Insights

Investment Insights by our experts and thought leaders

Multi-Asset Investment Themes 2015

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.

Market Commentary – Reasons for Oil Prices Rebound

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

Market Commentary – Offshore RMB (CNH) Market Outlook 2015

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.

NZ market insights - Farmgate Milk Price Update

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.

Is Brazil in Crisis?

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.

Finding Growth in Emerging Markets

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

Our Regional Equity and Asset Class Forecasts

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.

Fed "Baby Steps" and "Sneaky Sovereign" ECB QE

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 Re-stimulation and Emerging Market Divergence

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.

G-3 Economies Should Surprise in 2015

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.

Abenomics the Winner in Japan's Election

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.

Asian Fixed Income Monthly Outlook - December 2014

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.

Asian Equity Monthly Outlook - December 2014

Asia Pacific ex-Japan markets were volatile in November, with the MSCI Asia Pacific ex-Japan Index down 1.3%, dragged down by MSCI Australia Index which returned -6.3% in USD terms.

Capitalising on the 'Pacific Decade'

Capitalising on the 'Pacific Decade'

The Asia-Pacific region is evolving and reforming rapidly, both in terms of developing and developed countries. Over the course of the next 10 years, Asia-Pacific, including Japan, will become a default allocation in investor portfolios.

Identifying the key themes for tomorrow's Asia

Asia is evolving rapidly, which has implications for investors globally. It should no longer be viewed as just a cheap manufacturing hub, but a region with high value-added industries catering to an increasingly wealthy middle class.

Active management of credit more effective over the longer term than a target-seeking strategy

As we move further away from the turbulent period between 2007 and 2009, interest in credit has increased rapidly as investors globally search for extra return in a low yield environment.

Rate cuts down under?

If the RBA does cut interest rates, it is likely that they will make more than one cut, so we could see Australia's official cash rate at 2.00% by the second quarter of 2015.

Revisiting the age-old debate on value vs growth investing

Revisiting the age-old debate on value vs growth investing

Many empirical studies have shown that a value style approach to investing in Australian shares has consistently outperformed growth investing - and with less risk.

Recession in Japan? 3 Key points to remember (again)

The three main points from our prior report on this topic have not changed; however, there are a few more anomalies in the data this time.

The Japanese equity market for the most part maintained a strong tone in 2014, with the Nikkei Stock Average at one point in December rising intra-day above JPY18,000 - a level it had not seen since July 2007.

With a slowdown in consumer demand following the April consumption tax hike, a second straight quarter of negative GDP growth in July-September, and unseasonably cold weather resulting in an even further drag on consumption, Japan appears to be only halfway through to achieving its goals of putting an end to deflation and reviving the economy.

The Asian Credit Market

Growth continues to be a strong theme in Asia making the case for investing in the region a compelling one. The Asia ex-Japan (AxJ) region has more than doubled its share of the global economy since the Asian financial crisis.

Green Bonds Go Mainstream

2014 has become a landmark year for green bonds, having become one of the few sustainable investment instruments to reach a suitable scale and poised to enter the mainstream for global institutional investors.

Japan's Profitability: "Show Me the Money" Corporate Governance

Japan's Profitability: "Show Me the Money" Corporate Governance

Equity investors should not fret too much about weak macro data, as Japanese companies have been able to overcome such for nearly a decade through rationalization and improved corporate governance.

Liability driven investing. Not just for institutions; It can work for individual investors too

The ultimate beneficiary of most of the manager's investment decisions is an individual investor with particular needs and requirements. This may sound obvious, but actually it often gets ignored.

Point of View: On Moody's Japan Rating Downgrade

Moody's downgrade of Japan to A1 will likely have very little effect on bond yields, the economy or risk-asset psychology. The major reason why is due to its odd premise of predicting too much success of Abenomics, while most market observers are not so optimistic.

Recession in Japan? 3 Key points to remember

Three important things to know about the recently announced Japanese GDP statistics that indicated that the country was in a recession.

Know your investment manager: They may not be as passive or active as you think

The argument within the investment community over which offers better results continues to rage. However, we think that a more important question is being missed—are investors getting what they expect from the two investment styles?

Debunking Demographics

We examined the relationship between a country's working age population and its listed company corporate earnings for ten nations, and found that the relationship is ambiguous at best, with correlations ranging from positive to strongly negative.

Asian Fixed Income Monthly Outlook - November 2014

US Treasuries (UST) rallied in October – a month that saw dramatic movements across asset classes. The US Federal Reserve (Fed) ended its bond-buying program following the October policy meeting.

Asian Equity Monthly Outlook - November 2014

Asia ex-Japan markets bounced back towards the end of October returning 2% for the month in USD terms and outperforming the MSCI World index by 1.4%.

Amid the continued recovery in the U.S. economy and announcements of strong economic indicators, the Federal Reserve Board announced on 29 October its decision to discontinue its programme of asset purchasing and quantitative monetary easing.

Amid continued downward pressure on prices, the Bank of Japan (BOJ) decided to ratchet up its quantitative and qualitative easing program at its Monetary Policy Meeting on 31 October.

US mid-term elections: Republican control of Congress likely to lead to gridlock with President

Although there are potential flashpoints, there are some areas where the US President may be more willing to cooperate with the new Congress — such as being awarded the authority to fast track trade agreements, particularly the Trans Pacific Partnership (TPP)

Japan’s Key Factor: the Wealth Effect

We have long reported on the role of the wealth effect, as its importance is vastly underestimated by local and foreign investors. The 2Q data for net financial assets shows a QoQ increase to a new historical high.

Official Support for Japan’s “Show Me the Money” Theme?

Update on Japan’s “Show me the Money” corporate governance — the dividend paid by TOPIX continues to rise towards its historic high, but the payout ratio has been stagnant for the past few months, as earnings continue to rally equally well.

Changing of the guards in Asia

Is political democracy good for economic growth and ultimately, stock markets in Asia? Indisputably, sound political systems are crucial for economic development and progress.

Our View on the Recent Market Turbulence

Our house view is that non-economic factors played the largest role in the recent market turbulence. We discuss these below and forecast their future development.

Australian Fixed Income: Credit Commentary - October 2014

Physical credit spreads have remained at reasonably tight levels due to the ongoing search for yield — although global uncertainty in the Middle East, fears about Ebola, and re-emerging concerns about Europe have generated negative sentiment.

Australian Fixed Income: Market Commentary - October 2014

The Australian economy seems to be struggling to achieve traction as the mining boom transitions from a capital expenditure phase to a shipment phase.

No sovereign bond bubble but perhaps a new conundrum

Prior to the global financial crisis, nearly $17 trillion of developed nation bonds were rated AAA. Now there are less than $2 trillion. Not only has supply been restricted, but also diversity, with the number of AAA rated countries falling from 15 to 9.

Asian Fixed Income Monthly Outlook - October 2014

In its September Federal Open Market Committee (FOMC) statement, the US Federal Reserve (Fed) renewed its pledge to keep interest rates near zero for a considerable time after its quantitative easing (QE) program ends in October.

Asian Equity Monthly Outlook - October 2014

Asia Pacific markets succumbed to profit-taking after registering seven consecutive months of positive USD based returns. The MSCI Asia Pacific ex-Japan Index was down 7.2% for the month in USD terms as the strengthening dollar magnified the loss.

Since the start of October, the Japanese stock market has shown weak performance. Heightened concerns over the worsening economic climates in Europe and China and less bullish forecasts on the U.S. economic recovery drove stocks in Europe and the U.S. sharply down, with the Japanese market following suit.

The currency markets in September saw a sharp weakening of the yen and strengthening of the U.S. dollar, with the yen starting the month trading at about 104 to the dollar, but weakening to about 109 by the end of the month.

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.

Australian Equity: Market Commentary - September 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.

China Worries Continue

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

Australian Fixed Income: Credit Commentary - September 2014

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.

Australian Fixed Income: Market Commentary - September 2014

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.

Japan's “Show Me the Money” Corporate Governance

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.

Super-Abenomics Key Performance Indicators - September 2014

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: CY14 GDP Should Exceed Consensus

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.

Equity Markets - September 2014

Although not a Goldilocks scenario, our forecasted macro-backdrop is quite positive for global equities.

Bond and Currency Targets - September 2014

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.

Central Bank Watch - September 2014

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.

G-3 Economies Should Be Fine

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.

Asian Fixed Income Monthly Outlook - September 2014

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.

Asian Equity Monthly Outlook - September 2014

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.

Australian Fixed Income: Credit Commentary - August 2014

Credit spreads generally continued to tighten in August, although Australian physical spreads were mainly flat over the month.

Australian Fixed Income: Market Commentary - August 2014

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.

Asian Fixed Income Monthly Outlook - August 2014

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.

Asian Equity Monthly Outlook - August 2014

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.

The Japan Update – Improved ROE could spur Japan stocks higher

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.

The impact of US high yield bonds sell-off on Asian Credits

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.

Super-Abenomics Key Performance Indicators - July 2014

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.

Update on Eurozone External Accounts

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.

Update on GIIPS' External Accounts

Regarding our long-standing theme of rebalancing in the Eurozone, recent trends have been more negative, so we offer this summary with some relevant charts.

Japan's Dividend Resurgence: “Show Me the Money”

Last month we described Japan’s “Show me the Money” corporate governance as regards the sharp rise in corporate profit margins to new highs. This theme is paralleled by the trend in dividend payments.

Asian Fixed Income Monthly Outlook - July 2014

During the Federal Open Market Committee (FOMC) meeting in June, the US Federal Reserve (Fed) announced an additional USD 10bn per month in tapering, while keeping the target rate at 0.25%.

Asian Equity Monthly Outlook - July 2014

Asia Pacific ex-Japan markets performed in-line with global counterparts returning 1.7% in USD terms versus 1.8% for MSCI World.

The plan to lower Japan’s corporate tax rate as part of the government’s growth strategies is attracting a great deal of attention from the markets, but equally important is the government’s initiative to strengthen corporate governance and to change how company managers think about governance.

At an extraordinary meeting on 24 June, Japan’s Cabinet approved a new growth strategy and the detailed policy proposals to implement it.