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Weekly Manager Views

24 January 2020

At GAM Investments’ Weekly Investment Meeting held on 22 January, the speakers were Michael Biggs, who commented on global growth and rate expectations, and Ernst Glanzmann, who shared his views on the Japanese equity market.

Global macro & EM debt

Michael Biggs

  • In 2019, the Federal Reserve (Fed) reduced its expectations for long-term policy rates by 50 bps, even as it left its long-term growth and inflation expectations unchanged. This has a profound impact on financial markets. Normally, falling interest rates are not particularly good for risky assets because they are associated with a deterioration in the growth outlook that causes risk premia to increase. In this case, however, rates have decreased without a deterioration in the growth outlook, and consequently all financial assets rallied.

  • Investors might be concerned, given last year’s rally, that many financial assets are now overvalued, but we believe this decline in neutral interest rates has the potential to provide a fundamental support for the rally. The decline in yields should only be reversed if the Fed concludes that it is wrong and chooses to increase its estimate of longer-term rates in the future. This seems unlikely at present. The Fed is reviewing its monetary policy framework in 2020 and, if anything, we believe the outcome will be more dovish for long-term interest rates.

  • Our view for most of last year was that monetary and fiscal stimulus in China was being offset by the negative impact of the trade war. Now, a phase-one trade deal has been signed, and the indicators suggest a rebound might be gaining traction. Industrial production and GDP growth strengthened in Q4, both Purchasing Managers’ Indices (PMIs) have increased and industrial profit growth has returned to positive territory.

  • We expect the recovery in China to feed through into the rest of Asia first, and then to the rest of the world. There are some signs that this has already started to happen. Global metal prices have increased, and since mid-December dynamic random access memory (DRAM) prices have been rising. This has boosted export growth in East Asian economies such as Taiwan and South Korea.

  • If US growth slows and growth in the rest of the world picks up as we anticipate, then we would expect the US dollar to move sideways to weaker. If this were to happen, then we believe commodity prices would likely rise and EM FX and EM equities should rally. We are still in the early stages of this global manufacturing recovery cycle, and we intend to become increasingly bullish on risky assets if these positive signs continue.

Japanese Equities

Ernst Glanzmann

  • The last decade saw the Nikkei 225 Index – Japan’s key equity market gauge – post a positive compound annual growth rate (CAGR) of 8.8% which is favourable compared to the ‘lost decades’ of the 2000s (-7% CAGR) and 1990s (-6% CAGR). A significant part of the improved performance can be attributed to ‘Abenomics’ – economic policies advocated and introduced by Prime Minister Shinzo Abe in 2013 – and corporate governance reforms. Despite the improved performance, earnings per share (EPS) among Nikkei 225 companies climbed 16%, double the Nikkei 225 Index CAGR, suggesting valuations actually dipped over the 10-year period.

  • China / US trade disputes in 2019 had a dampening effect on Japanese equities over the year as corporate managers across Asia shelved investments. As the situation between China and the US begins to stabilise, some of these delayed investments will likely be restored, in our view, leading to a more pronounced recovery in capital expenditure (capex) and capex-related areas, such as manufacturing.

  • In addition, we expect Japanese equities across multiple sectors to be spurred by themes such as 5G roll-out demand, electric motorisation and digital transformation. Corporate governance has improved markedly on average, albeit at a slow pace, and we expect this trend to continue. Awareness of environmental, social and governance (ESG) factors has increased significantly and we have seen, for example, far more outside directors on company boards. Japan continues to face a labour shortage, meaning firms are grappling with the task of becoming more efficient with less labour.

  • Looking ahead, we anticipate profit growth for Nikkei 225 companies on an aggregated basis should be in the single digit range (6-8%) over the next few years, matching historical patterns more generally. Specifically, we anticipate an average dividend payout ratio of 40% and a total payout ratio (including share buybacks) of 60%.

  • Tailwinds to Japanese equities in 2020 include continued quantitative easing by the Bank of Japan and inbound demand in relation to the 2020 summer Olympic Games in Tokyo. Potential headwinds include alternating military tensions in the Middle East and potential setbacks in fragile trade negotiations between the US and China.

Important legal information
Source: GAM unless otherwise stated. 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 no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or advice. Reference to a security is not a recommendation to buy or sell that security. The companies mentioned were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.
January 2020