Insights

As we have already mentioned several times, it has been a very tough year for New Zealand bonds. Although there is perhaps light at the end of the tunnel after the market hit a very low point; in our view, good quality assets could outperform cash over the medium term.

We present our Q3 2022 outlook for the Global Unconstrained Bond Strategy which incorporates our core markets, emerging markets and global credit views.

We explain why we are more positive on Asia bonds than we were at the beginning of 2022. To begin with, inflation in Asia is less severe compared to other regions, lessening the need for Asian central banks to tighten aggressively. This makes Asia bonds attractive from a real yield perspective.

The East and West appear to be headed in different directions. The East may benefit from China’s easing and supportive growth characteristics. Meanwhile, the West is mired in slowing growth, excessive levels of inflation and central banks ever more eager to take down inflation through conventional tool kits designed to slow demand.

Inflationary pressures accelerated in May across the region, due to higher transport and food prices. We maintain our preference for Malaysian bonds, as we believe that inflation will be better contained in Malaysia compared to other countries.

As New Zealand grapples with inflation and the spectre of a recession, we highlight the impact increasing mortgage rates may have on consumer spending. This is an important theme as it ties in with how we need to consider absolute interest rate levels.

As in the rest of the world, times are tough for New Zealand’s economy. Even so, given that stagflation occurs when higher inflation is combined with slower economic growth and rising unemployment, New Zealand is contending with the negative growth and inflationary aspects of stagflation without the accompanying unemployment issues.

As it often is when Japan’s Liberal Democratic Party wins an election by an impressive amount, the initial equity market reaction was positive. But the ramifications of the ruling party’s upper house election victory will in the intermediate term be a function of what happens to the global economy and geopolitics in the months and quarters ahead.

We take a look at why the Bank of Japan is likely to stick to its easy monetary policy even as other central banks embark on policy tightening; we also highlight the signs of a full-fledged capex recovery taking place in Japan.

There has been remarkable progress in electric vehicle (EV) technology and its acceptance globally. We believe that Chinese EVs are set to lead the world in this area as technological innovation, demand, government policy and consumer behaviour have put China ahead of Europe and the US.