Insights

Investment Insights by our experts and thought leaders

Future Quality Insights -November 2023-New regime, new learning

The last few quarters have been a good reminder that we are in a changing world. As a result, we need to focus always on investing in enduring franchises and we would suggest that our Future Quality approach is soundly placed in that regard. We also need to approach monetary policy with an open mind—sometime soon the central banks could change the game again. In surfing parlance, be ready with your trusted board and make the most of the conditions.

Credit spreads: not as tight as they seem

Recently many fixed income investors have experienced steep price declines in their bond portfolios. We have argued that it is not only duration that explains the interest risk of a portfolio, but that convexity needs to be accounted for as well. In this paper we point out that credit risk measures also have to be adjusted in an environment of declining bond prices.

The emergence of Sustainable Bonds as an asset class has been relatively rapid, and the spectrum of different classifications of investments can naturally be confusing for investors. Here we outline some of the key criteria for investors to look for when investing in Green, Social and Sustainability Bonds (GSS).

New Zealand Equity Monthly – October 2023

In one of the most significant changes surrounding New Zealand’s equity market in recent years, the general election held in October delivered a change of government. Overall business sentiment has been generally positive after the election result. The outcome has been favourable for the aged care sector and building-exposed names. On the other hand, it has thrown up some uncertainties over the future of New Zealand’s environmental policy.

New Zealand Fixed Income Monthly – October 2023

The general election held in October resulted in a change in government for New Zealand. Although it is difficult to gain a full picture at this stage, we can make some key observations on monetary policy: the Reserve Bank of New Zealand’s mandate could be pared back to ensure that its sole focus is on managing inflation.

Navigating Japan Equities: Monthly Insights from Tokyo (November 2023)

We analyse the Bank of Japan’s decision to further tweak its yield curve control scheme amid the latest developments hinting at sustained wage growth; we also assess why an acute labour shortage could be a golden opportunity for Japan Inc. to change structurally.

While the risk-off environment stretched into another month, we are still finding plenty of positives in Asia. India’s macro remains favourable; Chinese equity markets are near the cheapest in 20 years; and the semiconductor industry is showing signs of a bottoming. With the US potentially having reached peak interest rates, this could be a welcome backdrop for Asian markets going forward.

Assessing the impact of Green Bonds

The Green Bond market has experienced tremendous growth since 2007, but despite its rapid success, there are still barriers to overcome. In particular, assessing the impact of Green Bonds continues to be a contentious topic.

Biodiversity is next for green bond expansion

Our economic system is based on a model of take, make and waste that consistently over-utilises and fails to replenish Earth’s valuable, but dwindling resources. The need to transform how we interact with nature creates a major opportunity for the green bond universe. So far, issuers have successfully embraced funding the transition toward carbon neutrality, but far fewer are looking at regenerative biodiversity projects or initiatives that seek to protect our ecosystems from loss.

China and India’s contrasting inflation front

We explore the opportunities and risks emanating from China’s near-zero inflation and India’s above-average consumer prices.

The climate change megatrend

Although once-in-a-generation exceptional weather events now risk becoming alarmingly routine, there is still time to turn the tide. This need for immediate action is why we define climate change as an investment megatrend, and we believe Green and Sustainable Bonds have a vital role to play.

Defying seemingly broad sentiment that a slowdown is coming, the US economy continues to chug along, and bond yields are continuing to wake up to the monetary reality that long-term rates need to be repriced accordingly. The adjustment has been aggressive and fast. Still, there is a natural limit to these types of moves.

Modern versus traditional alpha

Modern alpha relies on multiple sources and is therefore more stable and recurring than the traditional “big bets”. For most investors, the main source of alpha is fundamental research. But to add stability it is plausible to combine fundamental research with quantitative strategies as an additional alpha source.

Amid the current rise in oil prices, global central banks have become more vigilant against inflation, becoming increasingly wary of risks occasioned by a potentially premature end to their rate hiking cycles. Consequently, we deem it prudent to be more cautious on duration. We therefore have a largely neutral view on duration for most countries in the region.

Digging into ASEAN: unearthing the world’s next winner

We have long been enthusiastic about the ASEAN share markets, and the region continues to offer appealing prospects. While the fundamental drivers behind ASEAN’s growth and opportunities are not entirely new, in our view the trends remain irrepressible. We discuss two key pillars—industrialisation and consumerisation—that are expected to help cement ASEAN’s place in the minds of investors.

Realigning fixed income with purpose

While fixed income issuance has become a standard mechanism for governments and companies to raise finance, it often lacks a defined purpose. However, the growing trend of responsible investing is changing that. The need to tackle our planet’s many climate, environmental and societal challenges is reuniting fixed income with its sense of purpose.

New Zealand Fixed Income Monthly – September 2023

Although the Reserve Bank of New Zealand stated in May that inflation was likely to return to its target range of 1-3% per annum if the Official Cash Rate remained at a restrictive level for some time, market expectations for interest rates have changed significantly since. At that time, rate hikes were expected to lead to rate cuts as inflation began to ease. New Zealand’s inflation has proved stickier than expected, however, as shown by the 6.0% annual rise seen in the consumers price index for the June 2023 quarter. This shows that interest rates continue to be held hostage by high inflation.

Japan primed for resurgence after a turnaround year

We believe that a long-term revival looms for Japan. Deflationary pressures are dissipating amid rising wages. The financial markets are headed for a resurgence, supported by robust stocks—which could benefit further from a re-allocation of the country’s vast household savings—and BOJ monetary policy headed towards normalisation after decades of unorthodox easing.

Navigating Japan Equities: Monthly Insights from Tokyo (October 2023)

This month we discuss the timing of Japan’s savings to investments push as assets held by households hit a record high; we also look at the rise in the domestic long-term yield to a 10-year peak and assess its potential impact on the equity and credit markets.

New Zealand Equity Monthly – September 2023

New Zealand equities continued to see weakness in September, with the market falling by approximately 3%. This partly reflected broader volatility given that the Australian market declined by about 4% and US equities saw a fall of approximately 5%. More notably on a domestic level, however, the market’s direction was affected by the key August round of corporate results. The August reporting season is the most significant for New Zealand given that many companies release their full-year results and some firms with December fiscal year-ends release their half-year results during the month.

With oil markets closing in on US dollar (USD) 100 per barrel and US bond yields reaching 16-year highs, one could be excused for being struck by a bout of conservatism. With valuation dispersions again back to all-time highs, we contend that the risk-reward looks more favourable when taking a long-term view of Asia.

Changes to Japan’s domestic tax-free savings scheme – the Nippon Individual Savings Account (NISA) –are expected to deliver an increased flow into mutual funds both international and domestic, and attract a younger generation of investors in one of the world’s most liquid markets in terms of household wealth.

Global Investment Committee’s outlook

We expect occasionally volatile, but positive trends for the global economy, financial system and markets in each of the next four quarters. Regionally, we prefer the European and Pacific Ex-Japan markets for the 4Q, and also Japan’s on a 12-month view.

Navigating China markets amidst property sector headwinds

Nikko Asset Management’s investment experts delve into the risks and opportunities arising from China’s flagging economy and its weakening property sector.

Shift to secular growth could be a “real deal” moment for Japan equities

The current rise in Japanese equities could have legs, setting it apart from other phases in the previous 30 years which often led to disappointment. Japan’s shift from cyclical to secular growth, highlighted by labour shortages fuelling a rise in wages, is a development that is setting the equity market on a fundamentally different trajectory. We expect wage developments, as a factor affecting both consumption and inflation trends, to help determine further gains for Japan equities.

Japan’s macro picture is positive, but focus on corporate earnings

It isn’t wise to dwell on the details of any countries’ newly published macroeconomic data, but the overall outlook for Japan is slow but steady economic growth. However, as the last few decades have shown, such should not discourage investors if the powerful corporate governance trends and technological advancements continue as we believe they will.

The markets are pricing “higher for longer” with US Treasury 10-year yields pressing above their October 2022 highs, tempering enthusiasm across global equities into neutral sentiment territory. As inflation pressures continue to ease without tipping the jobs market into recession, the US Federal Reserve still looks on course to achieve a soft landing. However, not surprisingly the markets remain slightly on edge as the top in yields cannot yet be called for certain.

On the Ground in Asia-Monthly Insights: Asian Fixed Income-August 2023

Indian and Indonesian bonds are expected to fare relatively better than their regional peers, supported by their attractive carry, positive macro backdrop and policy credibility. As for currencies, expectations that US interest rates may have reached their peak could weigh on US dollar sentiment and favour Asian currencies in return.

While regional markets understandably retained its focus on the economic weakness in China, we believe that the fear gripping the markets belies the region’s long-term sustainable return and positive change opportunities. The challenges that China must overcome are not insurmountable and certainly do not translate to systematic or social instability risk, in our view.

Japan’s long-term value is getting unlocked

There’s more to Japan’s renaissance than relatively inexpensive valuations. Companies have become more receptive to corporate reform and shareholder engagement; Japan’s services sector is benefitting from a resumption in tourism; and, in Japan, inflation is settling at supportive levels after years of deflation.

Focusing on the knowns in an era of unknowns

We are currently in the midst of a regime change to a world of slower growth, periodic bouts of inflation and technological transformation. While much of what the future holds is unknowable, such as the impact of artificial intelligence, there are other clear long-term trends that can help guide investors: the path to clean energy, growing healthcare requirements and the re-emergence of the travel industry.

India’s transformational trends

Structural reforms, investments in energy transition, rising consumption and vast improvement in India’s infrastructure, productivity and manufacturing sector are expected to bolster the country’s next phase of economic growth and development.

Climate change solutions in Japan

The climate change crisis we are witnessing presents both challenges and opportunities. Focusing on the latter from an investment perspective, in our view asset managers are in a position to help facilitate society’s goals of reducing GHG emissions and decarbonising.energy

Five Years of Disruptive Innovation

To mark five years since the launch of the Nikko AM ARK Disruptive Innovation Fund, Nikko AM and ARK Invest take a look at the five primary innovation platforms, their achievements over the last five years, and our expectations for them during the next five to ten years.

Navigating Japan Equities: Monthly Insights from Tokyo (September 2023)

This month we take a closer look at Japan’s 2Q GDP surge and analyse the factors that could offset a potential slowdown in exports; we also assess why the markets are less perturbed by a weak yen compared to a year ago and discuss the prospects of the currency strengthening in the months ahead.

Finding opportunities from geopolitical change in Asia

A changing geopolitical landscape in Asia coupled with a desire to partially diversify away from China-based supply chains is creating opportunities in India and Indonesia.

The just-released 2Q CY23 data on aggregate corporate profits in Japan was somewhat mixed, but the overall corporate recurring pre-tax profit margin rebounded near its record high on a four-quarter average.

The economic wheels continue to turn forward, surprising many given that the Federal Reserve lifted the overnight target rate to 5.5%, a level not seen since 2001. It is also above the top rate of 5.25% seen back in 2006–2007, before rate cuts ultimately failed to prevent the Global Financial Crisis. This time around, balance sheets are much stronger in the private sector and so are regulations. And now, the combined fiscal impulse and investment wave may keep pushing recession risk further away.

New Zealand Fixed Income Monthly – July 2023

Recent data demonstrate that declining demand is now a major concern for companies as recent rate hikes by the Reserve Bank of New Zealand increasingly constrain economic activity.

New Zealand Equity Monthly – July 2023

The devastation from the tropical cyclone and flooding that struck New Zealand’s North Island in February 2023 was a reminder of the increasing need to mitigate extreme weather events and to take stock after they strike.

We retain our preference for Indonesian government bonds and for currencies, we believe that greater support for the renminbi from Chinese policymakers should remove a near-term headwind for currencies in the region. We take a more cautious view towards risk in the near-term due to a slightly weaker macro backdrop and uncertainties ahead which make the valuation of Asia investment grade credit look slightly stretched versus both historical levels as well as developed market spreads.

With the Chinese economy on the brink of deflation, the timing of the Chinese government’s recent pro-growth directives was a very welcome signal. If carried out, they can lead to structural changes that can potentially lead to an improvement in consumer confidence and growth in the Chinese economy, in our view.

Navigating Japan Equities: Monthly Insights from Tokyo (August 2023)

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.

Asset TV: Climate transition – threats and opportunities

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.

New Zealand Fixed Income Monthly – June 2023

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.

Exploring Asia’s investment megatrends: consumption, healthcare and net zero

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.

Navigating Japan Equities: Monthly Insights from Tokyo (July 2023)

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.

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