Insights

Investment Insights by our experts and thought leaders

Have Bond Markets Become Unfit for Purpose?

Rather surprisingly, a UK tabloid newspaper recently contacted the author following the seemingly spectacular “blow up” in the UK bond markets, and the subsequent “crises” within the pension / insurance sectors. The journalist clearly wanted to write a story about reckless spendthrift government fiscal policies, and miss-management by pension fund managers. However, this was not the story that they got from the interview.

Japan’s “show me the money” corporate governance: 3Q, another record high

The just-released 3Q CY22 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.

The case for China bonds

China’s bond market is exhibiting low correlation to other asset classes, displaying historically lower volatility, enjoying continued internationalisation of the renminbi and benefitting from the country being included in globally recognised indices.

This month, Fed Chair Powell seemed hellbent on quashing any last hope of a pivot or at least slowing the pace of rate hikes sometime soon. But this crushing blow to hope helped sow the seeds of an eyewatering rally when one inflation print showed some promise—hence, the manic cycle continues.

We are inclined towards Singapore and South Korean government bonds, given their relatively higher sensitivities to stabilising US Treasury yields. In currencies, we see the Singapore dollar continuing to outperform its regional peers.

The ASEAN region fared better on the whole in October thanks to gains by the Philippines and Malaysia; Hong Kong and Taiwan stocks were volatile while the China market continued sliding.

New Zealand Equity Monthly – October 2022

A notable feature of global equities this year has been the significant divergence seen among indices. New Zealand’s S&P/NZX 50 Index has provided an example of this by following a different track to the overall global trend so far.

New Zealand Fixed Income Monthly – October 2022

As in the rest of the world, consumers in New Zealand are facing significant headwinds as the cost of living rises. The consensus was for inflation to decline rapidly after peaking, but the data now show that New Zealand’s inflation is becoming significantly entrenched, broad based, and domestically driven.

Navigating Japan Equities: Monthly Insights from Tokyo (November 2022)

We discuss Japan’s recent currency market interventions from an equity market perspective; we also share our thoughts on steadily rising inflation after a surge in the September core CPI.

Why convexity matters

Yields have moved significantly this year, challenging the assumption that the relationship between a bond’s price and yield is linear. We discuss convexity, which measures how sensitive a bond’s duration is to yield changes, and its importance under the current conditions.

Inbound tourism: An immediate boost for Japan

As Japanese Prime Minister Fumio Kishida focuses on various economic initiatives to shore up his support ratings, the revival of inbound tourism is seen as a measure that can provide the economy with an immediate boost.

The potential implications of China’s 20th Party Congress

China’s 20th Party Congress ended on 23 October with President Xi Jinping winning an unprecedented third term as expected. We provide a brief analysis of the Congress and the impact it could have on China’s zero-COVID policy and the capital markets.

The future looks bright for Asia’s equity markets

Asia continues to offer opportunities in terms of attractive companies; on a relative basis, Asian markets look set to outperform as the region becomes an even more important part of the global economy.

The Inelastic Supply Curve

We have little (in fact, virtually no) doubt that the opening salvos of the monetary response to the Pandemic were driven by a sense of panic rather than by calculated analysis. The Federal Reserve appeared to be downplaying internally as well as externally the impact of the Pandemic as late as on the 11th March 2020, but by lunch time on the 12th March it was in full crisis mode.

Global Equity Quarterly (Q3 2022)

The low for this bear market could be a lot closer at hand now than it was, with equity valuations having fallen considerably. We remain focused upon assessing our companies’ ability to deliver earnings expectations and cash generation. These give us confidence in the long-term, even if shorter-term developments remain volatile.

New Zealand Fixed Income Monthly – September 2022

Compared to its global peers the New Zealand bond market was stable in September. In the coming months, the New Zealand market is unlikely to see UK levels of volatility; one factor behind the turmoil in the UK, for example, was the country’s very high rate of inflation and associated pressure from energy issues. Uncertainty over a potentially large public fiscal outlay was similarly UK-specific.

New Zealand Equity Monthly – September 2022

The recent reporting season showed that New Zealand’s “gentailers” (companies that both generate and sell energy) remain committed to developing renewable generation capacity, with five such projects currently under construction. However, a rise in the cost of developing such capacity in the past 12 months is creating a significant challenge for gentailers.

Going forward, despite some expected moderation amidst the slowdown in global growth, we believe that growth and corporate credit fundamentals will remain sufficiently robust to prevent a meaningful widening of credit spreads. However, some modest widening may be expected in the near term, with the benchmark spread level at the tighter end of the expected medium-term range and given the plethora of global market risks.

Central bank tightening is beginning to have an impact, but less evidently in terms of easing inflationary pressures than in causing strains on the global financial system. Policymakers are beginning to blink—first with Japan intervening to support the yen for the first time since 1998, followed by the Bank of England (BOE) returning to quantitative easing (and postponing planned quantitative tightening) to ease pressures on the UK pension system following an ill-advised fiscal easing by new UK government leadership.

Rising interest rates and inflation woes continued to weigh on regional and global markets. US consumer prices registered above expectations with the August consumer price index (CPI) jumping 8.3% year-on-year (YoY). The tight labour market made further case for a rate hike, culminating in a 75-basis-point (bps) interest rate hike by the US Federal Reserve (Fed).

Investing in a multipolar world

Between still high levels of inflation, fast-tightening central banks, a growing energy crisis in Europe and slow growth in China, it is easy to imagine a bleak growth outlook. But these difficult dynamics also harbour opportunities often masked in exaggerated mispricing based on fear and confusion.

Navigating Japan Equities: Monthly Insights from Tokyo (October 2022)

This month we analyse what immediate impact the full reopening of Japan could have on the economy and markets; we also review the factors that may make Prime Minister Kishida’s “asset-income doubling plan” more effective in the long term.

A big comeback: Rising fortunes of Asia’s small caps

After spending almost a decade in the shadows of their larger counterparts, Asia’s smaller companies are being viewed in a new light. Factors that had weighed on these businesses are now turning into tailwinds, and we have identified seven key developments which should provide momentum for the asset class.

A Round Trip to the Plaza Hotel, and the End of Orthodoxy

As the famous 1980s’ bumper sticker (almost) said, “shocks happen”. The global economy / ecosystem is an inherently dynamic entity, constantly changing its shape and composition. Some of these changes will of course favour some economies while disadvantaging others.

Our scenario is fairly ugly for the 4Q, but has a strong silver lining thereafter. We are not optimistic about the global economy and investor returns reverting to normal for an extended period, but there should be clear intermediate term relief and pockets of strong outperformance due to idiosyncratic advantages.