Insights

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.

July was a remarkably strong month for New Zealand equities, with the strength of the market partly reflecting the dovish turn taken by the Reserve Bank of New Zealand.

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.

The Reserve Bank of New Zealand stood pat on interest rates in its latest Monetary Policy Review in July, but it signalled a shift towards a more dovish stance, suggesting that a first rate cut could be conducted by the end of 2024.

A few weeks ago, we began experimenting with the hypothesis that households – and even some governments – were starting to reassess their long-term income expectations. Years of weak productivity growth, concerns over economic efficiency, the cost of living, the climate and troublesome geopolitics are all likely weighing on confidence in the future, along with the seemingly changed outlook for interest rates.

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.

A look back at the past six months reveals the extent to which New Zealand’s equity market has missed out on the strength seen in many other global markets. Amid these struggles, however, the New Zealand market’s sensitivity to interest rates also offers a note of hope.

Given the current weakness in New Zealand’s economy, the key question regarding interest rates is not so much the direction they will take but when they are likely to be cut. The struggles seen in the economy span from GDP to employment and look set to persist for some time.

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.

The US and most other authorities’ reaction to the Global Pandemic was to flood the financial system with cash, principally via the act of central banks buying government bonds. The sums involved were massive, in part because the authorities understandably did not know “just how bad the crisis would be” but also because there was a need in March 2020 to ensure that some financial institutions that were “the wrong side” of the bond market did not perish.