Insights

Despite uninspiring global equity performance in the last three months, at least for USD-based investors, Nikko AM’s Global Investment Committee continues to be positive on global equities on a one-year view, particularly those in Japan, Europe and the Asia Pacific, but remain unenthusiastic on global bonds.

Global growth is becoming increasingly less synchronized, with the Eurozone, Japan and UK showing some moderation in growth, whilst the US remains relatively robust.

The Japanese equity market declined in May, with the TOPIX (w/dividends) dropping 1.67% on-month and the Nikkei 225 (w/dividends) falling 1.18%.

Japan’s corporate governance reforms have progressed slowly but surely and the recent revision of the code will add momentum for the unwinding of cross-shareholdings.

Japanese profit margins continued roughly flat in the 1Q, but at a high plateau due to improved corporate governance over the past years. With global economic growth pushing up the top line, profits should continue to rise significantly in the quarters ahead.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

The much anticipated MSCI A Share inclusion happened on 31 May 2018 and will pave the way for further internationalisation of China’s stock markets.

We believe that long-term oriented institutional investors could find investing into private infrastructure via actively managed funds an attractive investment proposition.

After depreciating for over 18 months, the US dollar has managed to make a comeback, recouping its 5% YTD loss in a matter of weeks. Coupled with 10 year US Treasury (UST) yields hovering around 3%, this has put pressure on Emerging Markets (EM).

It has often been the conversations I have had with the people along the way which I have found most helpful when it has come to making investment decisions. This article aims to tell some of their stories and how apparently chance encounters can help generate investment ideas.

The MSCI AC Asia ex Japan (AxJ) Index gained 0.7% in USD terms. Trade jitters receded following China’s commitment at the Bo’ao Forum to further open up the economy to foreign businesses.

US Treasuries (USTs) experienced a sharp sell-off in April as yields rose about 10 to 24 basis points (bps) across the curve. Trade war fears between US and China receded, with Chinese President Xi Jinping's commitment to further open up the economy to foreign businesses.

Recent events have shed some light on a likely China-U.S. agreement fairly soon. Key to such was Trump’s order for ZTE’s sanctions to be lightened so that it can remain in business.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

The Japanese equity market rose in April, with the TOPIX (w/dividends) climbing 3.55% on-month and the Nikkei 225 (w/dividends) rising 4.73%.

The broad-based synchronized growth story continued to soften through March, as consumers pared back purchases in the face of rising prices.

As much as we would prefer to discuss market fundamentals over the trials and tribulations of the current US Administration, it has been largely unavoidable in this first quarter of 2018.

Chinese companies are now a force to be reckoned with on their home turf – a market which used to be dominated by foreign brands. This report looks at how the change has come about and where Chinese brands are headed.

Beijing conference takeaway: It is clear that while China is set for lower economic growth this year, this decrease represents a welcome central government focus on creating a cleaner, more efficient economy.

The MSCI AC Asia ex Japan (AxJ) Index declined 1.5% in USD terms, amid significant volatility across global markets. Concerns about a global trade war and a sell-off in the US tech sector weighed heavily on sentiment.

US Treasuries (USTs) traded in relatively tight range in March, with the yield curve bull flattening. The US Federal Reserve (Fed) raised interate rates by 25 basis points (bps), and signalled it could lift rates at a marginally more aggressive pace in coming years.

The Japanese equity market fell in March, with both the TOPIX (w/dividends) and the Nikkei 225 (w/dividends) dropping 2.04% on-month.

In its March meeting, the midpoint of the FOMC’s projection for the Core PCE price index did not hit 2.0% until 2019. However, it seems likely to occur in the upcoming March reading. Meanwhile, today's Core CPI already exceeded 2.0%.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

Our portfolio manager in Singapore explains why ASEAN might well benefit from the current US-China trade tensions and how the region’s three main strengths should keep economic growth strong.

Not only did the US trade deficit expand in February, it showed particularly disturbing trends regarding the Eurozone and China.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

With its advantages of a vast talent pool, financing and market access, China has most of the ingredients needed to transform into the “Silicon Valley of the East”

Many economists and currency analysts, after years of ignoring such “old fashioned” indicators, are now talking about the massive trade surplus that the Eurozone enjoys with the world, but in particular with the US.

If we have been in something of a financial ‘upside down’ for the last 10 years or so with negative interest rates and hugely accommodative monetary conditions, what have been the effects and what might lie ahead?

Markets continue to come to terms with the return of higher volatility, triggered ostensibly by fears of inflation and the unwinding of highly leveraged short volatility positions at the beginning of last month.

Actually, it has not been one long expansion since 2009, as we now can see how the slumping oil price caused a mini-recession a few years back.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

Our London-based Emerging Market fixed income analyst predicts increased volatility ahead for Latin American markets due to the threat of Leftist election victories this year, but that pro-market reforms will still progress.

Our updated view remains positive on the global economy and equity markets even as global bond yields rise a bit further. Our SPX target remains near 3000 by year end, with impressive gains elsewhere too.

A broad-based synchronized recovery continues to gain traction. Following the strongest year of global growth since 2010 (estimated at 3%) the consensus forecast for the current year looks to be even rosier.

The MSCI AC Asia ex Japan (AxJ) Index declined 5.0% in USD terms, as better US economic data prompted worries about inflation and expectations of faster interest rate rises from the Federal Reserve.

In February, US Treasuries (USTs) succumbed to a further sell-off, with yields rising across the curve prompted by better US economic data.

The Japanese equity market fell in February, with the TOPIX (w/dividends) dropping 3.70% on-month and the Nikkei 225 (w/dividends) tumbling 4.41%.

In my view, Japan is the only major country that is going through a structural improvement in corporate governance, and, thus, deserves special attention by global investors.

In our 2018 outlook, we made the case for rising volatility as central banks across the developed world slowly remove the stimulus punch bowl, but few would have imagined volatility spiking with such a vengeance as it did in recent weeks.

Poor economic and fiscal policies are, and will likely be, a recurring theme in Italian politics. However, from a trade perspective, we see Italy to remain a good carry/spread trade for at least the next twelve months against a backdrop of improving GDP growth in 2018 and 2019.

A broad-based synchronized recovery continues to gain traction. Following the strongest year of global growth since 2010 (estimated at 3%) the consensus forecast for the current year looks to be even rosier.

The Japanese equity market rose in January, with the TOPIX (w/dividends) climbing 1.06% on-month and the Nikkei 225 (w/dividends) rising 1.47%.

The MSCI AC Asia ex Japan (AxJ) Index returned 7.6% in USD terms in January, amid optimism about solid economic growth and corporate earnings. Asian currencies generally strengthened against the USD.

There was a sharp rise in US Treasury (UST) yields in January on the back of positive macro news, steady rise in oil prices and speculation that central banks in developed markets will start winding back on stimulus measures.

When investing there is no substitute for detailed fundamental analysis, as investors in Carillion in the United Kingdom have just discovered despite us still being in a period of unprecedented easy monetary policy.

Today's very high Core CPI result is one more indication that inflation is rising.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

The Japanese media are widely reporting that Governor Kuroda will be reappointed, which surprises very few people. Whether he wishes to finish his new five-year term is open to question, so the choice of Deputy Governor will likely be important.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

Over the past 15 years Australian house prices have been on an incredible run, resulting in Australian households becoming some of the most indebted in the world. So what is the economic cost of Australia’s sky high property prices and what could it mean for property prices in 2018?

Both Fed candidates support tapering MBS holdings faster than the current plan. This would likely raise mortgage rates and tame US housing prices, which are likely rising too fast for comfort.

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

Imagine a day when "Asia ex-China" portfolios are the norm. We think this is not too far-fetched an idea.

“Even though Mester is often perceived as a hawk, she is quite centrist in the current environment.”

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

With the Nikkei Index breaching the 24,000 mark, its highest level in 26 years, Japan appears to have put its “lost decade” of growth well behind it.

Over the past few years, one of the main risks that concerned our team was the possibility that asset classes could become positively correlated.

A broad-based synchronised recovery continues to gain traction. Following the strongest year of global growth since 2010 (estimated at 3%) the consensus forecast for the current year looks to be even rosier.

As widely expected, the US Federal Reserve (Fed) raised interest rates by 25bps in December, its third rate hike this year. It also raised its GDP forecast for 2018.

The MSCI AC ex Japan (AxJ) Index returned 2.7% in USD terms in December, outperforming the MSCI AC World index which returned 1.4%.

A flying visit into China post the 19th Party Congress seemed like a good idea. I got the sense that post the conference, visibility and direction over the next five years was reasonably clear. But it is more difficult to hold a similar view for 2018.

The Japanese equity market rose in December, with the TOPIX (w/dividends) climbing 1.57% on-month and the Nikkei 225 (w/dividends) rising 0.32%.

Our Senior Portfolio Manager for Emerging Markets in London forecasts that in 2018, this asset class could well match 2017’s achievement.

For 2018 and beyond, we see a story of central bank policy normalization and foresee the global economy growing in a similar fashion to how it did in 2017: low growth coupled with comparatively low inflation data.

We see the key investment themes to drive performance in Global Credit in 2018 to be similar to last year. We have developed our investment themes: Long US High Yield, Long Chinese Tier1 SOEs, Long European Hybrids, Long European Financials, Long Rising Stars.

We expect the economic backdrop for Asian credits to remain constructive in 2018, but remain cognizant of several risks including rising interest rates, robust supply, unexpected weakness in China, geopolitical developments and cross-asset volatility.

The global recovery is expected to continue, albeit at a more moderate pace. Meanwhile, we foresee policy normalisation and an acceleration of inflation in Asia.

China has not yet been fully incorporated into indices, creating a mismatch and a unique challenge to investors in navigating this new world order.

Despite geopolitical risks and central banks that will be less dovish than the market expects, the Global Investment Committee forecasts that the G-3 economies will grow faster than consensus and that global equity markets will remain very bullish in the intermediate term.

Low global inflation and, until recently, a strong Kiwi dollar have kept New Zealand’s inflation rate low over many years, however things may be about to change.

The MSCI AC Asia ex Japan (AxJ) Index returned 38.0% in USD terms year-to-date, on the back of a broad-based economic recovery. The Index outperformed the MSCI World Index, which rose 20.8% in USD terms in the same period.

US Treasury (UST) yields declined during the month. The nomination of Jerome Powell as the next US Federal Reserve (Fed) chairman overshadowed stronger US economic data, but was subsequently offset by increased geopolitical risks in the Middle East and a setback to US tax reform.

The MSCI AC Asia ex Japan (AxJ) Index returned 0.6% in USD terms in November. The index approached ten-year highs during the month on expectations of continuity in US Federal Reserve policy and robust economic data, but gains were pared at month-end by a sell-off in technology heavyweights.

The imminent party election will be crucial in determining this major Emerging Market’s future.

Having recently returned from the US, Stefan Hansen, Senior Research Analyst at Nikko AM Australia, shares his thoughts on US shale oil production and the potential impact on the oil price.

The implications of a surprising decline in non-manufacturers’ profit margin.

From an economic perspective Canada and Australia share some common features, but we would caution that the performance of the two economies is substantially different than generalisations would suggest.

Even as the situation in Germany to form a new government is difficult, financial markets have reacted very mildly to the uncertainties.

We think it is unlikely that May will be replaced within her own party. This is because there is a lack of an heir-apparent, and the Conservative Party would be extremely reluctant to even slightly increase the risk of another election.

The MSCI AC Asia ex Japan (AxJ) Index returned 4.7% in USD terms in October, outperforming the MSCI World Index which returned 1.9%.

US Treasuries (USTs) fell in October, as prospects of higher growth and inflation increased after the US Senate approved the Republican-backed budget for 2018.

The Japanese equity market rose in October, with the TOPIX (w/dividends) climbing 5.45% and the Nikkei 225 (w/dividends) rising 8.16%.

“Hopefully for the markets, the Fed transition will be smooth, but it might not be and hawkish Presidents may have much greater influence.”

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

Just as politics in other developed countries have recently taken on a more populist and/or anti-capitalist tone, so too has New Zealand’s.

The Case for Abenomics and global reflation leading to a TOPIX level of 2500 in two years’ time.

To help bridge the gap between the perceived unreliability of Chinese statistics and the importance of analysing the world’s second largest economy, we look for measures which have less potential to be manipulated.

Most bond index providers have started to recognize China’s financial market liberalisation and reform efforts. We think it is only a question of time before they are included in the main benchmark indices.

The Japanese equity market moved upwards in September, with the TOPIX (w/dividends) climbing 4.34% on-month and the Nikkei 225 (w/dividends) rising 4.28%.

A separate allocation to Asia IG offers European investors a way to mitigate risk within their EMD exposure.

US Treasuries declined in September, prompted by the possibility of a rate hike by the Federal Reserve in December and Trump's tax reform bill being passed by Congress.

The MSCI AC Asia ex Japan (AxJ) Index fell by 0.1% in US dollar (USD) terms, underperforming the MSCI AC World Index which returned 2.2%. Profit-taking and currency weakness relative to the USD pressured returns in September.

Our senior fixed income portfolio manager in Singapore explains why he is bullish on ASEAN currencies for the long-term.

Despite geopolitical risks and less dovish central banks, the Global Investment Committee remains moderately optimistic about the global economy and equity markets, while being cautious on global bonds.

Despite the uncertainty surrounding the time it will take before the formation of a new government, we do not think there is risk of major policy change in Germany. The election outcome, however, will likely weigh on the aspirations of France’s Macron for deeper Eurozone integration.

Given the shifting dynamics in the region, for investors interested in Asian equities, there are multiple options depending upon the level of risk they are willing to assume. This paper looks at the outlook for several countries in Asia-Pacific.

Investing in Japan is not the same as investing in Japanese companies. Given the increase in their overseas exposure, we believe it is a good time to revisit opportunities in Japanese companies.

The US Treasury (UST) market grinded higher in August. Rising tensions in the Korean peninsula and a lack of direction from the US Federal Reserve and the European Central Bank on the outlook for monetary policy put pressure on US Treasury yields.

The MSCI AC Asia ex Japan (AxJ) Index rose by 1.3% in US dollar (USD) terms, outperforming the MSCI AC World Index and bringing year-to-date returns to 31.1%. This was the eighth straight month of positive returns.

“There was an upward surprise in the US CPI data today, with the CPI exceeding the month-on-month (MoM) consensus estimate”

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

Johnson Matthey (JMAT) is celebrating its 200th birthday this year. Over the course of that long history, the business has faced several challenges but always found new ways to keep itself relevant - based on their core competencies in metallurgical science.

“Although Mester and Yellen do not align closely with Trump’s values, they are at least professional central bankers and can likely be relied upon to drive a non-political, non-confrontational but most importantly a safe course for monetary policy and bank regulation.”

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com

The release of the second quarter data on aggregate Japanese corporate profits confirms my twelve-year theme about improving corporate governance in Japan and how investors should not worry about the slow domestic economy.

Our London-based Global Credit Portfolio Manager lays out the scenarios of the upcoming German election and its ramifications for select German credits.

Our equity portfolio manager who specializes in India concludes that reforms should have a very positive effect on that country’s growth.

“Global investors and corporations should adhere to the model that political spats are no reason to get overly frightened or paralyzed.”

John Vail, Chief Global Strategist for Nikko Asset Management, contributes a regular column to Forbes.com