Insights

A better supply/demand balance in Europe, outperformance of “high yield“ globally, positive event-risk in the telecom sector and opportunities in local currencies, as well as other credit related investment themes, all present interesting opportunities for generating positive returns, even in a challenging environment.

Our Nikko Asset Management fixed income experts, led by Simon Down, discuss the prospects for commodity currencies.

In our view, the G-3 economies will fare reasonably well, and basically match the current consensus in the next few quarters; however, there will be significant challenges for each region.

For the time being, we are not estimating a date for reducing the Fed’s balance sheet, but a 2Q16 initiation seems quite logical at this stage.

Although we expected G-3 bond yields to rise, they did so less than we predicted in our June meeting. We expect yields to rise moderately further for the next two quarters.

Our forecasted macro-backdrop scenario has mixed ramifications for global equities, with the US declining but most other regions rising, and it is likely to be very volatile ride

Markets and economies are still being dictated to by unprecedented levels of monetary stimulus. We believe in building a portfolio of companies that are more likely to flourish in the growth environment beyond 2015.

US Treasury (UST) yield curve, along with other asset classes, experienced volatile swings in August. The Chinese central bank’s announcement that it would modify the approach to setting the CNY fixing midpoint effectively weakened the currency against the USD.

Asian equities fell 9.8%, underperforming the MSCI AC World Index by 3.2%, in USD terms. This marked the worst monthly performance for MSCI Asia ex-Japan Index since May 2012.

Looking at how Japanese companies fared with their April-June quarterly earnings, we can see that automobile manufacturers and major electronics producers posted large profit growth on the back of the weak yen and strong sales in the North American market.

We explain how Abenomics is the "icing on the cake" of corporate governance improvement over the last decade.

The internet revolution is coming to the financial sector, addressing inefficiencies in current system and business models. In China’s case we are witnessing a combination of financial liberalisation with an internet revolution in the financial sector.

Even though the current term premium on US Treasuries seems too low, it is unlikely to rise significantly unless offshore bond yields start to rise.

As has long been our view, disappointing economic data should not worry investors in Japanese risk assets very much at all.

While RMB weakness will likely persist for a few months, we don't expect the currency to devalue more than 10% versus USD and we maintain our confidence that the currency will be included into the IMF SDR basket in a year from now.

US Treasury (UST) yield curve bull flattened in July, as yields of short-dated USTs rose on Federal Reserve (Fed) Chairperson Janet Yellen’s statement that interest rates are likely to rise later this year while the yields of longer-dated USTs fell on the weakening inflation outlook.

Asian equities fell 6.3%, underperforming the MSCI AC World Index by 8.1% in USD terms. MSCI EM Asia Index was down 6.9% in USD terms, its worst monthly performance since May 2012.

Spreads in Asian corporate high yields (HYs) have been impacted by recent market volatilities. Risk aversion ruled the market after the surprise change in RMB fixing rule which led to concerns on the weakening growth in China and its impact on the emerging markets (EM) countries.

After the China devaluation, Asia currencies and equities broke down – in effect, catching down to some degree to Latin America, Europe, Middle East and Africa, which had already been significant underperformers.

We will be watching to see how companies respond this year to the Corporate Governance Code, specifically the twin issues of selling cross-shareholdings and improving capital efficiency.

India is a key market to watch in the coming years. Our expert on India, Andrew Holland, CEO of Nikko AM's joint venture there, discusses with Simon Down of our UK fixed income team the forecast for reforms in the country, with some surprising conclusions.

What lies ahead for iron ore prices, particularly with the Chinese economy slowing and undergoing a transition away from a materials-intensive economy to a consumption-driven economy?

Like many countries that have previously refused to reform at all levels, sometimes it takes a true crisis to change.

Yields of US Treasuries (USTs) bear steepened in June, with developments in Europe dominating sentiment. The 10-year Treasury eventually ended the month at 2.35%, 23 basis points (bps) higher compared to end May levels.

The MSCI AC Asia ex-Japan fell -3.7 % in June in USD terms, lagging the MSCI AC World by 1.4%. Asia ex-Japan markets continued to give up year-to-date gains in June as the old adage of sell in May and go away continued to hold true.

The sharp equity market correction in recent weeks after a very strong run over the past year will not have a crisis-level impact to the broader economy.

The IMF has been supportive of China's attempt to be included, but has not indicated that it recommends it. Furthermore, there is a risk that most of these reforms are too new for the IMF to judge whether they are effective or sustainable.

Nikko AM Asia views the recent corrections in Chinese equities, particularly in the onshore markets, as healthy given the sharp increases in value that had occurred due to a frenzied retail market intoxicated by relatively cheap margin financing.

Nikko AM Asia views the recent market corrections in Chinese equities, particularly in the onshore markets, as healthy given the sharp advance on account of a frenzied retail market intoxicated by the relatively cheap margin financing.

Reforms have been a key element of the Chinese leadership and we foresee a continuation of policies aimed at eradicating state inefficiencies and corruption; liberalise and prepare capital markets for more competition; address labour mobility and encourage urbanisation, to name a few.

We believe the global economy should be quite firm for the next year, but not so strong as to cause inflation concerns.

We have a non-consensus, but completely sound call for a more aggressive Fed, whereas we expect the ECB and BOJ to maintain their current aggressive easing program.

Despite good global economic growth, other commodity prices will likely remain quite flat in our view, partially due to a stronger USD.

We calculate that equity valuations are at fair levels and that stocks can grow along with earnings.

Although the recent bond market sell-off may remind the market of 2003, we don’t believe US bonds will be as badly affected. By comparing the worst US bond sell-offs since 2003, we estimate that the 10-year US Treasury yield could hit a high of 2.8-3.2% by October.

Yields of US Treasuries (USTs) rallied in May, with the 2-year and 10-year yields up 4 and 9 basis points (bps) respectively as compared to end-April levels.

The MSCI AC Asia ex-Japan returned -2.6% in May, lagging the MSCI AC World by 2.9%, in USD terms.Asian equities underperformed other Emerging Markets (EMs), particularly Brazil and Russia, which rallied sharply.

Notwithstanding a brief rebound in yen strength in mid-June, the Japanese currency has continued its weakening trend against the U.S. dollar, with the yen recently dropping to its lowest level in over 12 years.

Japan’s nominal GDP, commonly used to gauge a country’s real standard of living, has remained mostly unchanged since the 1990s following the collapse of Japan’s asset price bubble and the onset of deflation.

Real yields and inflation expectations currently suggest exceptionally low growth and low inflation far out into the future.

We expect that profit margins will expand further in coming quarters, driven by a large corporate tax cut and continued industry rationalizations that further prove that Japan's structural profitability trend continues upward.

We do not expect the recent steepening of the bund yield curve to be the beginning of a sustained new trend. Moreover, Eurozone and German economic data, albeit improving, are not sufficient to support the higher bund yields on a sustained basis.

Since the Fed starting hinting at the normalization of interest rates a year ago, Asian central banks' foreign reserve accumulations - except for India and Hong Kong - have either incurred substantial losses or remained flat.

With many markets having rallied from major support levels when they were in highly oversold positions, we believe that bond markets should stabilise or rally from current levels.

Yields of the US Treasuries (USTs) traded in a relatively tight range, eventually ending higher at month-end. At 2.03%, the 10-year point on the UST curve was up 11 basis points (bps) compared to the level at end-March.

The MSCI AC Asia ex-Japan returned 7.2% in April after shrugging off initial weakness and outperformed the MSCI AC World by 2.3% in April in USD terms.

The Japanese stock market has continued to rise, punctuated by the Nikkei 225 recently closing above 20,000 points for the first time in 15 years.

We expect that Japanese pension funds will continue to shift their investments into risky assets in 2015.

Oil-producing countries have seen the largest drop in their foreign exchange (FX) holdings over the last year. In our view, Saudi Arabia can afford to handle oil prices at their current level for some time but ...

The importance of President Xi Jinping's strong leadership cannot be stressed enough. Under him China is undergoing dramatic changes. While the most thorough cleansing of state corruption is ongoing, elements of China's grand strategy are becoming more evident both domestically and on the global stage.

Prices of the US Treasuries (USTs) ended March higher, with 2-year and 10-year USTs yields closing the month 6 basis points (bps) and 7bps lower respectively.

The MSCI Asia-Pacific ex-Japan returned -0.3% in March after shrugging off initial weakness and outperformed the MSCI AC World by 1.3% in March in USD terms.

The market isn't overheating even though the Nikkei stock average touched the 20,000 level, nor do we believe that overseas markets are overheating right now.

With the dollar/yen hovering around JPY120 to the U.S. dollar, Japanese stocks have recently been showing extraordinary strength, marked by the Nikkei 225 breaching the JPY20,000 level on April 10 for the first time in roughly 15 years – a level that it retook on 22 April and has stayed close to ever since.

Defaults from Chinese companies have been on the headlines recently. First, the default of property developer Kaisa Group last Monday (20 April 2015) was expected given the challenges in the ongoing debt restructuring.

Due to the developments described in this article, there is ample room for growth at Japanese firms and much opportunity for investment success.

Given the significant proportion of real estate investment as a percentage of GDP, as well as the proportion of local government revenue generated from land sales, the property market remains a crucial driver of the Chinese economy.

The March “tankan” survey results are not expected to lead to the BOJ's further acceleration of QE.

Interest rate and foreign exchange volatility has begun to increase as the market anticipates the time when the US Federal Reserve will start to reduce monetary accommodation and raise interest rates.

In sum, there certainly are some worrisome issues, as always, but we find none of them convincing enough to prevent moderate increases in equity prices.

Much as we expected, China's economy has continued to slow faster than consensus, but does not appear to be in a hard landing.

Central Banks: Despite firm economic growth, we believe that a negative YoY CPI through September will steady the Fed's hand.

Coupled with our expectation for global bond yields to rise moderately, we maintain our overweight view on global equities vs. bonds.

The recovery in profits by Japanese export firms should continue to attract the attention of the markets in the first half of 2015.

Prices of the US Treasuries (USTs) weakened in February, with yields of the 10-year USTs higher by about 35 basis points (bps).

The MSCI Asia Pacific ex-Japan gained 3.71% but underperformed the MSCI World which gained 6.43% in SGD terms. The MSCI World’s strong performance was attributable to the supportive external backdrop with improving economic indicators out of Europe.

John Vail updates his long-standing theme: Japan's Successful “Show Me the Money” Corporate Governance.

Through 2014, one of the largest asset classes in the world was virtually unnoticed as an indicator that Europe is not pushing the global economy into widespread deflation.

There are several credible reasons to expect that QE will boost corporate earnings in Europe, though by not as much as in the US. However the risk of disappointment relative to inflated expectations remains high.

In 2015, markets will be looking for any pick up in European and Japanese inflation as a result of their QE programmes. With growth picking up, we may start to see signs of a rise in US inflation.

The disappointing economic data should not worry investors in Japanese risk assets very much at all.

The key theme of the past few years has been quantitative easing. Although the US has come to the end of its version of this experiment, QE programmes have begun or are about to begin in Japan and Europe.

US Treasuries (USTs) rallied in January, with the 10-year UST yield ending the month at 1.64% which was 53 basis points (bps) lower than end-December.

Asia Pacific ex-Japan markets outperformed its global peers, registering a return of 3.8% in SGD terms as compared to the MSCI World index which gained only 0.4% in SGD terms, primarily due to the stronger Greater China region and Indian markets which were the best performing markets in January.

According to the 2014 Labour Survey recently released by Japan’s Ministry of Health, Labour and Welfare, total cash earnings – i.e., the total of contractual cash earnings (such as fixed monthly salaries) and other special cash earnings (such as bonuses) – of Japanese workers rose 0.8% in 2014, the first such rise in four years.

In a pre-GFC and pre-QE world, zero or negative interest rates on a German, Japanese or US 10-year bond would have been considered highly implausible. However...

We expect the next phase of the global evolution to be driven by a growing global population, rapid urbanisation and for most of it to happen in emerging markets with increasing focus on "green" development.

ECB's QE: The major question is, will this program work given the European model of debt creation is via the banking system and not the bond markets?

The steel industry and its underlying iron ore industry are witnessing excess production and deflationary forces that are similar to the global energy markets.

The QE announcement was a major step forward for Eurozone. It is not without dangers and questions about implementation, however, so markets should not get over-enthusiastic about it.

Now that oil prices have declined, if a central bank targets its overall CPI at 2.0% for 2015, it would likely be labeled as being overly aggressive and perhaps attempting to unfairly weaken its currency.

As the Fed continues to unwind its stimulus, even amidst threats of global deflation, there are hopes that China will accelerate the liberalization of its capital account and take over the Fed's role as the global supplier of liquidity.

US Treasuries (UST) had a volatile trading month in December and ended the periodwith the 5- and 10-year UST yields 17 basis points (bps) and 0.7bps higher compared to November.

Asia Pacific ex-Japan markets did better than other emerging markets, posting a negative return of 2.1% in USD terms as compared to the latter which returned -4.6% in USD terms as it was dragged down by Russia.

We expect oil prices to rebound and for the time being, we will stick with our call for Brent to rebound to $72 by end-June 2015, although $65 is a more plausible goal.

Asia credit recovered strongly in 2014. Long duration bonds gained as the intermediates and long-end US Treasury (UST) yields fell in response to disappointing growth outcomes elsewhere in the world even as the shortend of the curve began adjusting to rate hike expectation in the US.

It is that time of year again when those in the investment business (unfairly referred to as the ‘chattering class’) share their prognostications on the path of asset classes for 2015.

Clearly, oil prices have fallen further than nearly everyone anticipated. When our Global Investment Committee met in December, Brent was trading at $66.

The overall CNH bond market gained 3.02% in local terms in 2014. Both sovereigns and credits delivered positive returns of 2.6% and 3.14%, respectively.

Through the careful examination of historical data, it is possible to empirically affirm the existence of several anomalies in the stock market, even though there is not always a clear theory or explanation as to why they exist.

As of the end of September 2014, Japanese household financial assets totalled ¥1,654 trillion* (approx. US$15 trillion), representing an on-year increase of ¥44 trillion (approx. US$401 billion), or 2.7%, and surpassing the previous high of ¥1,645 trillion (approx. US$16 trillion**) recorded at the end of June 2014.

Supply-side shocks and market distortions have created a degree of uncertainty over the short to medium-term outlook for the New Zealand dairy industry.

Brazil can no longer continue as “business as usual” and it is at an important crossroads as to whether it can exit the well-known “middle income country trap.” Domestic issues aside, EMs will continue to encounter major headwinds as an asset class in early 2015 due to negative stories from large countries, such as Brazil and Russia.

These reforms coupled with strong balance sheets and demographics will support higher levels of global growth for decades to come.

The investment world is changing quickly and 2015 should prove to be a very interesting year, but we see no reason to change our long-held positive view on global equities.

Recently, two major voices in the "core Fed" (Fischer and Dudley) have indicated that despite low inflation, the Fed's main scenario is to begin hiking rates in mid 2015.

China's economy likely slowed much more than the official statistics show; otherwise, the government would not have reversed course on its various crackdowns, especially on the property market.

Our Global Investment Committee always seems to meet in the middle of great volatility, and this time was no exception, with the investment world facing all sorts of new challenges.

In our view, the LDP coalition's maintenance of a strong two-thirds majority in this election will greatly help Prime Minister Abe and his party's reform efforts, while likely bolstering Yen weakness to some degree.

US Treasuries (UST) ended the month stronger, trading within a relatively tight range for most of November. At month-end, 10-year UST was yielding at 2.16%, 18 basis points (bps) lower than October.