Insights

Although the Bank of Japan tweaked its policy in July, we discuss why the move may have been a compromise given expectations the central bank will wait for more concrete signs of inflation before taking a more significant step; we also describe why the rise by Japanese equities could have “legs” this time.

While market positioning has shifted towards a more constructive outlook, the macroeconomic mood has not. Rather, persistent upside pressures in equity markets have forced investors back into the market so they do not fall too far behind benchmarks and their peers.

Nikko AM’s Head Portfolio Manager – Core Markets, Steven Williams, recently participated in Asset TV’s Masterclass on the threats and opportunities for investors in the climate transition. Here are the highlights of Steven’s contribution to the discussion.

We remain constructive on relatively higher-yielding government bonds amid a supportive macro backdrop. Our favourable view of higher-yielders is further grounded on the view that lower-yielding government bonds will be more vulnerable to volatility in UST bonds.

The Reserve Bank of New Zealand indicated in May that the current interest rate hiking cycle is by and large complete, with the Official Cash Rate (OCR) having peaked at its current level of 5.5%. The central bank also signalled that it is unlikely to cut the OCR in the near future, stating its intention to keep interest rates at a restrictive level for some time in order to keep inflation under control. In addition, New Zealand has a general election scheduled for 14 October 2023, further reducing the likelihood of near-term moves in the OCR.

With inflationary issues subsiding across most of Asia, many regional central banks are now holding interest rates steady, if not cutting rates in the case of China. The US, meanwhile, is still warning of further rate hikes despite some overall softening in data. Of more concern to us is what China does next.

Right now, three megatrends are widely prevalent across Asia which look like significant drivers of investment growth for many years to come. These megatrends are consumption, healthcare and the net zero transition.

As a virtuous inflation cycle helps boost stocks, this month we focus on how labour shortages could nudge Japan away from a deflationary mindset; we also assess the BOJ under a new governor, who has said that monetary policy surprises could be unavoidable.

Japan’s corporate governance reform started nearly a decade ago is an ongoing process, but it received a boost from the Tokyo Stock Exchange’s latest initiative in January. The latest chapter in corporate governance reform coupled with Japan’s break from a deflationary mindset and the full re-opening of the economy after the pandemic are expected to create a more favourable investment environment for Japanese equities.

We expect occasionally quite volatile, but positive trends for the global economy, financial system and markets in each of the next four quarters. Regionally, we prefer the European market for the next two quarters, and also include Japan’s on a 9–12-month view.