MSCI Asia ex Japan (AxJ) was up 3.4% in USD terms, marginally outperforming MSCI AC World. Absolute returns were positive for all AxJ markets except the Philippines. The Taiwan Dollar (TWD) was the best performing currency in AxJ followed by the Korean Won and Indian Rupee. Buoyed by the partial unwind of the post-election Trump-trade, gold was the best performing commodity.
US Treasury (UST) yields traded in a tight range in February. Risk assets rallied and UST yields rose in the first half of the month, on the back of the prospect of tax cuts and a Dodd-Frank overhaul in the US. Subsequently, yields were pressured lower by concerns about a possible victory by Marine Le Pen in France’s presidential elections. Overall, the 2-year and 10-year points on the UST curve ended the month about 6 basis points (bps) higher and 6bps lower respectively.
In line with our market outlook going into 2017, we previously observed the prospect of attractive opportunities emerging during the year. This was expected to be driven by a rebound in earnings growth, attractive valuations and accommodative policy conditions.
With President Trump announcing that he will be releasing his tax plans in the coming weeks, we have shifted to a more cautious position on US duration. The risk is that President Trump announces a sizeable stimulus package, with the backing of the broad Republican base. This would raise fears that the US Federal Reserve would need to act more quickly than expected, and with markets only pricing in two or three rate hikes in 2017, we believe that markets are under-pricing the risks of this announcement.
Asia ex-Japan (AxJ) equities returned 6.2% in US Dollar (USD) terms, outperforming MSCI World. Singapore, Hong Kong and Chinese equities outperformed while Indonesia, Malaysia and Thailand lagged. Asian currencies generally strengthened against the USD over the month.
US Treasury (UST) yields ended higher in January as weaker-than-expected payroll data led markets to moderate their forecasts for Federal Reserve (Fed) rate hikes in 2017. Overall, 2-year and 10-year UST yields rose about 2 and 1 basis points (bps) respectively in the month.
Credit markets are expected to have another positive year. We expect economic growth in Asia to be stable but see some potential downside risks. In Europe, political risk remains high for 2017. Some of our key themes are: hybrid bonds, financials, oil/emerging markets and High Yield.
2016 was a year of surprises. The Federal Reserve (Fed) backtracked on its outlook on interest rate hikes, Britain voted to leave the European Union, Italian Prime Minister Matteo Renzi resigned after a resounding defeat in the Italian referendum, and Donald Trump triumphed over Hillary Clinton to become the 45th US President. Commodities rallied, owing partly to low base effects and reflationary expectations following Trump’s win. Against such a backdrop, risk-free rates had a volatile run, with the US Treasury (UST) yield curve shifting higher in the year.
Asia ex-Japan (AxJ) equities returned -2.0% in US Dollar (USD) terms, underperforming MSCI World and MSCI Emerging Markets (EM). Currencies across AxJ generally weakened against the dollar following the Federal Reserve's (Fed’s) decision to hike rates. Meanwhile, Gold declined 2.2% while oil jumped 8.66% month-on-month.
USTs weakened further in December, as caution prevailed following the November sell-off. As widely expected, the US Federal Reserve (Fed) raised interest rates by 25 basis points (bps). 10-year UST yields ended the month at 2.44%, about 6 basis points (bps) higher compared to end-November levels.
2016 was a year of surprises. The Federal Reserve (Fed) backtracked on its outlook on interest rate hikes, Britain voted to leave the European Union, Donald Trump triumphed over Hillary Clinton to become the 45th US President, and Italian Prime Minister Matteo Renzi resigned after a resounding defeat in the Italian referendum.
We are currently in a position where we are facing more questions than answers regarding Trump's policy stance as he comes into office and how it will affect the market.
Global Equity - Asia ex-Japan Equity - Japan equity
This PDF is a compilation of 2017 market outlook reports by three of our equity teams.
We believe that in an increasingly uncertain world, Japan’s less uncertain market will provide a compelling opportunity for serious investors.
The phrase “lower for longer” could well become unfashionable very quickly after years of central banks combating the forces of deflation and wishing for inflation instead.
The cumulative positioning of investors in companies and asset classes that are deemed safe in a “lower for longer” environment is undergoing a significant test at present.
2016 may best be remembered as the year in which Trump won and the world changed. The question becomes which reforms will take centre stage.
Asia ex-Japan equities returned -2.9% in US Dollar (USD) terms, underperforming MSCI World. US president-elect Donald Trump's stance on the repeal of the Trans-Pacific Partnership and a domestic US focus at the expense of foreign trade has initially been perceived as negative for Asia, although there remains much uncertainty with regard to US policy going forward.
UST yields surged in the month as Trump's election victory prompted expectations of a significant fiscal package and possible upside inflation risk under the new administration.
October was another difficult month for Global credit markets, in particular for Investment Grade bonds. By contrast, more risky High Yield bonds outperformed. In terms of sector results, financial issuers outperformed.