Investment Insights

The last few quarters have been a good reminder that we are in a changing world. As a result, we need to focus always on investing in enduring franchises and we would suggest that our Future Quality approach is soundly placed in that regard. We also need to approach monetary policy with an open mind—sometime soon the central banks could change the game again. In surfing parlance, be ready with your trusted board and make the most of the conditions.

Recently many fixed income investors have experienced steep price declines in their bond portfolios. We have argued that it is not only duration that explains the interest risk of a portfolio, but that convexity needs to be accounted for as well. In this paper we point out that credit risk measures also have to be adjusted in an environment of declining bond prices.

In one of the most significant changes surrounding New Zealand’s equity market in recent years, the general election held in October delivered a change of government. Overall business sentiment has been generally positive after the election result. The outcome has been favourable for the aged care sector and building-exposed names. On the other hand, it has thrown up some uncertainties over the future of New Zealand’s environmental policy.

The general election held in October resulted in a change in government for New Zealand. Although it is difficult to gain a full picture at this stage, we can make some key observations on monetary policy: the Reserve Bank of New Zealand’s mandate could be pared back to ensure that its sole focus is on managing inflation.

We analyse the Bank of Japan’s decision to further tweak its yield curve control scheme amid the latest developments hinting at sustained wage growth; we also assess why an acute labour shortage could be a golden opportunity for Japan Inc. to change structurally.

While the risk-off environment stretched into another month, we are still finding plenty of positives in Asia. India’s macro remains favourable; Chinese equity markets are near the cheapest in 20 years; and the semiconductor industry is showing signs of a bottoming. With the US potentially having reached peak interest rates, this could be a welcome backdrop for Asian markets going forward.

We explore the opportunities and risks emanating from China’s near-zero inflation and India’s above-average consumer prices.

Defying seemingly broad sentiment that a slowdown is coming, the US economy continues to chug along, and bond yields are continuing to wake up to the monetary reality that long-term rates need to be repriced accordingly. The adjustment has been aggressive and fast. Still, there is a natural limit to these types of moves.

Modern alpha relies on multiple sources and is therefore more stable and recurring than the traditional “big bets”. For most investors, the main source of alpha is fundamental research. But to add stability it is plausible to combine fundamental research with quantitative strategies as an additional alpha source.

Amid the current rise in oil prices, global central banks have become more vigilant against inflation, becoming increasingly wary of risks occasioned by a potentially premature end to their rate hiking cycles. Consequently, we deem it prudent to be more cautious on duration. We therefore have a largely neutral view on duration for most countries in the region.