The Japanese stock market made large gains starting from the end of 2012, but concerns over geopolitical risk in Ukraine and potential debt default in Argentina led to market sentiment weakening from the beginning of 2014.
A confluence of factors worked against the Australian market during the month. Regulatory concerns in the banking sector, lower commodity prices and a weaker Australian dollar were the key drivers of the market’s underperformance.
Much as we expected, China’s economy has continued to slow faster than consensus, but does not appear to be in a hard landing.
In the Australian credit market, the relative lack of supply compared with demand continues to cause spreads to tighten in the physical market offsetting the risks of an unstable geopolitical environment.
Reasons for the recent weakness in the AUD include a fall in the iron ore price, the rally in the US dollar, weaker Chinese data, and indications that the Reserve Bank of Australia is considering macroprudential controls.
Improving the number of independent directors and other governance issues are very important in the intermediate term for Japan, but it is crucial for investors to understand that much of the profitability message has already been understood by Japanese corporate for nearly a decade.
Japan’s pipeline inflation, which we measure using the recently renamed Producer Price Index’s Finished Consumer Goods for Domestic Demand sub-component continued to be quite depressed in August.
Japan’s 2Q GDP growth, at -7.1% QoQ SAAR, was far below June’s consensus of -3.1% (and our -2.5% estimate) and we need to reduce our CY14 forecast, but not by much and we remain more optimistic than consensus.
Although not a Goldilocks scenario, our forecasted macro-backdrop is quite positive for global equities.
G-3 bond yields rose less than we predicted, mostly due to continued ECB aggressiveness, worries about the Chinese economy and the decline in oil prices.
Sentiment about Fed policy remains very volatile, but Yellen has remained remarkably stable in her outlook and bond prices have remained under control during the transition away from ultra-accommodative levels.
Nikko AM’s Global Investment Committee met on September 26th and updated our house view on the global economic backdrop, financial markets and investment strategy advice. In sum, there certainly are some worrisome issues, as always, but we find none of them convincing enough to halt the upward momentum in equity prices.
The minutes from the July Federal Open Market Committee (FOMC) minutes revealed that several participants favoured raising rates sooner than previously anticipated, if inflation and employment prints continue to improve more rapidly than the US Federal Reserve’s (Fed) expectations.
Asia Pacific ex-Japan markets gave back some of the year-to-date (YTD) outperformance versus its global peers. The MSCI Asia Pacific ex Japan index returned 0.8% in the month of August, underperforming the MSCI World by 1.4%.
The US dollar has been gaining against the yen since mid-August and is currently trading at around ¥106, as the yen continues to weaken and the dollar strengthens.
Credit spreads generally continued to tighten in August, although Australian physical spreads were mainly flat over the month.
At its 2 September meeting, the Reserve Bank of Australia again left the official cash rate on hold at 2.50%, and the Australian Industry Group’s Performance of Manufacturing Index slipped back into negative territory in August, following a brief stabilisation in July.
Improving US economic fundamentals have marginally offset the heightened geopolitical concerns in Russia/Ukraine and Israel/Gaza, leading to the sell-off in risk-free assets in July.
Asia Pacific ex-Japan markets outperformed their global counterparts, bolstered by strong price returns in China and Hong Kong which were up 7.3% and 6% in USD terms respectively.
As part of its growth strategy, the Japanese government has proposed strengthening corporate governance. The proposal aims to enhance the profitability of private sector firms and ultimately to improve the economic lot of the general population.
The Japanese market for IPOs is booming once again. Following the collapse of Lehman Brothers and the global financial crisis, the number of IPOs in Japan went into decline. However, after new listings hit bottom in 2009, they have gradually recovered, with increases in the number of IPOs in each of the last four years.
The Japan Exchange Group, which runs the Tokyo Stock Exchange (TSE), announced on 7 August that the composition of the JPX-Nikkei Index 400 will change for the first time since the index was created in January of this year.
US high-yield funds, both exchange-traded and mutual funds, have seen heavy outflows in July with almost USD 10bn of outflows in the month, according to Standard Chartered Bank Weekly Fund Flows reports.
Domestically produced goods and imported finished consumer goods both rose mildly MoM. This must be causing much doubt at the BOJ about achieving the 2% Core CPI target.
As for the entire Eurozone, its trade surplus in goods and services remains near record highs, but it is not increasing further, so it is no longer supportive of GDP growth.