Nikko AM Insights

Although New Zealand’s November 2022 rate hike was larger than expected, markets had been pricing in aggressive tightening for quite some time. This may soften the impact of the current challenges. Given that yields on some bonds are now approaching 6%, we feel that stronger income generation opportunities are also providing a silver lining in the fixed income market.

This month we discuss the prospects of Japanese equities remaining well-supported into 2023 thanks to robust exports and inbound demand. We also explain why the markets are looking beyond a dip in Japan’s 3Q GDP, focusing instead on the prospect of growth resuming.

The cost of living and the cost of doing business are still weighing down on New Zealand’s consumers and companies as the end of 2022 approaches. On the corporate side, New Zealand’s companies continue to grapple with wage inflation driven by a scarcity of workers, higher logistics costs amid lingering supply chain issues, and elevated interest costs as hikes in the Official Cash Rate continue to bite.

Rather surprisingly, a UK tabloid newspaper recently contacted the author following the seemingly spectacular “blow up” in the UK bond markets, and the subsequent “crises” within the pension / insurance sectors. The journalist clearly wanted to write a story about reckless spendthrift government fiscal policies, and miss-management by pension fund managers. However, this was not the story that they got from the interview.

The just-released 3Q CY22 data on aggregate corporate profits in Japan was very positive, with the overall corporate recurring pre-tax profit margin hitting a record high on a four quarter average.

China’s bond market is exhibiting low correlation to other asset classes, displaying historically lower volatility, enjoying continued internationalisation of the renminbi and benefitting from the country being included in globally recognised indices.

This month, Fed Chair Powell seemed hellbent on quashing any last hope of a pivot or at least slowing the pace of rate hikes sometime soon. But this crushing blow to hope helped sow the seeds of an eyewatering rally when one inflation print showed some promise—hence, the manic cycle continues.

We are inclined towards Singapore and South Korean government bonds, given their relatively higher sensitivities to stabilising US Treasury yields. In currencies, we see the Singapore dollar continuing to outperform its regional peers.

The ASEAN region fared better on the whole in October thanks to gains by the Philippines and Malaysia; Hong Kong and Taiwan stocks were volatile while the China market continued sliding.

A notable feature of global equities this year has been the significant divergence seen among indices. New Zealand’s S&P/NZX 50 Index has provided an example of this by following a different track to the overall global trend so far.