Insights

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.

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.

Population growth, demographic changes and immigration policy are all important factors that followers of investment markets play close attention to. These are drivers that have a profound impact on a country's future.

The world is fast entering the adjustment phase as deglobalisation is accelerating, requiring new solutions and investment to clear new imbalances from energy supply to labour and eventually normalise inflation.

In recent years, the increased focus on ESG has validated our beliefs. Yet, the complex and fast-changing economies and societies that make up Asia continue to be a challenge confronting investors looking to apply ESG analysis across Asian asset classes. This is a good thing, as investors who can do this successfully will likely add even more value to alpha generation.

Inflationary pressures continued to remain elevated in July, as the headline CPI numbers in South Korea, Singapore, Indonesia and the Philippines increased, while those of Thailand and India moderated. During the month, the central banks of Thailand, Indonesia, the Philippines, South Korea and India raised their key policy rates.

The regional index of the MSCI AC Asia ex Japan in August was flat at 0.0% in US dollar terms, recovering after falling into negative territory earlier. The North Asian region was weighed down by foreign currency effects, trailing behind its ASEAN counterpart. India benefitted from its rate hike and lower oil prices.

In an encouraging sign for New Zealand equities, the benchmark NZX 50 Index ended August approximately 10% higher compared to the lows it saw in June, when it dropped below the 11,000 level for the first time in two years. However, the market still faces challenges given that at the end of August the index was also down about 10% compared to the start of 2022.

New Zealand bonds went through a tough period in August. The rough patch reflects continuing uncertainty, with the bond market undecided about whether it should focus on inflation itself or pay more specific attention to the measures that central banks are adopting to deal with it.

This month we discuss the factors behind Japan’s high level of share buybacks; we also look at the economic implications of COVID in the wake of a particularly large infection wave.

Utilising and regenerating Japan’s ample forest resources by promoting a “wood cycle” could contribute to the creation of economic wealth and a net-zero carbon future.

Almost forty years ago, China’s then paramount leader, Deng Xiaoping, decided that his country needed a “Great Leap Forward” in order to catch up with its economic rivals and secure its then fading place within the global system.

The just-released 2Q 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.

Our belief is that we have moved into a new regime where inflation will be structurally higher despite the anchors of high debt burdens, ageing societies and ongoing technological disruption.

We are taking a more constructive view in duration overall, as we believe that the markets have largely priced in hawkish Fed expectations. Among the low-yielding countries, we prefer Singapore and Hong Kong, while we like Malaysia and India among the mid- to high-yielding countries. On currencies, we maintain our preference for the Singapore dollar.

It may be easy to become gloomy after the drawdown of the last few months. But we believe that there are plenty of reasons to be optimistic about the prospects for compounding your future capital from today’s levels, if you take into account the following three steps: 1) recognise that that we have shifted to a different road type, and it is rougher and more variable; 2) realise that this new road may be best travelled with different vehicles; and 3) improve your probabilities by sticking to a few enduring principles.

The shift in market narratives continues to gather pace, matching the increase in volatility of the economic cycle seen since the beginning of the pandemic. Central banks are generally aiming to smooth the economic cycle, but this time they may be adding to the volatility of the cycle instead.

Higher commodity prices impacted returns in Asia, while a slip in prices of crude oil and metals benefitted many Asian nations. We expect the future trajectory of inflation to dictate the path of interest rates, which in turn is seen determining economic growth globally.

Asia high yield credit had a tough start to 2022, succumbing to heavy selling pressure . Apart from geopolitical tensions, tighter financial conditions and rising recession risk in major developed economies, sentiment toward Asia HY has been heavily weighed down by sustained stress in China’s property sector. Going forward, we believe the pace of correction will moderate.

We take a look at the short and long term prospects of Abenomics without Abe, and we also discuss the recent trend of an increasing number of Japanese companies passing on higher costs to consumers and whether this phenomenon can continue.

This month we focus on two ESG-linked themes that generate a significant amount of investor interest: carbon neutrality and modern slavery.

As we have already mentioned several times, it has been a very tough year for New Zealand bonds. Although there is perhaps light at the end of the tunnel after the market hit a very low point; in our view, good quality assets could outperform cash over the medium term.

We have been saying for some time that inflationary pressures within the global goods markets may have peaked (at least for now) and that the global economy is slowing rapidly on the back of what are now very weak real incomes, collapsing monetary growth, and China’s sharp economic downturn (the causes of which run far beyond the country’s zero-COVID strategy).

We explain why we are more positive on Asia bonds than we were at the beginning of 2022. To begin with, inflation in Asia is less severe compared to other regions, lessening the need for Asian central banks to tighten aggressively. This makes Asia bonds attractive from a real yield perspective.

The East and West appear to be headed in different directions. The East may benefit from China’s easing and supportive growth characteristics. Meanwhile, the West is mired in slowing growth, excessive levels of inflation and central banks ever more eager to take down inflation through conventional tool kits designed to slow demand.

Inflationary pressures accelerated in May across the region, due to higher transport and food prices. We maintain our preference for Malaysian bonds, as we believe that inflation will be better contained in Malaysia compared to other countries.

As New Zealand grapples with inflation and the spectre of a recession, we highlight the impact increasing mortgage rates may have on consumer spending. This is an important theme as it ties in with how we need to consider absolute interest rate levels.

As in the rest of the world, times are tough for New Zealand’s economy. Even so, given that stagflation occurs when higher inflation is combined with slower economic growth and rising unemployment, New Zealand is contending with the negative growth and inflationary aspects of stagflation without the accompanying unemployment issues.

As it often is when Japan’s Liberal Democratic Party wins an election by an impressive amount, the initial equity market reaction was positive. But the ramifications of the ruling party’s upper house election victory will in the intermediate term be a function of what happens to the global economy and geopolitics in the months and quarters ahead.

We take a look at why the Bank of Japan is likely to stick to its easy monetary policy even as other central banks embark on policy tightening; we also highlight the signs of a full-fledged capex recovery taking place in Japan.

Fears of a recession and the US CPI hitting a four-decade high of 8.6% year-on-year in May rippled through various economies. Asian markets took heed from the multiple headwinds in the US, with inflation being a common theme across the region. For the month, the MSCI AC Asia ex Japan Index fell by 4.5% in US dollar terms.

Amid today’s incessant chatter of rising inflation and global recession fears, we identify three high conviction themes driving a growth renaissance in ASEAN: electric vehicles (EVs), digitalisation and a revival by the old industrial economy.

Last month’s ever austere Bundesbank Monthly Report contained an essay on Pension Reform in Germany. The article is quite long but suggests that the German Pension system only has two long term options to maintain its solvency: either accept that the purchasing power of pensioners is set to fall; or the retirement age will need to rise to 69 or higher by the year 2070. Either pensioners will have to accept less in the future in real terms or work longer – the choice seems stark.

“Stagflation-lite” coupled with a severe geopolitical crisis was much worse for equities than we expected, but most of the bad news is priced in, so the prospect for global economies and equities in aggregate should improve. While we expect global GDP to moderately underperform consensus, it should skirt recession and positively surprise equity markets, which increasingly have priced in recessionary conditions.

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.