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.
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.
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.