At GAM Investments’ latest Active Thinking Forum, two of our brightest investment minds discussed the drivers behind regulatory change in China and commented on upcoming corporate earnings releases and political developments in Japan.
Jian Shi Cortesi – China Equities
Recent regulatory interventions in China are ultimately driven by the government’s motivation to ensure the country’s long-term stability and sustainability. For example, common prosperity policies are designed to ensure social stability, which is the foundation of China’s economic growth. Other rules, including anti-monology legislation, are likely to have a motivating effect on the population to remain innovative. Gaming restrictions, as an additional example, are intended to foster positive social values. China’s economy has in fact weakened due to some of the recent regulatory tightening. Tighter rules on home purchases have led to a negative property price outlook and a sales slowdown, resulting in Evergrande, along with a few smaller, highly-leverage developers defaulting on debt. Consumption is weak due to cautious employment and income outlooks, while electricity shortages and isolated local Covid-19 lockdowns have also impacted the economy. Amid the uncertainty, opportunities can be found. In the short term, we see opportunities to add to oversold growth names before sentiment improves. Looking further ahead, China’s economic development plans are highly certain and provide a roadmap for investors. Innovation, digitisation and clean energy are among the clear policy themes. We believe investing in areas driven by supportive long-term policies could prove rewarding to investors over time.
Ernst Glanzmann – Japan Equities
The Covid-19 situation in Japan has improved dramatically in recent months. Cases have declined significantly and, after lagging other nations in its vaccine rollout, Japan has caught up rapidly. This is an encouraging picture for consumption going forward. We are approaching the next round of quarterly earnings statements. Investors are eagerly awaiting news on supply chain issues and will likely focus heavily on forward-looking statements from corporates. On average, we expect earnings to be flat / slightly positive on a quarter-on-quarter basis given that June quarterly earnings were significantly better than expected.
On the political front, the new government of prime minister Kishida is expected to implement tax incentives for capital expenditure, research and development and human capital. The government is also likely to promote digital-related infrastructure investments in regional areas. We believe such initiatives bode well for Japan’s economy. In addition, Kishida is keen on decarbonisation, which should support demand for environmentally-friendly products and machinery to boost fuel efficiency. This is positive for the capital goods sector in particular. Environmental, social and governance (ESG) factors continue to gain attention in Japan and supply chain upgrades including environmental performance and traceability are required much more than before.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.