Investment Insights

The devastation from the tropical cyclone and flooding that struck New Zealand’s North Island in February 2023 was a reminder of the increasing need to mitigate extreme weather events and to take stock after they strike.

We retain our preference for Indonesian government bonds and for currencies, we believe that greater support for the renminbi from Chinese policymakers should remove a near-term headwind for currencies in the region. We take a more cautious view towards risk in the near-term due to a slightly weaker macro backdrop and uncertainties ahead which make the valuation of Asia investment grade credit look slightly stretched versus both historical levels as well as developed market spreads.

With the Chinese economy on the brink of deflation, the timing of the Chinese government’s recent pro-growth directives was a very welcome signal. If carried out, they can lead to structural changes that can potentially lead to an improvement in consumer confidence and growth in the Chinese economy, in our view.

Although the Bank of Japan tweaked its policy in July, we discuss why the move may have been a compromise given expectations the central bank will wait for more concrete signs of inflation before taking a more significant step; we also describe why the rise by Japanese equities could have “legs” this time.

Nikko AM’s Head Portfolio Manager – Core Markets, Steven Williams, recently participated in Asset TV’s Masterclass on the threats and opportunities for investors in the climate transition. Here are the highlights of Steven’s contribution to the discussion.

While market positioning has shifted towards a more constructive outlook, the macroeconomic mood has not. Rather, persistent upside pressures in equity markets have forced investors back into the market so they do not fall too far behind benchmarks and their peers.

We remain constructive on relatively higher-yielding government bonds amid a supportive macro backdrop. Our favourable view of higher-yielders is further grounded on the view that lower-yielding government bonds will be more vulnerable to volatility in UST bonds.

The Reserve Bank of New Zealand indicated in May that the current interest rate hiking cycle is by and large complete, with the Official Cash Rate (OCR) having peaked at its current level of 5.5%. The central bank also signalled that it is unlikely to cut the OCR in the near future, stating its intention to keep interest rates at a restrictive level for some time in order to keep inflation under control. In addition, New Zealand has a general election scheduled for 14 October 2023, further reducing the likelihood of near-term moves in the OCR.

With inflationary issues subsiding across most of Asia, many regional central banks are now holding interest rates steady, if not cutting rates in the case of China. The US, meanwhile, is still warning of further rate hikes despite some overall softening in data. Of more concern to us is what China does next.

A stable political backdrop is just one of several key considerations supportive of investors increasing their exposure to Japanese equities, in our view. We believe that reforms to both its corporate governance structure and the configuration of its stock market have made Japan a more attractive investment destination for global investors. The removal of COVID-19 inbound travel restrictions is expected to provide Japan with an additional economic boost, with tourism further benefitting from the yen’s relative weakness.