Insights

With oil markets closing in on US dollar (USD) 100 per barrel and US bond yields reaching 16-year highs, one could be excused for being struck by a bout of conservatism. With valuation dispersions again back to all-time highs, we contend that the risk-reward looks more favourable when taking a long-term view of Asia.

Changes to Japan’s domestic tax-free savings scheme – the Nippon Individual Savings Account (NISA) –are expected to deliver an increased flow into mutual funds both international and domestic, and attract a younger generation of investors in one of the world’s most liquid markets in terms of household wealth.

We expect occasionally volatile, but positive trends for the global economy, financial system and markets in each of the next four quarters. Regionally, we prefer the European and Pacific Ex-Japan markets for the 4Q, and also Japan’s on a 12-month view.

Nikko Asset Management’s investment experts delve into the risks and opportunities arising from China’s flagging economy and its weakening property sector.

The current rise in Japanese equities could have legs, setting it apart from other phases in the previous 30 years which often led to disappointment. Japan’s shift from cyclical to secular growth, highlighted by labour shortages fuelling a rise in wages, is a development that is setting the equity market on a fundamentally different trajectory. We expect wage developments, as a factor affecting both consumption and inflation trends, to help determine further gains for Japan equities.

It isn’t wise to dwell on the details of any countries’ newly published macroeconomic data, but the overall outlook for Japan is slow but steady economic growth. However, as the last few decades have shown, such should not discourage investors if the powerful corporate governance trends and technological advancements continue as we believe they will.

The markets are pricing “higher for longer” with US Treasury 10-year yields pressing above their October 2022 highs, tempering enthusiasm across global equities into neutral sentiment territory. As inflation pressures continue to ease without tipping the jobs market into recession, the US Federal Reserve still looks on course to achieve a soft landing. However, not surprisingly the markets remain slightly on edge as the top in yields cannot yet be called for certain.

Indian and Indonesian bonds are expected to fare relatively better than their regional peers, supported by their attractive carry, positive macro backdrop and policy credibility. As for currencies, expectations that US interest rates may have reached their peak could weigh on US dollar sentiment and favour Asian currencies in return.

While regional markets understandably retained its focus on the economic weakness in China, we believe that the fear gripping the markets belies the region’s long-term sustainable return and positive change opportunities. The challenges that China must overcome are not insurmountable and certainly do not translate to systematic or social instability risk, in our view.

There’s more to Japan’s renaissance than relatively inexpensive valuations. Companies have become more receptive to corporate reform and shareholder engagement; Japan’s services sector is benefitting from a resumption in tourism; and, in Japan, inflation is settling at supportive levels after years of deflation.