In our view, the change from dollar strength to relative weakness is meaningful for the shift in relative growth prospects, favouring the rest of the world over the US.
While consumer sentiment may be weaker across China presently, we believe that the long-term outlook for the country’s consumer sector remains attractive. China’s lower-tier cities are stepping up to fuel the growth engine that once relied heavily on megacities.
Clean, secure and affordable energy is likely to be one of the major challenges of this decade. Given we need abundant energy to complete the energy transition, we believe fossil fuel companies that are actively enabling transition to low carbon society can be part of the solution. They often understand how to deliver global energy at scale and have the balance sheets capable of enabling the transition to clean energy.
Chinese shares outperformed in December as the country continued to move away from its zero-COVID policy while markets in Taiwan and South Korea slumped amid concerns towards the global economy. In ASEAN, Thailand led the region as the country is expected to be one of the biggest beneficiaries of a potential return of Chinese tourists.
We expect global inflation to ease and global growth to weaken in 2023; we also think that the Fed is likely to pause hiking rates by the first quarter of 2023. Against this backdrop, we are broadly constructive on regional bonds as most Asian central banks could be nearing the end of their rate hike cycles.
We discuss the Bank of Japan’s unexpected move to tweak its yield curve control scheme and the potential implications; we also provide a brief overview of some of the factors seen impacting Japan equities in 2023.
We don’t expect smooth sailing for the global economy and markets, but there should be great relief for both stocks and bonds in 2023, with pockets of strong outperformance due to idiosyncratic advantages. Notably, Europe and Developed Pacific-ex Japan should be overweighed for equites for the next six months, but Japan should perform the best by next December.
We are more positive on duration overall, on the assessment that we are likely past peak hawkishness from the Federal Reserve and other developed market central banks. We favour Singapore and South Korean government bonds, given their relatively higher sensitivity to stabilising US Treasury yields.
While we do not expect the US Federal Reserve to pivot any time soon towards easing policy, the firm break in dollar momentum perhaps reflects a shift in the relative growth story which had favoured the US towards one focused on the rest of the world centred around improving China demand.
In what was probably the best kept secret of many years, the BOJ unanimously agreed to shift its YCC policy well before virtually any economist or market watcher expected. The largest question people seem to have is “why now?”. As with most major decisions, the answer was likely a confluence of several important items.
Asian stocks rebounded strongly in November after Federal Reserve Fed Chair Jerome Powell pointed to slower pace of monetary policy tightening and lifted market sentiment. All Asian markets ended in positive territory, with China in the lead with a month-on-month (MoM) gain of 29.7%.
Although New Zealand’s November 2022 rate hike was larger than expected, markets had been pricing in aggressive tightening for quite some time. This may soften the impact of the current challenges. Given that yields on some bonds are now approaching 6%, we feel that stronger income generation opportunities are also providing a silver lining in the fixed income market.
As we look towards 2023, it is easy to be overwhelmed by the broader permutations of possible outcomes. But things don’t appear so dire in Asia. Inflation, which is effectively a value transfer from net consumers to net producers, may continue to benefit India and pockets of ASEAN due to favourable demographics and rising productivity.
This month we discuss the prospects of Japanese equities remaining well-supported into 2023 thanks to robust exports and inbound demand. We also explain why the markets are looking beyond a dip in Japan’s 3Q GDP, focusing instead on the prospect of growth resuming.
The cost of living and the cost of doing business are still weighing down on New Zealand’s consumers and companies as the end of 2022 approaches. On the corporate side, New Zealand’s companies continue to grapple with wage inflation driven by a scarcity of workers, higher logistics costs amid lingering supply chain issues, and elevated interest costs as hikes in the Official Cash Rate continue to bite.
As geopolitical risks and globalisation are reassessed in the wake of the COVID-19 pandemic and war in Europe, we believe that Japan stands to benefit as more companies refocus on their home markets.
New Zealand’s Official Cash Rate and short-term interest rates may stay elevated in 2023 but longer-term interest rates are likely to decline starting in the second half of the year as financial markets begin pricing in the possibility of rate cuts. Falling rates could see a stabilisation of the housing market and an improving outlook for the economy and financial market returns.
No single catch-phrase epitomises the 2023 global macro outlook, but here are ten predictions for the year ahead.
On balance, we are constructive mainly for valuation support and growth prospects improving for China with a firm tailwind from an easing dollar. Pockets of the US equity market may struggle on weaker earnings, but the rest of the world should still fair relatively well provided the US does not enter a deep recession.
Some of the factors that have shaped 2022 look less likely to recur in 2023 (for instance, supply chain duress because of COVID containment) but others will likely last longer (most notably a higher cost of capital). We are cautiously optimistic that less aggressive monetary policy will eventually make 2023 a kinder year for equity markets but there may yet be shocks to overcome.
Labour shortages and inflation are expected to pressure the New Zealand economy in 2023. That said, New Zealand’s listed market is more defensive than the broader economy with large weights in defensive sectors such as utilities and telecommunications.
We expect a moderation of growth, a peak in inflation and a more accommodative monetary policy in 2023. We see this as a positive for Singapore, as we believe a more accommodative policy backdrop will help support continued expansion in corporate earnings growth in 2023.
We believe that the rewards will outweigh the risks related to China amid an existence of enough cyclical, thematic and structural trends that could enable the country to outperform in 2023; particular focus will be on the government’s zero-COVID policy and its support for the property sector.
Most Asian countries are expected to grow at a slower pace in 2023 than they did in 2022, and fiscal stimulus will no longer be a dominant factor driving growth in the region. We expect monetary policy outlook to persist as the primary driver of rates in 2023 with focus on the potential end to the tightening cycle.
We present our 2023 outlook for core markets, emerging markets and global credit.
We believe that the benign macro backdrop should remain supportive for credit fundamentals in 2023. The fiscal deficits of Asian economies are expected to gradually narrow as the need for pandemic support decreases.
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.
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.
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.
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.
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.
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.
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.
We present our Q4 2022 outlook for the Global Unconstrained Bond Strategy which incorporates our core markets, emerging markets and global credit views.
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 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.
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.
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).
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.
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.
The current environment in fixed income is definitely challenging for investors as the rate cycle has turned. However, we believe that by unlocking the full performance potential of the different credit asset classes achieving positive absolute performance is still possible.
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.
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.
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 present our Q3 2022 outlook for the Global Unconstrained Bond Strategy which incorporates our core markets, emerging markets and global credit views.
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.
There has been remarkable progress in electric vehicle (EV) technology and its acceptance globally. We believe that Chinese EVs are set to lead the world in this area as technological innovation, demand, government policy and consumer behaviour have put China ahead of Europe and the US.
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.
“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.
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.
We present our Q2 2022 outlook for the Global Unconstrained Bond Strategy which incorporates our core markets, emerging markets and global credit views.
We discuss the implications of the weak yen, now considered by some as a menace rather than a blessing, for the Japanese market and economy. We also explain the potential impact of higher energy and commodity prices.
A trip back to China provided an opportunity to experience first-hand the impact innovative technology and digitalisation is having on a fast-changing urban society.
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.