Insights

Investment Insights by our experts and thought leaders

Staying on the road less travelled

As global equity investors, we are often asked how we have successfully navigated an evolving market landscape since the strategy’s inception in 2014. The truth can ultimately be attributed to three key factors: humility, collaboration with people who share the same core team values and a robust investment philosophy.
For August we maintained our overweight growth position and a neutral position on defensives. Several factors continue to support our optimism towards growth assets, including the first rate cut from the Fed, earnings surprises remaining above their historic average, US economic growth beating expectations, and large fiscal spending globally.

Global Equity Quarterly (Q2 2024)

Perhaps there may be disappointment at the lack of money-spinning applications pertaining to AI which may cause investor sentiment to cool. Nevertheless, the improvements in earnings and cash flow appear sustainable so far and are certainly much more attractive than those being produced by many other parts of the economy.

What the Fed’s rate cut tells us about current financial conditions

The Federal Reserve’s 50 bps rate cut demonstrated the power of financial markets at present. As the markets had already priced in a significant probability of a 50 bps reduction, the Fed could have viewed such conditions as a good time to “buy insurance” and implement a half a percentage point cut while the markets were likely to absorb it well.

Less may be more in Japan’s LDP leadership contest

There is one major thing to keep in mind going into Japan’s upcoming leadership contest for the ruling Liberal Democratic Party (LDP)—the country’s looming general election. The ruling party’s chief concern is to select a candidate who can prevail at this election. This makes the candidacy of an incipient LDP leader more of a marathon than a sprint.

Unlocking value in Japan’s cash-rich small and mid-cap firms

We believe Japan’s programme of ongoing reforms will further benefit “cash-rich” firms, many of which are small and mid-cap companies.
We believe that the biggest fundamental change for Asian markets in the medium term is a shift in the interest rates regime, notably that of the US.

From taboo to trend: the rise of shareholder activism in Japan

Once considered taboo in Japan, shareholder activism has been evolving. Japanese equity market culture has been changing dramatically, enabling shareholders to be more vocal and sometimes even hostile towards the companies they invest in, all in the name of “shareholder engagement”.
In a positive bond market environment driven by global monetary easing expectations, we favour government bonds from India, Indonesia and the Philippines, where higher yields remain attractive to investors.

Navigating Japan Equities: Monthly Insights From Tokyo (September 2024)

This month we assess why the market is unfazed by Japan’s upcoming leadership change; we also explain how a bid for a prominent Japanese convenience store operator has highlighted how affordable domestic firms now look in the eyes of their foreign counterparts.

New Zealand Fixed Income Monthly (August 2024)

The Reserve Bank of New Zealand’s rate cut in August appears to constitute a slight easing of the brakes rather than a large change. With the Official Cash Rate at 5.25%, conditions are still restrictive. The first signs of recovery are likely to be seen in improvements in business and consumer confidence, but it will take some time for the impact to filter through to borrowers.

New Zealand Equity Monthly (August 2024)

In August the Reserve Bank of New Zealand lowered interest rates, marking the first change in the Official Cash Rate since May 2023. We expect New Zealand equities to be supported if the central bank maintains an accommodative approach.
As the November 2024 US presidential elections draw ever closer, we explore the global trade, economic and geopolitical implications from an Asian equity perspective, focusing on the uncertainties and opportunities that could arise if Donald Trump secures a second term in office.

Change as the only constant: investing in a world in transition

The Global Equity Team answers the following questions related to the key trends they see emerging: 1)does the AI investment theme still offer significant long-term potential? 2) will the market leadership broaden beyond technology names into other sectors? and 3) what are the main risks and challenges equity investors may face in the remainder of 2024?
For August we reduced our overweight on growth assets amid volatility in the markets and maintained a neutral position on defensives. We expect volatility to be quelled, given that the markets have factored in the Fed cutting interest rates in September and with more easing anticipated over the following 12 months.

Global Investment Committee review: still positive, with downside risk caveats

On 13 August, the Global Investment Committee held an extraordinary session to review the impact of recent volatile market movements. We maintain our central scenario for positive GDP growth in most major economies, although we see heightened downside risks to our US GDP growth outlook.
India remains the long-term growth story in Asia and continues to attract fresh investment flows. China, on the other hand, has become the value play waiting for positive catalysts to turnaround sentiment.
We expect the broader trend of easing global yields, prompted by expectations for the Fed to begin lowering interest rates, to support a downward bias in Asian bond yields. We continue to favour Indian and Philippine government bonds over their regional peers.

How to wean off a weak yen without fading Japan’s recovery

The weak yen has played a key role in Japan’s economic recovery by boosting its corporate profits, gross national income and current account surplus. However, it may be time to consider ways Japan can retain its recovery without help from a weak yen should the financial markets eventually change direction. The need for portfolio diversification and Japan’s structural reforms are some of the factors that could incentivise investors to trim their exposure abroad and reinvest domestically.

New Zealand Equity Monthly (July 2024)

July was a remarkably strong month for New Zealand equities, with the strength of the market partly reflecting the dovish turn taken by the Reserve Bank of New Zealand.

Navigating Japan Equities: Monthly Insights From Tokyo (August 2024)

The Nikkei experienced its worst single-day fall early in August after reaching a record high just the previous month. Despite the recent slide, domestic factors supporting Japanese equities remain relatively unchanged, in our view. We believe that the narrative of Japan overcoming deflationary pressures due to increasing real wages is still intact.
We assess the extreme turbulence this week that rocked Japanese equities, which had reached record highs just last month. We discuss the factors that led to the sharp downturn at the start of the week and consider what could be in store for the market, including prospects for recovery.

New Zealand Fixed Income Monthly (July 2024)

The Reserve Bank of New Zealand stood pat on interest rates in its latest Monetary Policy Review in July, but it signalled a shift towards a more dovish stance, suggesting that a first rate cut could be conducted by the end of 2024.
Although market volatility resurfaced in the early part of the April-June quarter as interest rate cuts in the US began to look less likely amid higher-than-expected inflation, risk assets bounced back and rallied strongly later in the quarter. This reflected signs of softness in the US economy, which made it more likely that the Fed would be able to cut interest rates.
We retained both our overweight to growth assets and our neutral position on defensives. The outlook for growth remains positive as global central banks have started monetary easing, with Europe and Canada leading the way by cutting their interest rates.

Japan's cash-rich companies: harnessing corporate reforms

Japan, a nation of “cash-rich” companies, is undergoing corporate reforms aimed at raising valuation of companies by improving their capital efficiency. The reforms, along with cash-rich companies' historical outperformance and strategic options due to their ample cash holdings, make these firms well worth exploring.
In China, we await confirmation of real, positive fundamental change before increasing our confidence towards the country, and we maintain a highly selective approach. Elsewhere, a combination of AI-induced excitement and positive structural reforms has driven Asian markets higher, particularly in Taiwan, South Korea and India.
We favour South Korean, Indian and Philippine government bonds and have adopted a neutral stance on Indonesian bonds. Meanwhile, the fundamentals backdrop for Asian credit remains supportive.

New Zealand Equity Monthly (June 2024)

A look back at the past six months reveals the extent to which New Zealand’s equity market has missed out on the strength seen in many other global markets. Amid these struggles, however, the New Zealand market’s sensitivity to interest rates also offers a note of hope.

New Zealand Fixed Income Monthly (June 2024)

Given the current weakness in New Zealand’s economy, the key question regarding interest rates is not so much the direction they will take but when they are likely to be cut. The struggles seen in the economy span from GDP to employment and look set to persist for some time.

Navigating Japan Equities: Monthly Insights From Tokyo (July 2024)

This month we focus on the surge in long-term JGB yields and whether it poses a threat to equities; we also discuss the potential upside for Japan’s small- and mid-cap stocks.

From beauty products to bicycles: the promising landscape of Asian small caps

Asian small caps, ranging from “indie” cosmetics brands to bicycle manufacturers, present a chance to get involved with the future economic powerhouses of the world. The strategic positioning, high growth potential, adaptability, and innovation of Asian small caps make them a compelling choice.

Green bonds: attractive opportunity in a changing sustainable investment landscape

In the current financial landscape, where ESG outflows are making headlines and greenwashing risks remain in the spotlight, one trend stands out—the surge in green bond issuance.

Time to revisit Chinese bonds from a global portfolio perspective

Recently, China has been frequently appearing in global headlines, although many of these stories are not particularly encouraging. Amidst a fixation with the slowdown in the world’s second-largest economy, global markets may be missing the obvious, quieter China trade.

Global Investment Committee’s outlook: still growing but proceed with caution

Our central scenario is for positive GDP growth in most major economies, with mild upside risks to growth in all regions but Europe. Within this central scenario, we anticipate range-bound inflation with a gradual disinflationary trend in the US and Europe. We expect reflation to continue in Japan and also to pick up in China.
Markets have continued their strong growth through 2024, as odds continue to grow that central banks are able to walk the tight rope and avoid any real slowdown of global growth. US inflation has remained above expectations. However, some marginal softness is now appearing to flow through consumer spending and employment.

Japan’s equity markets: an active investment paradise

Japan Equity Investment Director Junichi Takayama explains how active management can help identify opportunities, particularly within the small and mid-cap markets.
The early economic cycle dynamics and cheap valuations in Asia contrast starkly with the expensive late cycle dynamics in the West, and we expect this to provide good diversification options for global investors.
We have shifted to a mildly positive stance on overall duration, preferring high-yield markets such as India, Indonesia and the Philippines. We expect Asia credit to remain well-supported due to subdued net new supply as issuers continue to access cheaper onshore funding.

BOJ takes a slow, steady approach to reducing bond purchases

The Bank of Japan maintained interest rates at its June meeting, disappointing market participants who expected a reduction in monthly bond purchases. The BOJ signalled a future reduction in bond purchases but only at the next policy meeting in July, without providing further guidance on possible rate hikes or balance sheet reductions.

New Zealand Fixed Income Monthly (May 2024)

New Zealand's fixed income market has struggled so far in 2024 and inflation has remained high. However, there is growing confidence that the Reserve Bank of New Zealand will lower the Official Cash Rate in the next six to 18 months due to a slowing economy, with the expectation that inflation will retreat to the central bank's target range by the end of 2024.

New Zealand Equity Monthly (May 2024)

New Zealand’s equity market is currently facing challenging times. However, a sense that the country’s interest rates may have peaked are some of the indications that the market’s outlook may brighten.

India’s election and implications for equities

In the 2024 Indian parliamentary elections, Prime Minister Narendra Modi's BJP won fewer seats than expected. However, with support from pre-alliance partners, Prime Minister Modi will lead a coalition government for a third term, indicating a public desire for policy continuity and reform. While economic fundamentals are strong, the election results also reflect rural distress and the need for job creation, suggesting the government may focus on expanding the manufacturing sector, infrastructure development and digitalisation.

Navigating Japan Equities: Monthly Insights From Tokyo (June 2024)

This month we look beyond Japan’s impressive dividends and share buybacks from the perspective of corporate governance reform; we also explain how the “quantity effect” associated with exports may reduce the relevance of currency levels.

Healthcare: the sector where innovation is flourishing under the radar

The healthcare sector is benefiting from rapid innovation, fuelled by a significant jump in COVID-led funding. The breakthroughs achieved during the pandemic are only just being realised, and further innovation will be fuelled by artificial intelligence.

Seeing further: navigating AI change through a Future Quality lens

With AI transforming the technology landscape, how do investors wade through the noise to identify genuine investment opportunities? We use our Future Quality framework to find the high-quality companies that are already moving the AI dial.
As the market comes to grips with the US rate structure potentially remaining high, we expect to see increased market volatility and a potential return of the positive correlation between bond and equities that was evident in the market through 2022.

The yen: how weak is too weak?

The ongoing weakness in the yen has led to intense debate over whether Japan can cope with further challenges to its global purchasing power. Although it is a matter of concern, a weak currency isn't necessarily undermining Japan's economic recovery. That said, a prolonged downtrend for the yen warrants vigilance as it could destabilise the economic recovery by triggering inflation.

Seeing further: the increasing role of electrification in the energy transition

Energy consumption forms the backbone of modern lifestyles, and global economic growth is fundamentally dependant on energy supply growth. But as we consider the transition from fossil fuels to clean energy alternatives, the scale of the challenge is truly monumental.
In terms of duration exposure, we maintain a positive outlook for medium-term duration, finding the current yield levels attractive. We expect Asia credit to remain well-supported due to subdued net new supply as issuers continue to access cheaper onshore funding.

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Nikko AM works with the UK-based international organisation Carbon Footprint Ltd. to offset carbon emissions through offset programmes, and has been certified as carbon neutral since 2018.