus programme well beyond market expectations.
Our Singapore-based Fixed Income Portfolio Manager details the reasons for ASEAN’s recent rebound and why such should continue.
Although the current polls do not indicate a clear majority outcome, in this piece we will examine some of the issues that may cause sentiment to shift towards a Brexit, and what the UK leaving the European Union might mean for the UK and EU economies post breakup.
While a recession in the US is not our base scenario, the impact of such an event on credit exposure is worthy of consideration. In our historical analysis we've found that the driver of past recessions can provide important insight into which credit maturities are most attractive.
US monetary policy grows less independent as 2016 unfolds and risks to global growth abound in a rebalancing China, a deflationary struggle in Europe and whispers of a Brexit.
2016 began in complete panic, with risk assets including emerging markets (EMs) selling off deeply through the first few weeks of the year.
Our global strategist sheds light on how corporate profit margins are reflecting the continuing improvement of corporate governance in Japan.
We suspect that many market participants have viewed the major central banks’ various “extraordinary measures” that have been adopted since the financial crisis of 2007-8 as having been a good thing. Therefore they have perhaps – or most probably – been wrong-footed by the markets’ rather negative reaction to the promises of yet more QE / negative rates / more monetary experiments.
Our Global Credit staff in London detail their rationale behind concentrating on service sector exposure globally.
Volatility can provide excellent buying opportunities. Something which gets overlooked in the 'noise' of markets.
Our global equities team in Edinburgh explains their views on the prospects for their asset class.
As we have seen over the past year in the equity market, the more Beijing wants to exert control, the more it slips away. Is pragmatism going to trump ideology in Beijing? In the current environment, the PBOC letting the RMB free float might not be so unbelievable after all.
This policy change by the BOJ is a positive in terms of maintaining and strengthening the inflation expectations that have begun to flower.
In our view, the USD will soften when the Fed comes to accept the reality of slow-to-no growth globally and becomes more dovish in its language and approach.
There is apparently a saying in the UK’s Parachute Regiment that after you have jumped out of the plane you simply have to accept whatever landing you get. While we might hesitate to liken China’s great credit boom of 2009-2014 as being akin to jumping out of a plane – although there certainly was an element of there being a leap into the unknown – it is clear that China’s economy is landing at present.
Unfortunately for the soundness of the sleep among BOJ-watchers, Mr. Kuroda believes that surprising the market is the best way to achieve his intended result.
Our Singapore Multi-Asset and Equity team analysts cover oil’s swoon using a bit of humor, but the clear-cut conclusion is of great importance.
Our Chief Global Strategist regards Japan positively in the global-macro context and predicts that Japanese equities will outperform global equities in the first half of 2016.
Our Chief Investment Officer in Japan details the many reasons for optimism on Japanese equities in 2016
Our Singapore fixed income team expounds on the outlook for this clearly globally important factor.
In early 2016, hedge fund Nevsky Capital decided to call it quits after 15 years of successful asset management. One of the reasons for the closure is that since the global financial crisis (GFC), emerging markets (EMs) are breaking away from the transparent 'Washington Concensus' model and are now prone to much less predictible nationalistic policies.
There are many concerns about Abenomics losing its power to reform the economy, but our Chief Strategist in Japan, Naoki Kamiyama, shows that the major developments in tax reform prove that Abenomics is alive and well.
It has of course become something of a tradition to do a ‘year ahead’ piece covering themes that could potentially shape the investment landscape and, with this in mind, we have decided to offer our thoughts on just what may lie ahead over the course of what we suspect is going to be a particularly interesting year.
James Eginton provides his insights on the economic transition in China following a recent research trip to the region. The transition from a reliance on infrastructure investment to consumer spending - perhaps the largest the world will ever see - has significant implications for global growth.
John Vail reflects on the Fed decision and the path forward. The Fed was even more dovish than apparent in the headlines.
Nikko Asset Management's Global Investment Committee met on December 8th and updated our intermediate-term house view on the global economic backdrop, central bank policies, financial markets and investment strategy advice.
We only expect mild further easing ahead, especially as the ECB does not wish to cause a rupture while the Fed is hiking rates.
We forecast that Asia Pac ex Japan, Japan and Europe will outperform in the next six months, while the US should underperform and, thus, deserve an underweight stance vs. all other regions.
Our investment management teams have again come together to update their views given new developments in India.
Looking forward, even though inventories were revised higher, their long depletion means they remain far too low in my view, and should continue start to rise significantly in the quarters and years ahead.
As we enter 2016, we believe the divergent monetary policy theme will continue -- with the major risk to global bond markets and Fed rate rises continuing to be Europe.
It must be remembered that 2015, like 2014 and 2013 before it, was supposed to be the year in which the US and indeed other consumers finally threw off the shackles of the Post GFC era and raised their level of spending on the back of falling energy prices and rising housing and property wealth.
The IMF's decision to include the Renminbi into the SDR is a major push for the RMB to become one of the world's major reserve currencies.
Our lead Australian fixed income portfolio manager discusses her intermediate-term outlook for the bond market “down under.”
Developed and emerging markets in Asia ex-Japan have clearly been under tremendous pressure in recent months, including redemptions of more than USD 50bn from the region in September, the heaviest ever witnessed.
We update our views on whether ECB QE has had a positive effect on corporate earnings.
“Monetary Policy can only take growth from other countries or borrow it from the future” – Masaaki Shirakawa, during a private conversation, September 2015
There are many reasons for the BOJ to defy consensus expectations for more easing.
There is an admirable effort to improve the female participation rate, but it is too early to judge whether the measures will have a major effect.
A better supply/demand balance in Europe, outperformance of “high yield“ globally, positive event-risk in the telecom sector and opportunities in local currencies, as well as other credit related investment themes, all present interesting opportunities for generating positive returns, even in a challenging environment.
Our Nikko Asset Management fixed income experts, led by Simon Down, discuss the prospects for commodity currencies.
In our opinion, rather than embarking on credit boom "ping pong" with the EM, the Western world should have invested in raising productivity
In our view, the G-3 economies will fare reasonably well, and basically match the current consensus in the next few quarters; however, there will be significant challenges for each region.
For the time being, we are not estimating a date for reducing the Fed’s balance sheet, but a 2Q16 initiation seems quite logical at this stage.
Although we expected G-3 bond yields to rise, they did so less than we predicted in our June meeting. We expect yields to rise moderately further for the next two quarters.
Our forecasted macro-backdrop scenario has mixed ramifications for global equities, with the US declining but most other regions rising, and it is likely to be very volatile ride
Markets and economies are still being dictated to by unprecedented levels of monetary stimulus. We believe in building a portfolio of companies that are more likely to flourish in the growth environment beyond 2015.
We explain how Abenomics is the "icing on the cake" of corporate governance improvement over the last decade.
Despite this evidence of a new global malaise, there are still those that continue to expect the US economy to “ride to the rescue” over the next few months.
The internet revolution is coming to the financial sector, addressing inefficiencies in current system and business models. In China’s case we are witnessing a combination of financial liberalisation with an internet revolution in the financial sector.
A concentrated, stock-picking approach is the best way to serve a long-term investor's goal of capital appreciation
Even though the current term premium on US Treasuries seems too low, it is unlikely to rise significantly unless offshore bond yields start to rise.
For investors outside China, whether they have holdings in Chinese shares or not, coming to a coherent investment view on the country has become imperative as it exerts an ever-increasing influence on global markets.
As has long been our view, disappointing economic data should not worry investors in Japanese risk assets very much at all.
While RMB weakness will likely persist for a few months, we don't expect the currency to devalue more than 10% versus USD and we maintain our confidence that the currency will be included into the IMF SDR basket in a year from now.
We will be watching to see how companies respond this year to the Corporate Governance Code, specifically the twin issues of selling cross-shareholdings and improving capital efficiency.
Without a doubt, we find the current state of the global economy more complex than perhaps at any other time in our 25 years of experience.
India is a key market to watch in the coming years. Our expert on India, Andrew Holland, CEO of Nikko AM's joint venture there, discusses with Simon Down of our UK fixed income team the forecast for reforms in the country, with some surprising conclusions.
What lies ahead for iron ore prices, particularly with the Chinese economy slowing and undergoing a transition away from a materials-intensive economy to a consumption-driven economy?
Like many countries that have previously refused to reform at all levels, sometimes it takes a true crisis to change.
The sharp equity market correction in recent weeks after a very strong run over the past year will not have a crisis-level impact to the broader economy.
The IMF has been supportive of China's attempt to be included, but has not indicated that it recommends it. Furthermore, there is a risk that most of these reforms are too new for the IMF to judge whether they are effective or sustainable.
Nikko AM Asia views the recent corrections in Chinese equities, particularly in the onshore markets, as healthy given the sharp increases in value that had occurred due to a frenzied retail market intoxicated by relatively cheap margin financing.
We expect short-term volatility but the threat of financial contagion via the banking system in Europe is much lower than in 2011/12 and we’re unlikely to see a severe longer-term impact on global markets.
One of the key features of the global economy – and particularly of the “Pacific Rim economies” – that has most concerned us over recent months has been the immensely weak investment spending trends that are starting to appear across Asia. We firmly believe that this weakness in capital spending ...
We believe the global economy should be quite firm for the next year, but not so strong as to cause inflation concerns.
We have a non-consensus, but completely sound call for a more aggressive Fed, whereas we expect the ECB and BOJ to maintain their current aggressive easing program.
Despite good global economic growth, other commodity prices will likely remain quite flat in our view, partially due to a stronger USD.
We calculate that equity valuations are at fair levels and that stocks can grow along with earnings.
Although the recent bond market sell-off may remind the market of 2003, we don’t believe US bonds will be as badly affected. By comparing the worst US bond sell-offs since 2003, we estimate that the 10-year US Treasury yield could hit a high of 2.8-3.2% by October.
Real yields and inflation expectations currently suggest exceptionally low growth and low inflation far out into the future.
We expect that profit margins will expand further in coming quarters, driven by a large corporate tax cut and continued industry rationalizations that further prove that Japan's structural profitability trend continues upward.
We do not expect the recent steepening of the bund yield curve to be the beginning of a sustained new trend. Moreover, Eurozone and German economic data, albeit improving, are not sufficient to support the higher bund yields on a sustained basis.
One of the reasons that we tend to eschew “black box” forecasting models of any economy is that we suspect that there are simply too many variables and discontinuities for even mathematicians with the skill of the late John Nash to ever really encompass effectively. In this context, One of the least understood or modelling-friendly “variables” within a macroeconomic system is the household savings rate...
Since the Fed starting hinting at the normalization of interest rates a year ago, Asian central banks' foreign reserve accumulations - except for India and Hong Kong - have either incurred substantial losses or remained flat.
With many markets having rallied from major support levels when they were in highly oversold positions, we believe that bond markets should stabilise or rally from current levels.
We expect that Japanese pension funds will continue to shift their investments into risky assets in 2015.
Over the last 20 or so years, global interest rates and bond yields have collapsed to levels that few would have thought possible even in the late 1980s. The process started in Japan in the mid-1990s following the bursting of that country’s credit-driven Bubble Economy, but from 2003 – and certainly from 2008 onwards – the UK, US and much of the “dollar bloc” have followed suit...
Oil-producing countries have seen the largest drop in their foreign exchange (FX) holdings over the last year. In our view, Saudi Arabia can afford to handle oil prices at their current level for some time but ...
The importance of President Xi Jinping's strong leadership cannot be stressed enough. Under him China is undergoing dramatic changes. While the most thorough cleansing of state corruption is ongoing, elements of China's grand strategy are becoming more evident both domestically and on the global stage.
The market isn't overheating even though the Nikkei stock average touched the 20,000 level, nor do we believe that overseas markets are overheating right now.
Given the significant proportion of real estate investment as a percentage of GDP, as well as the proportion of local government revenue generated from land sales, the property market remains a crucial driver of the Chinese economy.
Due to the developments described in this article, there is ample room for growth at Japanese firms and much opportunity for investment success.
There is a well-known dilemma that exists for the country that “owns” or operates the global reserve currency. Since global trade and many capital account transactions are settled in the reserve currency, it is incumbent on the economy that provides the reserve currency to ensure that it is a net exporter of its currency so as to accommodate global growth and hence the growing need for reserves and international settlement funds ...
John Vail updates his long-standing theme: Japan's Successful “Show Me the Money” Corporate Governance.
World trade prices are currently falling at probably their fastest pace since the dark days of the Global Financial Crisis and, in doing so, they are imparting a deflationary bias to the world economy. We find that even in some of the world's strongest economies ...
Through 2014, one of the largest asset classes in the world was virtually unnoticed as an indicator that Europe is not pushing the global economy into widespread deflation.
There are several credible reasons to expect that QE will boost corporate earnings in Europe, though by not as much as in the US. However the risk of disappointment relative to inflated expectations remains high.
In 2015, markets will be looking for any pick up in European and Japanese inflation as a result of their QE programmes. With growth picking up, we may start to see signs of a rise in US inflation.
The disappointing economic data should not worry investors in Japanese risk assets very much at all.
The key theme of the past few years has been quantitative easing. Although the US has come to the end of its version of this experiment, QE programmes have begun or are about to begin in Japan and Europe.
We expect the next phase of the global evolution to be driven by a growing global population, rapid urbanisation and for most of it to happen in emerging markets with increasing focus on "green" development.
In a pre-GFC and pre-QE world, zero or negative interest rates on a German, Japanese or US 10-year bond would have been considered highly implausible. However...
ECB's QE: The major question is, will this program work given the European model of debt creation is via the banking system and not the bond markets?