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