We expect 2024 to be a year of domestic consolidation and long-term reform measures, where markets are driven more by Japan-specific events than by global factors. After decades of deflation, we see Japan as finally breaking out of this cycle in 2024, as it enters a virtuous cycle of price increases and wage hikes.
We expect 2024 to be a year of higher returns and lower volatility for Asian local government bonds as US Treasury yields are seen stabilising. We also see Asian currencies firming against the dollar in 2024 as the Federal Reserve’s rate hike cycle comes to an end.
We expect fundamentals and technical backdrop for Asian credit to remain supportive in 2024. However, valuation is a challenge with current Asian high-grade spreads near historical lows. The myriad cyclical and structural factors driving the major sub-sectors within Asian high-yield credit makes it is difficult to call the overall spread direction in 2024, although the current spread level remains wide and offers room for compression over the medium term.
We believe ASEAN will offer good pockets of growth and quality opportunities, as well as earnings resilience and protection amid some of the prevailing global macro headwinds.
We believe that our “New Singapore” narrative focusing on sectors and companies that represent the future of the city-state will remain relevant in 2024. Energy transition has risen to prominence within the New Singapore narrative in addition to data, technology, healthcare, logistics, tourism and food solutions.
Considering that major tech companies are profitable, cash rich and cannot afford to lose out in the highly competitive AI race, spending on high-end computing and neural networks looks set to continue in 2024. This will likely create a lasting boon to many component suppliers (the so-called picks and shovels of AI) across Asia.
It could be some time before the market stabilises in the wake of the global banking turmoil, and investor appetite toward financial subordinated debt will likely be weak in the near term. That said, considering the current valuations of fundamentally stronger Asian banks, we believe that a large part of such concerns are already reflected in their spreads/price following the re-pricing which took place earlier in March.
Considered to be one of the greatest modern-day medical breakthroughs, robotic surgery is revolutionising surgical practices around the world. The breakthrough is particularly prominent in China, which could be the next growth frontier for surgical robotic companies.
The just-released 4Q CY22 data on aggregate corporate profits in Japan was somewhat mixed, as the overall corporate recurring pre-tax profit margin fell from its record high on a four quarter average. The non-financial service sector ticked up, but the manufacturing sector fell from its record high.
Contract development and manufacturing organisations (CDMOs) could play an important role in addressing health-related needs as society seeks rapid solutions to issues such as an increase in refractory diseases.
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.
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.
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.
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.
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 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 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 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.
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.
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.