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.
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.
Asia ex-Japan equities returned -1.5% in US Dollar (USD) terms, outperforming the MSCI World which declined by 1.9%. Crude oil prices finished the month down as OPEC members failed to reach a conclusive deal on supply, while political developments in US and ASEAN were key drivers of markets during the month.
USTs ended lower in October. Better US economic data and a hawkish statement from the Federal Open Market Committee (FOMC) bolstered expectations of a December interest rate hike. 10-year UST yields rose about 23 basis points (bps) to 1.83%.
Singapore's weak 3Q2016 GDP report and MAS's 'unchanged' policy guidance on the SGD paint a sombre outlook for the Singapore economy for the rest of 2016 and 2017. We believe this provides good insight on the equity strategy going forward and reaffirms our strong bias away from the domestic economy and towards a focus on the alpha and restructuring opportunities in New Singapore.
"Find growth and you will find performance" was our Asian Equity investment mantra in early 2016 as the world grappled with slowing growth and lethargy with monetary experimentaton in low and depressed interest rates.
Emerging markets (EM) have endured strong adjustments in commodities and currencies that coupled with reforms makes a good case for better growth ahead. Still, it will take time for EM to navigate to more stable sources of growth, requiring relative stability through the delicate transition.