Insights

Emerging markets (EM) slid from February through the year-end on the back of a stronger dollar, an escalating trade war and notably weaker growth in China. However, we see evidence that these previous headwinds may now be turning into tailwinds.

The Japanese equity market fell in December, with the TOPIX (w/dividends) dropping 10.21% on-month and the Nikkei 225 (w/dividends) declining 10.28%.

It is a design fault amongst perhaps the majority of economists that, when things don’t quite go according to their forecasts, they will either ‘blame the data’ and stick to their previous view for too long, or attempt to finesse a ‘U-turn’ in such a way that it does not look like one so as not to undermine their short-term credibility….

Global growth is expected to grind lower in 2019, with continued monetary policy normalization in developed markets being the key headwind for the world economy. Financial conditions will tighten further as the Fed continues its gradual increase in interest rates.

In December, US Treasury (UST) yields fell as risk assets came under pressure from various factors, triggering ‘safe-haven’ buying.

The return of negative bond/equity correlations was a rare silver lining for multi-asset investors in 2018.

The MSCI AC Asia ex Japan (AxJ) Index fell by 2.6% in USD terms in December, as concerns about slowing global growth, tightening monetary policy and rising geopolitical tensions continued to drive sentiment.

The S&P/ASX 200 Accumulation Index returned -0.1% during December.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was up 1.50% over the month, outperforming Australian equities which fell 0.12%.

At present, our working hypothesis for 2019 is that, following a potentially quite bright start to the year as the US approaches its ‘peak fiscal stimulus’ and the Administration runs down some of its savings deposit holdings at the Federal Reserve (for reasons connected with the Debt Ceiling), global liquidity conditions and in particular dollar liquidity conditions are likely to tighten quite significantly – and possibly severely – during the second quarter.

The word “volatility” crops up a lot when commentators try to explain price movements in financial markets. More often the word is used to explain a sudden drop in prices, whereas if prices rise investors compliment themselves on their astute insights rather than the vagaries of the markets. Psychologically, losses are felt more intensely than the pleasure of a gain.

While New Zealand markets have had a rather interesting and more volatile time, the main drivers of the economy remain sound.

The Japanese equity market rose in November, with the TOPIX (w/dividends) climbing 1.30% on-month and the Nikkei 225 (w/dividends) rising 1.98%. Equities rose in the early part of the month on strong US economic indicators and easing political uncertainty after the US midterm election results largely matched expectations.

As we wrap up the final weeks of 2018 and look ahead to whatever challenges lay ahead next year, we can’t help but reflect on what has been a testing and frustrating year for investors.

US Treasuries (USTs) registered gains in November, while yields fell along with faltering US equities.

While it is true that the Fed will be criticized no matter what it does tomorrow, it could limit criticism to mild levels if it hikes only 10 bps.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

Today’s release of the 3Q CY18 data on aggregate Japanese corporate profits showed interesting trends regarding our long-term theme about improving corporate governance.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

The macroeconomic backdrop for Asian countries should remain broadly neutral for credit performance in 2019. GDP growth is expected to moderate across the key economies, although we don’t expect any hard landing scenarios to materialize.

One thing is for sure, 2019 will not be a dull year. We expect more headlines and drama on trade but would pay more attention to underlying policy direction at both the Federal Reserve and Chinese authorities, as bigger markers for improved fortunes across Asian markets.

Shakespeare once said, “present fears are less than horrible imaginings.” As we come to the close of 2018, we have observed equity markets turn double-digit returns to losses, an aggressive rise in interest rates and a modest increase on the perception of escalating tensions surrounding the world’s two largest economies.

In addition, we have to consider the eventuality of a prolonged trade war. But China would be able to mitigate its impact initially via a combination of monetary and fiscal stimulus, helping offset the impact of tariffs to a certain extent.

Credit markets didn’t perform in line with the expectations we set at the beginning of the year and disappointed most investors.

The potential hangover from the monetary binge of QE continues to weigh on global equity markets as we head towards 2019. The turning of the calendar will do little to change this.

Once again, the Federal Reserve (Fed) policy has proven itself to be the key determinant of global liquidity, and 2018 was clearly tight.

As we reflect on 2018, we would all agree that Trump and his trade policies dominated the conversations and dictated some of the major moves in the financial markets around the world.

We believe 2019 will be an important year for active selection or alpha and our focus will be on delivering on stock selection returns by picking quality companies who are resilient in growth amid a rising risk environment.

So many developments have occurred since we last met in September, but the major ones were the surprising collapse in oil prices mostly due to geopolitical factors, the U.S.-China trade and BREXIT conflicts becoming increasingly intractable, and that aspects of the global economy showed occasional signs of moderation.

Global growth remains desynchronized, with China, the Eurozone and Japan continuing to show further signs of moderation, while the US remains relatively robust.

The MSCI AC Asia ex Japan (AxJ) Index gained 5.3% in USD terms in November, despite persistent concerns over global growth and a slide in technology stocks.

The S&P/ASX 200 Accumulation Index returned -2.2% during November.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was up 0.24% over the month, outperforming Australian equities which fell over 2%.

Global growth remains desynchronized, with China, the Eurozone and Japan showing a further moderation in growth, while the US remains robust.

The late 1990s and mid 2000s were periods that appeared characterised by above trend growth in much of the OECD and ‘unexpectedly’ low rates of inflation, a combination that was blithely described as the ‘Goldilocks Economy’.

Earth’s largest single geographic region, Asia represents approximately 60% of the planet’s population and is one of its fastest growing economic areas. The region had more billionaires in 2017 than anywhere else and it will represent 57% of middle-class consumption by 2030.

Over the past year Australian house prices have seen 12 consecutive months of decline, the longest streak of persistent falls in over 20 years.

Volatility is back in a big way in 2018. A large increase in the VIX is showing an annual level not witnessed since 2007. The sell-off that started in October appears to have been triggered by a number of negative technical forces in the USA coming into effect at the same time, which impacted global markets.

One of the pleasures of getting older is that you start to have proper grown-up conversations with your children.

The US economy is enjoying its second-longest growth cycle in history and is on the way to becoming the longest on record.

How do you react when you see blood; do you swoon or just observe with intrigue? Perhaps conditioned by a recent overdose in crime related dramas (favourites include: ‘Killing Eve’, ‘Peaky Blinders’ & ‘Better Call Saul’), it was the latter outcome for me after a recent DIY debacle with a saw.

The MSCI AC Asia ex Japan (AxJ) Index fell by 10.85% in USD terms, on the back of concerns about rising interest rates, slower economic growth, and persistent US-China trade tensions. Large technology stocks were particularly hard hit.

US Treasury (UST) yields spiked at the start of October as the market responded to stronger US data and Federal Reserve (Fed) Chairman Jerome Powell's hawkish comments.

The Japanese equity market dropped in October, with the TOPIX (w/dividends) falling 9.41% and the Nikkei 225 (w/dividends) declining 9.04% on-month.

Global equities corrected downwards by 7.5% in USD terms in October. Stocks in the US ended the month down 6.5% after an intra-month peak-to-trough drawdown exceeding -10%.

On the back of unrelenting USD strength, 2018 has been a tumultuous period for Asian currencies. Countries in the region with current account deficits have been facing more currency pressure, prompting their central banks to engage in series of rate hikes to defend their currencies.

Clearly, the U.S. Administration has tried to protect the steel and other industries considered important for defense and economic security. The intent is to have them invest in new capacity due to the recently higher product prices.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

The S&P/ASX 200 Accumulation Index returned -6.1% during the month.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was up 0.48% over the month, outperforming Australian equities which tumbled over 6%.

As the world experiences more extreme weather patterns and climate-related incidents, pressure is mounting to curb greenhouse gas emissions.

In 1986, the governors of the G5 ‘arguably most important’ central banks were P Volcker (USA, life-time central banker / Treasury Official); K-O Pohl (Germany, Journalist / Central Banker); S Sumita (Japan, life-time MoF / BoJ); R Leigh-Pemberton (UK, ex Commercial Banker); and M Camdessus (France, bureaucrat).

The trade war between the US and China appears to be morphing into deeper and more protracted conflict as reflected in a recent speech by US Vice President Mike Pence, who criticised China not just for trade practices but more fundamentally for its broad political and economic model.