Investment Insights

This is the “swan song” of this report, which comes at an appropriate time because it was always meant to prove to readers that corporate governance, and the overall case for investing in Japanese equities, was sound. Now that the market’s performance and global enthusiasm for Japan has swelled, there is less need for the report, although it is useful to note the continuance of its impressive trend.

We explain how reflationary dynamics underpin the foundations of Japan’s incipient structural recovery and illustrate why we believe the country’s equity comeback should not be written off as another flash-in-the-pan cyclical upturn headed for an eventual return to deflationary dynamics.

The seemingly impossible soft landing on the back of one of the most aggressive monetary tightening cycles in history is looking not just possible, but increasingly probable. US data is coming in stronger and global demand is generally steady with increasing channels of potential upside.

Our economic system is based on a model of take, make and waste that consistently over-utilises and fails to replenish Earth’s valuable, but dwindling resources. The need to transform how we interact with nature creates a major opportunity for the green bond universe. So far, issuers have successfully embraced funding the transition toward carbon neutrality, but far fewer are looking at regenerative biodiversity projects or initiatives that seek to protect our ecosystems from loss.

Although once-in-a-generation exceptional weather events now risk becoming alarmingly routine, there is still time to turn the tide. This need for immediate action is why we define climate change as an investment megatrend, and we believe Green and Sustainable Bonds have a vital role to play.

Our Future Quality investment philosophy revolves around identifying companies that have pricing power, possess management teams that invest will appropriately, boast strong balance sheets and offer opportunities that are not yet priced in by the market. This approach will remain constant in 2024 although we are also acutely aware of the significant impact energy security will have on global decarbonisation efforts.

The Indian market remains attractive. It has the highest earnings growth in the Asian region, valuations that are in the middle of its historic range and an economy that is growing strongly with inflation under control.

Despite continued struggles with inflation in New Zealand and elsewhere, our view is that the RBNZ’s next change to the OCR is likely to be downward, albeit at a later timing than the market has recently been expecting.

We view 2024 with optimism—markets could begin to be driven by company earnings rather than by inflation outcomes and interest rate expectations as they have in the past year, and New Zealand’s market is well placed to shrug off volatility experienced in 2023.

We expect an anticipated decrease in developed market bond yields, coupled with enhanced foreign inflows, to bolster demand for Asian bonds. We see Asia credit remaining well supported with subdued net new supply as issuers continue to access cheaper onshore funding.

The emergence of AI has dramatically shifted the future pathway for the technology sector, and our research has found that this emerging structural trend chimes with our Future Quality principles.

While fixed income issuance has become a standard mechanism for governments and companies to raise finance, it often lacks a defined purpose. However, the growing trend of responsible investing is changing that. The need to tackle our planet’s many climate, environmental and societal challenges is reuniting fixed income with its sense of purpose.

This month we discuss how emerging growth narratives such as semiconductors may come into focus in 2024; we also assess the slightly hawkish turn the BOJ took at its January policy meeting.

Last year, global investors turned their attention firmly towards Japan as a way of increasing their Asia exposure while avoiding perceived geopolitical and regulatory risks linked to China, and amid the high inflation environment dominating western economies. But this year, Japan’s success is more based on its own merits.

The US economy continues to look robust, so we have stayed constructive on growth assets and short maturity global credit where yields are attractive. We still believe that the path to 2% inflation in the US is relatively unclear. If anything, our conviction on this point has increased because easier financial conditions may ultimately pave the way for the return of sticky inflation.

The peaking of interest rates and potentially the US dollar could be a boon for broader markets—particularly those more sensitive to liquidity, countries with more room to ease rates and areas where positive fundamental changes have been overlooked. China’s economy is undergoing a major transition into one that promotes advanced manufacturing, technology, self-sufficiency and higher-end overseas growth. These are areas of our focus.

We expect macro and corporate credit fundamentals across Asia ex-China to stay resilient due to fiscal buffers although slower economic growth seems to loom over the horizon.

This month we discuss why the equity market is relatively unaffected by the political scandal shaking Japan’s ruling party; we also assess how 2024 could become an inflection point in the country’s “savings to investments” drive.

Although we believe that the prospects for the economy remain mostly unchanged, the outlook is softer at the margins, perhaps reflecting the tightening of financial conditions seen during the recent months. Over the past month, however, financial conditions have eased considerably on the assumption of impending rate cuts.

Given the volume of quality defensive companies with relatively high dividend yields, higher for longer interest rates are a significant headwind for New Zealand’s equity markets. Alongside these, the country’s globally-focused export companies will be looking for the global growth story to play out positively, but for the meantime will at least be enjoying a relatively weak New Zealand dollar.