We present our Q2 2023 outlook for the Global Unconstrained Bond Strategy which incorporates our core markets, emerging markets and global credit views.
The long-held theme of this report (since 2006) that profit margins remain on a structural uptrend, despite sluggish domestic GDP growth, still holds and domestic and international investors finally realise that Japanese corporations are delivering solid profits and shareholder returns, with the increased expectation that such will likely continue over the intermediate term.
Life is different in the post-pandemic world. Equity markets and economies are different too; geopolitics have deteriorated and barriers to trade have increased while the threat of global warming looms ever larger. In this short essay, we attempt to bring some perspective to this while giving a view on where we are in markets today and what might happen next.
Asian REITs continue to be one of the fastest growing asset classes in the region, offering decent yields, a sustainable income stream and exposure to the region’s biggest landlords.
China’s re-opening and supportive policy tone may continue to provide a critical counterweight to global macro weakness. Macro and corporate credit fundamentals across Asia ex-China are also expected to stay robust.
As New Zealand’s current tightening cycle started about 19 months ago, it can already be said to be mature. It also follows that the full impact of the monetary policy decisions taken so far should now be building in the economy.
Currently, we believe that valuations look stretched (mainly in the US) and volatility too low to justify that a new bull market is at hand, given the plethora of risks. We remain constructive on China's recovering demand and new sources of tech growth, but we are cautious for now for the relative complacency that appears not to adequately discount the eventually weaker economic data ahead and now renewed regional bank stress, and perhaps a US debt ceiling battle in the making.
As the exponential growth of machine learning kicks in, we believe that big technology companies with the first mover advantage in AI and high-end manufacturers of AI-focused hardware and microprocessors, notably Asian players, are in a position of advantage.
New Zealand’s equity market was surprisingly strong in the first four months of 2023 given the current challenges faced by the economy. The actual picture is more mixed, however, partly as a result of the concentrated nature of the New Zealand market.
This month we discuss how Warren Buffett’s focus on Japan has put the country’s market back on investor radars and how it could be a chance for companies to disseminate meaningful information; we also analyse the TSE’s surprise “name and shame” tactic with listed companies.
Financials, healthcare and energy buck the trend and rise in a down market.
Market dynamics have changed quite considerably since mid-March after the regional bank failures in the US, which were quickly followed by turmoil at Credit Suisse leading to the bank’s forced marriage with UBS. The government response was swift and significant, and while central banks have attempted to message a somewhat normal return to its tighter policy agenda, markets simply are not buying it.
In Asia, where healthcare innovation and investment are borne from a critical need, the region’s healthcare industry today is where its technology industry was in the 2000s, meaning that a decade of investment is beginning to bear fruit.
Against a backdrop of a more stable bond market, we prefer relatively higher-yielding Philippine, India and Indonesian government bonds. In addition, there appears to be early signs suggesting that inflationary pressures in these countries have likely peaked, which we see providing further support for these bonds. As for currencies, we expect the Thai baht and Indonesian rupiah to outperform regional peers.
In a world starved of workers and growth, we believe that Asia’s ability to supply both puts the region on a very firm footing over the longer term. Once we get through this current US-led rate tightening cycle and the flush out of weaker financial institutions in the West, we see a bright future for Asia, which is now trading at extremely attractive valuations.
This month we discuss how potential market volatility still bears watching even if the global banking turmoil may not directly shake Japan; we also assess how a steady domestic demand recovery may be in sight even if the public is slow to remove their masks after the recent easing of restrictions.
Asia’s consumption trends were once thought to be heavily influenced by those in the West, but that is no longer the case. Asian consumers have diverse tastes and influences and they are starting to dictate global trends instead of merely absorbing them. We believe that Asian brands are well placed to respond to this new paradigm.
Asian local currency bonds are expected to thrive as the region’s central banks end their rate hike cycle on the back of easing inflation. We believe that strong fundamentals, high-quality yields and limited foreign ownership are other factors that are supportive of this fixed income asset class.
Investors have been dealing with elevated volatility in asset prices since the pandemic began. A contributing factor that continues to muddy the waters has been the volatility in economic data due to COVID-led distortions. In more recent months, particularly in the US, unseasonal weather patterns have made reading the economic tea leaves even more difficult.
It could be some time before the market stabilises in the wake of the global banking turmoil, and investor appetite toward financial subordinated debt will likely be weak in the near term. That said, considering the current valuations of fundamentally stronger Asian banks, we believe that a large part of such concerns are already reflected in their spreads/price following the re-pricing which took place earlier in March.