Insights

Defined as negative growth for two consecutive quarters, a recession is certainly in the realm of possibilities (if not probable). However, it may be more a reflection of continued extreme economic volatility following the COVID-19 pandemic, rather than a conventional recession that follows an extended period of economic expansion.

We review the “new form of capitalism”, a government plan to boost economic growth initiated by Japanese Prime Minister Fumio Kishida, who is enjoying a high public approval rating ahead of a closely watched upper house election.

Recent results in the New Zealand retirement sector have been strong almost across the board, with operators of retirement villages posting high sales of both new stock and existing units. Independent valuations of retirement village assets have also increased significantly across all operators.

The beleaguered New Zealand bond market received some respite in May, while the Reserve Bank of New Zealand raised the Official Cash Rate by 50 basis points to 2%, with the market pricing in the central bank hiking rates again in July and August.

We prefer Malaysian bonds, as we are of the view that inflation will be relatively better contained in Malaysia. We are keeping a neutral view on duration for low-yielding regions and countries such as Hong Kong, Singapore and Thailand. On currencies, we favour the Chinese yuan, Thai baht and Singapore dollar to Philippine peso and Indian rupee.

This month we explain why losses by Japanese equities so far in 2022 have been limited relative to their peers; we also assess the positive impact a return of inbound tourism could have on Japan’s economy and markets.

Asian equity markets rose marginally in May, boosted by Shanghai’s plan to lift COVID-19 restrictions, even as the US Federal Reserve raised its benchmark overnight interest rate by 50 basis points. For the month, the MSCI AC Asia ex Japan Index rose by 0.5% in US dollar terms.

Since the Pandemic first unfolded, it has generally paid to invest and act according to what the Federal Reserve Chairman said was going to happen, rather than what did in fact happen. The obvious example being last year, when the Fed told markets not to worry about inflation even though the central bank clearly should have been worried about rising inflation rates…..

The just-released 1Q CY22 data on aggregate corporate profits in Japan was positive, with the overall corporate recurring pre-tax profit margin hitting a record high on a four quarter average. Both the non-financial service and manufacturing sectors contributed, with the latter surging to another record high. Note that the strong results occurred despite quite weak GDP, further proving the long-held theme of this report that profit margins remain on a structural uptrend despite sluggish domestic GDP growth, as shown in the charts below. Increased pricing power, coupled with improving corporate technological prowess and efficiency, should be credited for this, but improving global economic growth certainly was also a major factor.

For the last two centuries energy revolutions have created extensive platforms for subsequent technologies to drive wealth creation and raise living standards across the world. And this decade heralds the start of an energy revolution providing investors with lots of opportunities—the beginning of an energy broadband infrastructure boom.

Change is both more prevalent and significant in Asian markets. We believe that seeking to understand it is essential to deliver sustainable returns.

The outlook is increasingly clouded as markets come to terms with a Fed that may do “whatever it takes” to contain inflation. Given that current inflationary pressures appear to be mainly driven by supply-side constraints and rising energy prices, it follows that the Fed would need to be willing to take the economy into a recession to meet its mandate.

Increasing energy and food prices were the main factors that pushed most regional headline CPI prints higher in March. The Monetary Authority of Singapore aggressively tightened FX policy while China stepped up both monetary and fiscal policy support as the country struggled to contain its worst COVID-19 outbreak in two years.

Asian markets were downcast in April as investors were concerned about inflation and the likelihood of a larger-than-expected rate hike by the US Federal Reserve. For the month, the MSCI AC Asia ex Japan Index fell by 5.2% in US dollar (USD) terms.

It has still been a tough year so far for New Zealand bonds amid pressure from inflation. That said, the market in New Zealand has been an outperformer among global peers since the beginning of 2022.

This month we turn our focus to developments in China and their impact on New Zealand companies. New Zealand’s trade with China expanded by 22% in 2021 despite COVID-19 having an impact throughout the year. This highlights the incredible growth seen in trade between the two countries over the years.

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.

The rise that has occurred within longer term bond yields over recent weeks has certainly been “enthusiastic”, and we suspect that many view the move as being no more than a belated / overdue reaction to the higher rates of inflation within the global system.

Relief rallies are always encouraging but do not necessarily portray parting clouds for a return to “normal” market conditions. The market is still digesting a rather dizzying array of challenging dynamics that have unfolded quickly over the last quarter.

We are keen to participate in the push towards a less carbon intensive future but want to do so in a balanced fashion, with one eye on the associated risks.

We have eased our cautious view towards duration as we expect global rates to consolidate from current levels. On currencies, we are positive on the Malaysian ringgit, Indonesian rupiah and Singapore dollar.

Asian stocks declined in March, dragged down by the Russia-Ukraine conflict. Lingering concerns over inflation also weighed on the equities markets. For the month, the MSCI AC Asia ex Japan Index fell by 2.8% in US dollar terms.

This month we discuss the Japanese stock market’s recovery from the initial shock of the Russia-Ukraine war; we also assess the potential impact of a Russian debt default on Japan’s markets and financial system.

The New Zealand bond market has experienced a rough start to 2022. The chief driving market factor has been the upward movement in reference interest rates, with the swap and government curves all moving up as central banks turn hawkish to fight inflation for the first time in a generation.

This month we focus on A-REITs, which are larger and more liquid relative to their New Zealand peers. One of the sector’s benefits over its New Zealand counterpart is its simple numerical advantage: Australia boasts 34 REITs, which is three times the number of REITs in New Zealand.

We share our thoughts on sustainable companies that address social issues and contribute to the physical and mental well-being of individuals.

The GIC expects the global economy to continue struggling in a form of “stagflation-lite” and sees a relatively flat performance for global equities for the next three to six months (although quite positive on Pacific equities), with moderate weakness for global bonds.

The economic costs of the current conflict in Ukraine may pale into insignificance in comparison to the human suffering, but they are not irrelevant to markets. The bottom line is of course that wars make society poorer, as does conflict in general, natural disasters, or catastrophic errors.

The Russian invasion of Ukraine has created significant uncertainty for investors. Prior to the war’s outbreak, central bankers were already facing a challenging inflationary environment, and these new commodity-driven price pressures are set to complicate matters even further.

Following the Russian invasion of Ukraine, there has been considerable media coverage and interest about the implications this has on New Zealand investments. This invasion has seen devasting humanitarian effects. Our thoughts are with the people of Ukraine and those who have had family and friends affected by this crisis.

We are generally neutral to slightly cautious in our view of countries whose bonds are relatively more sensitive to UST movements. Within Asia currencies, we prefer the Chinese renminbi and Malaysian ringgit over the Indian rupee and the Philippine peso.

We think the New Zealand bond market looks very attractive relative to the rest of the world given how high our interest rates are. At the same time, we certainty aren’t immune to developments in the rest of the world, particularly the US, where the Federal Reserve is poised to begin raising rates.

The New Zealand market recovered well from the global plunge in equities seen in response to Russia’s invasion of Ukraine on 24 February. The current events in Europe have had very little immediate impact on New Zealand, particularly from a corporate earnings perspective.

Asian stocks suffered losses in February as escalating Russia-Ukraine tensions culminated in an invasion of Ukraine by Russia. But despite the war in Eastern Europe, in our view Asian economies are more than strong enough to withstand commodity price hikes even at their current elevated levels.

This month we discuss how higher long-term yields could impact Japanese stocks; we also focus on how robust exports could play a role in boosting the country’s long stagnant wage growth.

The Western World today faces a public sector burden that bears a troubling resemblance to the immediate Post-war period in the late 1940s and 1950s; a private sector debt burden that bears comparison to the late 1990s / early 2000s; and an inflation problem that is beginning to look like the 1970s. Now, we would add to this list a “Cold War” situation that looks like the early 1980s (i.e. Afghanistan and other Proxy Wars between superpowers).

The just released 4Q CY21 data on aggregate corporate profits in Japan was very positive, with the overall corporate recurring pre-tax profit margin hitting a record high on a four quarter average.

In order to gain a range of perspectives on the Russia-Ukraine conflict, Nikko Asset Management has gathered the views of various experts and investment teams, representing many of our major asset classes and geographical regions.

We analyse the course the Bank of Japan could take as other major central banks move towards policy change; we also take a deeper look into Japan’s strong exports, which are expected to keep buoying the economy in 2022.

Policy actions by monetary authorities diverged across the region; we remain cautious on bonds of low yielding countries and regional currencies.

Have you ever stopped to imagine what would happen if the world’s central banks spent just over a decade pouring USD 25 trillion of liquidity into the economy with more than 60% of that liquidity created in the last two years? In this article, we’ll try to assess what has happened and think about how investors should navigate the next phase of the greatest financial experiment of all time.

The outlook is currently challenging. Tightening is coming, but it is not here yet and in the meantime current policy remains quite accommodative. There is no doubt that extremely easy policy boosted equity prices, which were reinforced by strong earnings. Still, we believe organic growth can continue.

Asian stocks had a tough start to 2022 amid concerns that persistent inflation could cause any tightening by the US Federal Reserve (Fed) to be more aggressive than expected. For the month, the MSCI AC Asia ex Japan Index fell by 3.10% in US dollar (USD) terms.

Increasing expectations of a more aggressive Fed tightening cycle have led to a sell-off in US Treasuries. We share our thoughts on what this means for investors in 2022 and discuss our outlook for Asian bond markets.

We see the volatility in the New Zealand markets as an opportunity to focus on new companies for which we have a high degree of confidence in their earnings.

Inflation is creating challenges for the New Zealand bond market and economy. In line with bond markets around the world, New Zealand’s market has had a difficult start to 2022. Bond yields and interest rates in general have been climbing as central banks hike rates to tackle soaring inflation.

We highlight the increasing importance of engagement in Japan, explain how it could be the key to unlocking the long-underperforming Japanese market’s potential, and assess how it can lead to the generation of alpha.

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.

It would not be surprising if the major swings in the markets and macroeconomic conditions, including historic central bank shifts, have made most investors somewhat seasick. Recently on a day-to-day basis, markets seem to react quite irrationally, but the overall backdrop is fairly clear: the markets are getting accustomed to one of the most rapid and major shifts in Federal Reserve policy ever in its history.

The Federal Reserve may have been caught by surprise by the persistence of inflation in the USA over recent months but we suspect that many investors in the Emerging Markets are about to experience a similarly unpleasant surprise of their own.