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High Energy Prices Challenge Wall Street’s Green Shift

Wall Street arranged more bonds and loans for clean-energy projects than oil-and-gas companies in the first quarter. The shift could be short-lived amid the push to boost fossil-fuel supplies after Russia’s invasion of Ukraine.

Banks underwrote more than $100 billion of bonds and loans for clean-energy uses in the first quarter and arranged $95 billion in borrowing for oil-and-gas firms. The pace of underwriting slowed in both categories from last year, when total oil-and-gas and green debt issued in each area totaled about $570 billion.

The shift toward more green-debt underwriting has been dramatic in recent years. The ratio of oil-and-gas to green debt underwritten fell to 0.9 in the first quarter from 1 last year. In 2018, four times as much money was raised by banks for fossil fuels than for clean-energy uses. 

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Debt underwriting involves finding buyers and backstopping prices when necessary. It is one of the main ways banks help companies and governments raise money. The data don’t include direct lending, equity underwriting or other borrowing linked to sustainability measures.

While the overall industry did more green underwriting in the quarter, some banks reversed course. Citigroup Inc. arranged more green debt than fossil-fuel debt for the first time last year. In the first quarter, it did more oil-and-gas debt. Other banks that underwrote more oil-and-gas than green debt and also saw the ratio increase in the first quarter include Wells Fargo & Co. , Mizuho Financial Group Inc. and Société Générale SA.  

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Banks say they can’t transition away from fossil fuels too quickly given limitations on clean-energy capacity and that their lending activity reflects broader industry trends. Oil and natural-gas prices have surged, turbocharged by the war in Ukraine, improving the outlook for many producers and prompting calls for increased output. Meanwhile, supply-chain disruptions have pushed up costs and delayed many clean-energy projects. Many financiers also say they must work with companies to bring down emissions rather than divesting from high-emitting industries.

JPMorgan Chase & Co. , the largest U.S. bank and biggest energy-sector financier last year, cut the ratio of oil-and-gas to green-debt underwriting to 1.2 last year from 10 in 2018. The ratio stayed at that level in the first quarter, again indicating more fossil-fuel activity than the broader industry. JPMorgan last year pledged oil-and-gas companies in its portfolio would substantially reduce operational carbon intensity—emissions per unit of output—by 2030.

Analysts say carbon-intensity targets are less aggressive than outright emissions-reduction figures because carbon intensity can decline while overall emissions increase.

Citigroup in January said it was targeting a large absolute drop in financed energy-sector emissions by 2030, a move that analysts said surpassed similar pledges by its peers. Its ratio of oil-and-gas to green-debt underwriting rose to 1.4 in the first quarter from nearly 1 last year. Citigroup Chief Executive Jane Fraser spoke at last year’s Glasgow global summit about the need to scale climate solutions and has said the bank might have to cut off clients to meet its climate targets.

Wells Fargo arranges much more fossil-fuel debt than green debt, with a ratio of 6.7 in the first quarter and 6.3 last year. That is down from 68 in 2018. The San Francisco-based lender recently joined other banks in saying it would cut its net emissions to zero by 2050.

Among the energy companies that raised billions in debt through large banks in the first quarter were commodity traders Vitol SA and Trafigura Pte. Ltd. and oil-and-gas producer ConocoPhillips.

Many environmentalists are also concerned that the pace of clean-energy financing is slowing, delaying the spending needed to reach the world’s climate goals and reduce global reliance on oil and gas. Biotech firm Amgen Inc. and Honda Motor Co. were among those that raised green bonds to reduce emissions last quarter, but the total amount raised was well below last year’s pace.

Some analysts say between five and 10 times last year’s total in green bonds and loans is needed annually by the middle of the decade to accelerate the energy transition.





Still there real estate investment oportunities in U.K?

Private renting is not a new concept in the UK, but it's only in the last few years that large-scale, institutional investors have made their mark on the sector. 2013 was the year things changed, whether you consider the watershed moment to be M&G’s acquisition of a Berkeley residential portfolio or Delancey funding the Athlete’s Village in Stratford.  The sector has expanded rapidly in the years since, with over 30,000 homes complete and a further 110,000 in the pipeline that will be built, let, and managed by professional investors as homes for rent.

Looking to the student accommodation sector as our benchmark, there’s at least a decade to go before institutional private rent reaches maturity. This means there is still scope for seismic shifts in the sector. There is also plenty of opportunity for new and innovative entrants to disrupt the market, as customer awareness and understanding of this tenure increases.  

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If you’re investing in asset classes that perform similarly especially in downward moving markets the answer could be no. On the contrary, investing in asset classes that demonstrate little or no correlation1 to one another may help you enhance diversification and reduce portfolio volatility. While diversification can neither ensure a profit nor eliminate the risk of experiencing investment loss, the ideal scenario is to have a mixture of non-correlated asset classes in an attempt to reduce overall portfolio volatility and generate more consistent returns over the long-term. Many investors who believe their portfolios are diversified may not be as diversified as they think. That’s because traditional portfolios are typically comprised of only stocks, bonds and cash. While stocks and bonds may provide some diversification*, there are other investment opportunities that could provide even more.


Overall the top five countries for investment in residential assets over the next 12 months is the UK (33 per cent), France (28 per cent), Germany (25 per cent), Spain (24 per cent) and Italy (18 per cent).  Signalling that the market is attractive for future investment, nearly three-quarters (74 per cent) of respondents plan to invest in European residential assets over the next twelve months. Of these, nearly one third (29 per cent) expect to invest more in 2021 compared to 2020, on average increasing assets by nearly 30 per cent. When investing, the majority (88 per cent) will also choose to enter new countries in partnership with a local developer or manager.  Traditional residential assets are the preferred haven choice for most investors, with nearly three-quarters (71 per cent) managing build or own-to-lease properties, while half (51 per cent) maintain student living premises and two-fifths (44 per cent) senior and retirement living spaces.   

The top reasons respondents cited as causes to be optimistic were that there is high demand due to a shortfall in supply (43 per cent), real estate income yields are higher than those for fixed income (43 per cent), and asset prices remain attractive (40 per cent). For those respondents that remain negative, concerns over the pandemic and more lockdowns (64 per cent), the recession impacting demand (51 per cent) and the fact that the real estate market lacks daily liquidity in comparison to equity and bond markets (46 per cent) were cited as the three main reasons.


While there may be a higher rental return on commercial properties, the purchase price range can be smaller than residential. 
Residential comparable sales are much easier to distinguish and gather potential price rise or fall information than in commercial. Also because of zoning changes, infrastructure and more. 
Commercial appreciation can be a more consistent journey as many potential value changes can be understood from rental improvements that are often built into the lease. Macro trends e.g. import and export activity, currency movements, ageing population etc.. and more have been partially responsible for the decreasing rental yields for warehouses and medical assets. Yields decreasing on commercial property, mean that people are willing to pay more on the purchase price for less rental income upside.

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Volumes should continue to grow solidly over the medium-term. The reasons will have nothing to do with the strength of demographic tailwinds or urbanisation rates. Don’t get me wrong - both remain hugely important and hugely supportive and will continue to be there. The Brexit noise in Government will abate somewhat this year, but it would be naïve to think that negotiations will be anything other than a significant distraction for policy teams. This could be viewed as a bad thing for multifamily housing, but with a Government set on the aspirational homeowner as its key policy priority, the lack of attention will in all likelihood mean that the industry can get on with delivery. Over the past 10 years, the entire UK Build to Rent industry has been non-fictionalised. Developers, supply chains, funders, planners, lawyers, advisors, operators and innovators have coalesced around a largely US-styled asset class and got on to create a pipeline of over 150,000 homes. That is largely despite rather than because of policy. The industry has a long way to go on its journey to maturity. Planners think Build to Rent is 'premium' product. Consumers think it's still about exploitation, rather than choice. Developers still  behave as though it’s a land value play rather than a value-generating income play. Operators are still learning about what it means to be truly customer-centric. These are issues that need to be tackled and while I have perhaps been a little unfair to many here, I'm speaking to most in this nascent sector. 

The lack of attention provides us with breathing space to learn, to grow, to mature. While Berlin and ultimately the German Government mess about with supply destroying rent controls, in the UK we can drive a consensus around rental supply as a force for good. While market actors in New York and San Francisco, Paris and Madrid all grapple with stock revaluations due to tightened rent regulation, in the UK we can use the cover to get our story straight. Tech innovation that improves quality of life. Check. Advanced manufacturing solutions that de-carbonises new stock, and builds supply chains to reduce the cost of retrofitting old stock. Check. Meaningfully leveraging the new tidal wave of Impact investors that see affordable housing as a big prize on the way towards a dual purpose of driving a commercial return and providing a true social good. UK Build to Rent has some growing up to do. The stakes, in housing terms, couldn't be higher. 

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New Lithium-Extraction Technology Attracts Investors

Lithium is a key component of rechargeable batteries, and developing domestic supply is seen as an important step in a broad push for the U.S. to transition to alternative energy sources. In February, the Biden administration unveiled plans to invest $2.9 billion to boost production of advanced batteries and strengthen the battery supply chain in the U.S., including the development of domestic supplies of lithium. Last month President Biden also invoked the Defense Protection Act to increase production of battery metals.

But newer, still-experimental lithium production and extraction methods that could help increase supplies, while attracting investors for their potential to speed up production and reduce the environmental impact compared with most current lithium-extraction methods, are so far unproven at large scale.

Current methods of lithium production mostly involve extracting the lightweight metal from hard rock or pumping the salty brines that contain lithium out of the ground into vast ponds where evaporation separates it from other elements. Mining companies in Chile have used this environmentally hazardous practice for decades. It takes about 18 months to two years to produce lithium from a brine using ponds and several years to build such projects.

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The new methods, known collectively as direct lithium extraction, or DLE, have been shown to be faster than traditional methods and more efficient. While traditional methods yield about 40% to 50% of the lithium present in a mined resource, processes using DLE can extract 75% to 90%, companies behind the technologies say. Many DLE technologies use a chemical process or other methods to isolate lithium.

That means more lithium can be produced and made commercially available more quickly—at a time when demand for lithium is sending prices to all-time highs, while analysts are projecting shortages that could slow production of electric cars.

In Nevada, where the ground is rich with lithium brines, a wave of lithium prospectors have taken out claims for potential projects in the past year. Many conventional lithium-extraction efforts, however, face opposition from environmentalists and permitting delays.

The question is whether DLE is ready to make a major difference. Many DLE technologies that work well in a laboratory often run into trouble in the field, experts say. Many of the technologies would likely still require large amounts of water and power to run the devices on a large scale.

DLE is currently being commercially used only by the Philadelphia-based lithium miner and processor Livent Corp. alongside its other brine-extraction processes in Argentina, and by companies in China. The DLE component of Livent’s Argentina project is small and isn’t producing lithium at a scale that would indicate a technological breakthrough, analysts say. And experts say there isn’t enough transparency about the DLE technology being used in China to know how successful it is.

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FinTech Investment

Innovation is the process by which new ideas generate economic and social value. The emergence of FinTech has been critical in driving innovation and is a great contributor to growth and productivity within financial services. It’s become increasingly evident that technological innovation, through the emergence of FinTechs, is critical to the future of financial services. Innovation and FinTechs are key to increasing market access, the range of product offerings and convenience while also lowering costs. 

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FinTech continued to be the hottest thing in tech during Q1 2019 – there was the launch of the Apple Card, the giant ($400 million) investment by Softbank in UK FinTech Oaknorth and the recognition by major brands like Goldman, ING and NatWest that it was time to create their own FinTechs and challenger brands (Marcus, Yolt and Mettle respectively).  Investments in global fintech firms fell 3.7% in 2019, hurt by a sharp decline in deal activity in China in 2019 against the backdrop of a bruising trade war between Washington and Beijing, according to a new report by consulting firm Accenture.  

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Despite the steep fall-off in activity by Chinese companies, there were 3,472 deals worth US$53.3 billion globally last year, the second-highest value of investments since 2013, Accenture said. That compared with 3,251 investments worth a record-high US$55.3 billion in 2018.

Despite the future potential of emerging markets, fintech investors continued to favor the US, which retained the crown as the biggest market for fintech deals worldwide last year. The value of deals in the US jumped 54% to US$26.1 billion in 2019. Fintech investments in the UK rose 63% to US$6.3 billion, while India, Brazil, and Germany posted strong gains.

The largest fintech deal in China last year was the US$145 million financing of insurtech Shuidi Huzhu in June. Four deals, including the Ant Financial transaction, accounted for nearly US$20 billion in investment in China in 2018. Fintech deals in Singapore more than doubled to US$861 million in 2019, with 39% of investments going to payments startups, according to Accenture. Singapore had deals worth US$365 million in 2018.

Hong Kong saw its fintech investments nearly to double to US$374 million in 2019 as the city issued licenses to its first virtual banks, which are expected to make their debut later this year, Accenture said. That compared with US$188 million in 2018. It is important to note that some of the most high-profile fintechs which raised millions of dollars last year have yet to break even, never mind post a profit: Revolut, N26, the fintech units of Grab and Gojek, to name a few. Yet, that did not stop investors from continuing to support their costly expansion. Accenture's data show that the 92% drop in China's fintech investment was the main reason for the modest decline in global fintech investment last year.

Indeed, even as China cooled off, the rest of the world heated up. U.S. deals rose 54% to US$26.1 billion. Fintech investments in the UK rose 63% to US$6.3 billion. India became the world's No. 3 fintech market as deals almost doubled compared to 2018, reaching US$3.7 billion. Deals more than doubled in Singapore to US$861 million and rose 50% in Australia to US$1.1 billion. Deal value in Brazil almost tripled to US$1.6 billion. 

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Why HealthCare?

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Significant scrutiny and attention have been given to genome-sequencing costs and how they are calculated since the beginning of the field of genomics in the late 1980s. For example, NHGRI has carefully tracked costs per genome at its funded 'genome sequencing centers' for many years (see Figure 1). With the growing scale of human genetics studies and the increasing number of clinical applications for genome sequencing, even greater attention is being paid to understanding the underlying costs of generating a human genome sequence.
A genome consists of all of the DNA contained in a cell's nucleus. DNA is composed of four chemical building blocks or "bases" (for simplicity, abbreviated G, A, T, and C), with the biological information encoded within DNA determined by the order of those bases. Diploid organisms, like humans and all other mammals, contain duplicate copies of almost all of their DNA (i.e., pairs of chromosomes; with one chromosome of each pair inherited from each parent). The size of an organism's genome is generally considered to be the total number of bases in one representative copy of its nuclear DNA. In the case of diploid organisms (like humans), that corresponds to the sum of the sizes of one copy of each chromosome pair. 

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Demographic shifts and societal changes are intensifying pressures on health systems and demanding new directions in the delivery of healthcare. We are getting older. Ageing populations in both emerging and developed nations are driving up the demand for healthcare.

According to the United Nations, the world’s population is expected to increase by one billion people by 2025. Of that billion, 300 million will be people aged 65 or older, as life expectancy around the globe continues to rise. Additional healthcare resources and service innovation is needed globally to deliver the long-term care and chronic disease management services required by a rapidly increasing senior population. 

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At the same time, developing countries are experiencing significant growth in their middle class. The Brookings Institute estimates 65% of the global population will be middle class by 2030. Accelerated urbanisation and access to middle-class comforts are promoting sedentary lifestyle changes that will inevitably lead to greater incidence of obesity, diabetes and other costly health conditions.

Driven in part by demographic changes, a new paradigm of public and private sector collaboration is developing to transform healthcare financing and delivery.

A rising middle class will fuel increasing demand for more health options. Looking forward, more effective partnerships are needed between the public and private sectors to meet these expectations. Collaborations that in the past may have seemed unlikely will become commonplace. Changing technology and consumer needs will inspire partnership innovations that cut through conventional thinking.

As the population grows, technological innovations in mobile health (mHealth) will advance cost-effective health solutions. Technology and analytics are ushering in new ways of promoting wellness, preventing disease and providing patient-centric care. These advances are exciting tools for providers, private payers and governments alike, as they bring greater precision to predicting patient behaviour and detecting and diagnosing diseases.

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Healthcare is undergoing dramatic globalization. Throughout history, the sick and lame have embarked on pilgrimages to find cures. In the past, this was primarily to access facilities or technologies unavailable at home. Now travel for medical treatment has expanded enormously and many travel from developed countries to low- or middle-income countries, often to avoid high costs or long delays. Travel to another country for medical treatment has been called “medical tourism” and “cross-border healthcare” [1, 2]. Globalization of medical care is a multi-billion-dollar phenomenon, associated with economic, cultural, ethical, legal, and health consequences. A growing literature describes its dimensions and complexities [3–6]. This paper will focus on infectious disease implications.

Spending on health is growing faster than the rest of the global economy, accounting for 10% of global gross domestic product (GDP). A new report on global health expenditure from the World Health Organization (WHO) reveals a swift upward trajectory of global health spending, which is particularly noticeable in low- and middle-income countries where health spending is growing on average 6% annually compared with 4% in high-income countries. 

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The healthcare sector is made up of many different industries—from pharmaceuticals and devices to health insurers and hospitals—and each has different dynamics. Investments in this sector are affected by many variables, including positive trends related to demographics and negative trends related to reimbursement.1 Healthcare investing requires a multifaceted approach to understand the underlying drivers. Investors can profit from investments in both the overall sector and/or its industries. This article will detail the differences among the various healthcare industries and which metrics investors should follow before making an investment.

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Trends in the Healthcare Sector

When deciding on a healthcare company in which to invest, keep the following prevalent trends in mind. Changes to or continuations of these trends can have implications for a variety of areas within the healthcare sector.

-The aging population and the baby boomers
-People living longer with chronic disease
-Obesity and diabetes epidemics
-Technological advances
-The global reach of disease
-personalized medicine
A company's choice can affect its risk and profitability. 

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Underwriting skills drive health insurers' profitability. The better the underwriting, the lower the medical costs relative to the premium (or payment) received from the purchasing company.15 The key ratio that health insurers report is the medical cost ratio. This ratio is akin to the operating-profit ratio and should be looked at as a trend analysis. The medical loss ratio is also an important ratio and is similar to the gross margin, only in reverse (lower ratios are better). In addition, you want to invest in a company that has a conservative, trustworthy management because there are often timing mismatches between when medical services are consumed and when the bills are paid.

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Investments with economic approach

Index fund offers a low-cost, diversified approach to bond investing, providing broad exposure to U.S. investment-grade bonds with maturities from one to five years. Reflecting this goal, the fund invests about 30% of assets in corporate bonds and 70% in U.S. government bonds within that maturity range. A key risk of the fund is the fact that changes in interest rates can eventually lead to a decrease in income for the fund. Investors with a short-term savings goal who are willing to accept some price movement may wish to consider this fund.

US short maturity bonds

Information ratio (IR) measures the return of a portfolio adjusted for risk by dividing the portfolio’s excess return versus a benchmark by the tracking error. Information coefficient (IC) is the average correlation between forecasts and outcomes. And breadth (BR) is the number of independent opportunities for investments that offer excess returns over a period. Breadth tends to be related to the dispersion of asset returns.

Two essential themes for investors come out of a discussion of skill and opportunity sets. First, it is crucial to think about your source of edge and to align your organization’s process to serve that end. Second, a big part of winning is finding a game that allows you to show your skill.

Investors can express skill in three ways: market timing, security selection and position sizing. It’s not how often you are right that matters; it’s how much money you make when you’re right versus how much money you lose when you’re wrong.

But all the skill in the world is useless if there is no opportunity. There are a few ways this can happen. First, a skillful participant does not get to play the game, a result of capital or other constraints. Second, the cost to play may be too high due to arbitrage costs. Finally, skill is obscured if the opportunity does not offer differentiated payoffs.

To quantify opportunity, we look at dispersion. Dispersion measures the range of returns for a group of stocks. Generating a return in excess of the benchmark is really hard if the gains or losses in the underlying stocks are all very similar to those of the benchmark. On the other hand, there is a bountiful opportunity to pick the winners, avoid the losers and create a portfolio that meaningfully beats the benchmark if the dispersion of the constituent stocks is high. Research shows that dispersion is a reasonable proxy for breadth and that the results for skillful mutual fund managers are better when dispersion is high.

Tactical positining

These dynamics feed into our near-term outlook for inflation. We expect a modest acceleration in U.S. core CPI to about 2.5% over the next several months as companies increasingly pass on the costs of tariffs to consumers, before tailing off toward 2.2% at the end of 2020. Monetary policy and potential fiscal policy should also bolster inflation expectations. The Fed is still more worried about slowing economic growth than overheating. We think the Fed is unlikely to shift toward another tightening cycle anytime soon, even if the economic data and inflation surprise to the upside.


We expect the U.S. economy to experience a sharp recession in the first half of 2020 as widespread nonessential business closures necessary to slow the spread of COVID-19 curtail U.S. activity with unprecedented speed and severity. Our expectation for a peak-to-trough contraction of around 10% in quarterly GDP (not annualized) is significantly larger than the roughly 4% peak-to-trough decline during the global financial crisis in 2008. However, we also expect the contraction to be shorter, as quarantines are eventually relaxed and monetary and fiscal policy stimulus supports the economy – with a lag. Alongside this sharp contraction, we look for the U.S. unemployment rate to almost reach 20% before moderating back to between 6%–7% by year-end

Forecast for a rebound in the second half of 2020 is based in part on the expected gradual easing of the pandemic and reopening of the economy, but perhaps more importantly on the unprecedented speed and size of U.S. policymakers’ economic response. In addition to cutting the policy rate to zero and restarting large-scale purchases of U.S. Treasuries and mortgage-backed securities (MBS), the Federal Reserve has steadily rolled out programs aimed at reducing financial market stress and maintaining the flow of credit to households and businesses. Congress also worked quickly to pass a record $2.2 trillion dollar stimulus package, which includes 6% of GDP in spending to directly support individuals and businesses. Further fiscal stimulus is likely to be passed in the next few months.

Despite unprecedented efforts by policymakers, we still see clear downside risks to the forecasts. First, uncertainty about the spread of the coronavirus remains high. A second wave of cases or a slower path to reopening the economy would prolong the economic pain. Second, while policymakers have been quick to react to worsening economic conditions, any delays in dispersing funds throughout the economy raise the risk that bankruptcies lead to longer-term economic damage.


What is intriguing, however, is that the correlation between equities and bonds was positive, at 0.4, measured over the same period as the recession, using daily data. How is this possible? Simply put, bonds tended to be above their (positive) trend at the same time equities were above their (negative) trend, and vice versa. If investors had relied only on the correlation measure, they may have erroneously inferred that bonds and equities both performed poorly during the 1970 recession.

nvestors should care less about how the returns of assets deviate from their trends and more about the trends themselves – particularly when we are considering how bonds will perform in an equity market drawdown or in recessionary periods.

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With roughly six months to go until the US expansion becomes the longest on record, there has been growing concern that the global economy more broadly is running on late-cycle fumes.Lofty valuations, soaring profit margins, a flattening yield curve and a Federal Reserve tightening in the face of inflationary pressures — especially as the sugar high of fiscal stimulus appears to be wearing off — make an easy narrative. So much so that most analysts are already baking in the next recession.

Global cycles

European real estate market

Diversification is a key part of investing as it reduces the volatility and risk of loss in an investment portfolio over the long run. Having a diversified investment portfolio generally yields higher risk-adjusted returns in the long run compared to a non-diversified portfolio, and is perhaps the most important component of reaching long-range financial goals whilst minimising risk.
Real Estate provides investors with the ideal opportunity to diversify their assets, due to the asset class’s low correlation with conventional equity investments. Furthermore, there are a myriad number of ways in which assets can be diversified within real estate itself, such as by sector, geography, or strategy.
Diversification through real estate can reduce risk by 60% - 94% across the United States and European markets. 


One of the most widely used and recognised indices of listed real estate is the FTSE EPRA Nareit Global Real Estate Index which constitutes almost 500 real estate companies and with a combined free float value of over EUR 1.4 trillion. The FTSE EPRA Nareit Developed Europe Index covers 107 companies with a combined value of over EUR 200 billion.
The total value of listed real estate in across the global markets, covered by FTSE, EPRA, and Nareit is estimated to have a total value of close to EUR 3 trillion.

Listed Real Estate in Europe

Pension fund real estate investments are typically passive investments made through real estate investment trusts (REITs) or private equity pools. Some pension funds run real estate development departments to participate directly in the acquisition, development, or management of properties.
Long-term investments are in commercial real estate, such as office buildings, industrial parks, apartments, or retail complexes. The goal is to create a portfolio of properties that combine equity appreciation with a rising stream of inflation-adjusted income to balance the ups and downs of the markets. 

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Real estate investing can be a very challenging experience but it can also be very rewarding. It takes some experience, not to mention a lot of patience, time, and money. After all, you can't just invest your money and expect to start profiting immediately.
The average annual returns in long-term real estate investing vary based on a number of factors—by the area of concentration in the sector.

Returns European funds

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According to the National Council of Real Estate Investment Fiduciaries (NCREIF), as of Q1 2021 the average 25-year return for private commercial real estate properties held for investment purposes slightly outperformed the S&P 500 Index, with average annualized returns of 10.3% and 9.6%, respectively. Residential and diversified real estate investments also averaged returns of 10.3%.

Returns comparison

The real estate sector is divided into two main categories—residential and commercial real estate. Within either category, there are vast and varied opportunities for investors, such as raw land, individual homes, apartment buildings, and large commercial office buildings or shopping complexes. Investors can choose to invest directly in residential or commercial real estate or invest in real estate company stocks or bonds.

Why is it better to invest in Asia’s small companies?

With a backdrop of volatility and uncertainty, Asia continues to be one of the few reliable sources of growth today. Investors can capture good profits by investing in Asia’s smaller companies. However, focusing on company growth is not enough for equity investors in this space to make the best returns.

There is a huge number of opportunities for companies to take advantage of Asia’s structural economic growth story, and many investors may capture this exciting return opportunity by investing in Asia’s smaller companies. However, simply focusing on company growth is not enough for equity investors in this space to make the best returns.

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Asian smaller companies’ shares have historically delivered great returns over time. They have outperformed their larger siblings, and have done this with similar overall volatility or risk. The misconception that small equals risk can be suppressed when we compare the volatility of the respective MSCI benchmarks, which track very closely.
The diverse market means there are as many risks as there are opportunities. A research-intensive approach is essential to ensure that bad apples are avoided. The best apples are picked. There is no easy way to approach this puzzle. It does entail a large dose of sweat and tears.
Despite many intuitively believing a focus on growth is the best approach to investing in Asian smaller companies, history indicates that taking a Value approach to investing in this market significantly outperforms over time. Investors who are focused on quality and growth end to over-pay for these stocks and give up future equity returns. The most important driver of equity returns over time is the price you pay and to avoid overpaying.

A true Value approach can take you away from popular household names and towards those stocks that are ignored and under-appreciated by the market. This is vital to take advantage of mispricing, as we want to exploit behavioral biases of other investors who tend to overpay for growth and underappreciate Value stocks.
To follow this approach requires discipline. It’s better to spend a huge amount of time understanding the companies, the drivers of their earnings, the risks and the rewards and look for a large margin of safety before looking to invest. It’s important to focus on companies that have moats and franchise values that are under-appreciated or those with differentiated propositions of a next-generation business

Screenshot 2It’s better to have a well-diversified portfolio. Portfolio construction is a distinct activity that is built around capturing the best ideas while also looking to diversify risk. As an investor, it’s essential to build a high conviction portfolio of best approaches – benefitting from natural diversification of the portfolio due to high idiosyncratic risk while look for maximum upside potential. Most of the investment opportunities find across Asia currently lies in countries such as China, Hong Kong, Korea, India, and Taiwan.

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China Macro Outlook

China’s National Bureau of Statistics (NBS) was created to track agriculture and production in the state-owned enterprises. In a command economy, the statistics bureau’s primary purpose is tracking physical output to ensure that economic activity meets preset production goals; this allows the state to allocate raw materials. Consequently, rather than tracking the output contribution of each sector, the NBS focused more narrowly on final physical production.2 Because the means of production are owned and operated by the state, tracking exact economic activity—such as physical inputs, outputs and technology levels—is more straightforward in a command economy. In a market economy, the statistics bureau tracks economic activity more broadly—focusing on the concept of variables like GDP, employment and unemployment—to obtain an economy-wide measure of macro growth.

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China's property boom is back with a vengeance! After many government measures to support the housing market, there has been a dramatic rise in transactions and prices. High-profile cities like Shenzhen, Guangzhou and Shanghai have led with significant price-rises

Given China’s demonstrated ability to conquer one export market after another, an important question for both would-be competitors and world policy-makers weighing up various protectionist measures is this: How has China been able to emerge as the world’s “factory floor”? The answer lies in the eight major “economic drivers” of the China price: low wages, counterfeiting and piracy, minimal worker health and safety regulations, lax environmental regulations and enforcement, export industry subsidies, a highly efficient “industrial network clustering”, the catalytic role of foreign direct investment (FDI), An undervalued currency. These drivers have been identified from research conducted as part of the “China price Project” at the Merage School of Business. The analysis yields several important insights for both policy-makers and management strategists.

Determination of the China price extends well beyond issues of cheap labour, currency misalignments, and a lax environmental regime―the “usual suspects” in many trade debates. Second, there are important synergies between many of the China price drivers. For example, both an undervalued currency and export industry subsidies help attract additional FDI, which in turn, facilitates industrial network clustering. Finally, aspects of many of the China price drivers appear to fall outside the norms of international trade agreements (e.g. the World Trade Organisation (WTO)) and/or international standards for environmental protection and worker health and safety.

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In 2019 China was the number 2 economy in the world in terms of GDP (current US$), the number 1 in total exports, the number 2 in total imports, the number 71 economy in terms of GDP per capita (current US$) and the number 29 most complex economy according to the Economic Complexity Index (ECI). The top exports of China are Broadcasting Equipment ($208B), Computers ($141B), Integrated Circuits ($108B), Office Machine Parts ($82.7B), and Telephones ($54.8B), exporting mostly to United States ($429B), Hong Kong ($268B), Japan ($152B), South Korea ($108B), and Germany ($96.9B). In 2019, China was the world's biggest exporter of Broadcasting Equipment ($208B), Computers ($141B), Office Machine Parts ($82.7B), Telephones ($54.8B), and Semiconductor Devices ($34.8B) 

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The Chinese economy has restructured steadily since the Global Financial Crisis (GFC) of 2008, with the growth driver shifting from exports to domestic demand. The service sector’s share of GDP has also risen persistently compared to that of manufacturing. Indeed, consumption has been the most important driver of growth in eight of the past nine years.

Upon successful control of the epidemic and counter-cyclical policy stimulus, the economy has recovered swiftly from 2Q2020 onwards, returning to the pre-pandemic growth path by the year’s end. Notably, the recovery has featured a unique “two-speed” recovery pattern. In particular, industrial production has recovered earlier and more powerfully, driven by policy-supported public sector investment, housing and auto demand, as well as surprising strength in exports. Consumer spending and the service-sector recovery lagged for most of the year.

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“Producer price inflation is probably close to a peak. Base effects will turn less favourable from this month onwards. And we think that coal and metal prices will drop back before long as the recent slowdown in credit growth starts to weigh more heavily on construction activity,” added Evans-Pritchard

“Consumer price inflation is likely to rise a bit further as a tighter labour market and easing virus disruptions lifts services inflation. But we don’t expect it to rise much above 2 per cent in the coming quarters. As such, it is unlikely to trigger any shift in monetary policy.” China’s top economic planning agency, urged all provincial-level authorities to regulate the commodity market, strengthen supervision and make every effort to ensure adequate supply and stable prices of important products. 

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China cash rate (Policy Rate: Month End: China: Rediscount Rate) was set at 2.00 % pa in Jul 2021, compared with 2.00 % pa in the previous Jun 2021. China Policy Rate averaged 2.25 % pa and is updated monthly, available from Jan 1998 to Jul 2021. The data reached an all-time high of 6.03 % pa in Jun 1998 and a record low of 1.80 % in Nov 2010. Other key monetary policy rates of The People's Bank of China are also 1-Year Nominal Lending Rate and 7-Day Reverse Repurchase Rate. In the latest reports, China Short Term Interest Rate: Month End: SHIBOR: 3 Months was reported at 2.46 % pa in Jun 2021. Its Long Term Interest Rate (Treasury Bond Yield: Interbank: Spot Yield: 10 year) was reported at 3.10 % pa in Jun 2021. China Exchange Rate against USD averaged 6.42 (RMB/USD) in Jun 2021. Its Real Effective Exchange Rate was 150.27 in Jun 2021. 

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Chinese stocks are now trading at modest valuations—with a lot of bad news already priced in and economic growth likely to remain robust—investors say the second half of 2021 will likely improve. Still, the outlook for tech giants that dominate international China stock indexes remains murky—and the companies continue to struggle—so it will be hard for the broader market to make much of an advance. Shares from China are likely to give back about 8% on a total return basis, a measure that includes reinvested dividends, over the next 12 months, said Jack Siu, Credit Suisse’s chief investment officer for Greater China. That is roughly in line with his expectations for the global market. Chinese stocks have more attractive valuations than their American peers and offer the best medium-term growth potential outside the U.S., said Yichan Shu, Asia-Pacific senior investment strategist at State Street Global Advisors, something she said should support the market. The MSCI China traded at 15.5 times forecast earnings, according to estimates compiled by Refinitiv. That is a roughly 17% discount to the equivalent global index, which is heavily weighted toward U.S. stocks.

While expansion in China’s gross domestic product has slowed in recent years, it is still one of the world’s fastest-growing major economies. Its GDP rose 6% in 2019 and 2.3% last year despite the pandemic.

For international investors, one of the most important questions is how long China’s technology giants will continue to suffer under a regulatory clampdown. It has focused on monopolistic behavior, data privacy, financial stability and employee welfare—and has already helped wipe out hundreds of billions of dollars in market value. 

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Chinese stock market has never been suitable for the faint-hearted. Shares have been traded in Shanghai only for three decades but during that time the market has been experiencing some of the worst bubbles the world has ever seen. Between January 2006 and October 2007, the average price-earnings ratio of Shanghai stock exchanges increased from 17 to 70. It only took nine month for the P/E ratio to drop below 20 again. Compared to the previous bubbles, the valuations at the end of 2015 were quite modest. P/E ratio only doubled between 2014 and 2015 which barely even count as a bubble when previous price increased are taken account.

One reason for the chaos in the Chinese stock market is the lack of institutional investors. Chinese government is restricting international investors from directly owning mainland listed shares. A large portion of the shares are held by individuals with little experience in investing who have been buying stocks with borrowed money and high expectations. This has been creating price bubbles that the government has not been able to control. The price control mechanisms that the authorities have been implementing in order to stabilize share prices are only making the situation worse. Only true solution is modernizing the whole Chinese stock market and opening mainland exchanges fully to foreign investors.

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Is Japan a long-term opportunity?

Japan is leading the international markets in terms of underlying dividend growth. Companies in the land of the rising sun have been steadily increasing their dividend payouts, helped by their stable profit margins and cash hoards. The estimated dividend yield on the Topix 500 index, which tracks large Japanese companies, is about 2.5%, according to a recent note by Société Générale Cross Asset Research.Screenshot 5

The dividend yield, which had mostly remained steady since 2013, has been moving up recently, “indicating that Japan Inc. is getting more used to the idea of paying out cash as dividends,” according to Société Générale Cross Asset Research.

Looking across regional indexes, whether looking at the trailing three-year or trailing five-year changes in dividends, Japan1 stands out from broad international indexes like MSCI EAFE or MSCI Europe. The five-year numbers come in at almost double digits - very close to the U.S. markets. For the latest three years, Japan came out with a dividend growth figure higher than the U.S. Over the last ten years - a period that includes the financial crisis - eurozone regional indexes still show lower overall dividends in 2017 than they did in 2007. Again, the three-year dividend growth shows a meaningful pickup recently.

Domestic Growth Driver

The economy grew at a slower pace than initially estimated in the second quarter as the United States-China trade war prompted a downward revision of business spending, intensifying calls for the central bank to deepen stimulus this month. Weakness in the global economy and trade protectionism has emerged as risks to growth and added some pressure for the Bank of Japan (BOJ) to expand stimulus when it meets next week. The economy grew an annualized 1.3 percent in April-June, weaker than the preliminary reading for 1.8 percent annualized growth, revised Cabinet Office data. The annualized growth rate translates into a quarter-on-quarter expansion of 0.3 percent from January-March, compared with a preliminary reading for a 0.4 percent gain. The outlook for the world’s third-largest economy remains clouded as risks from declining manufacturing overseas and at home hit exports. Analysts have also warned of a possible drop in domestic consumption after Japan raises its sales tax to 10 percent next month, which could run one of the economy’s few growth drivers. Amid the risks to growth, BOJ Governor Haruhiko Kuroda has kept the door ajar for cutting interest rates further into negative territory, saying last week such a move is among the bank’s policy options. Speculation is growing that the BOJ could ease policy as early as this month to prevent the yen from spiking, an increasingly likely prospect if the U.S. Federal Reserve and the European Central Bank unveil new easing measures.Domestic growthScreenshot 1Screenshot 2

Investment Focus

In 2013, the ratio of Japan’s inward FDI stock to its GDP was 3.5 percent, the lowest among developed countries, and far below the global average of 34.1 percent. The U.S. and Germany, for instance, have ratios seven to eight times higher than Japan, while China and South Korea have ratios three to four times that of Japan’s. Inward FDI in developed countries is characterized more by mergers and acquisitions (M&A) - involving buyouts of existing companies - than by greenfield investments entailing the establishment of new companies. In this context, M&A by foreign companies in Japan is sluggish. Receiving direct investment from international companies promotes economic growth by increasing venture, production, and employment. But the benefits of receiving direct investment are not limited to these quantitative expansions. They also include qualitative improvements through transfers of advanced technology and management know-how to Japanese companies. Higher productivity also stems from intensified competitive pressure on Japanese companies.
Similarly, consumers benefit from the availability of new products and services. Aware of the contributions inward FDI could make to Japan’s economic recovery and medium- to long-term growth, the Abe administration - in a revised version of its Japan Revitalization Strategy released in June 2014 - advocated expanding inward FDI. The strategy aims to double the 2012 year-end inward FDI stock by 2020. This expansion is a crucial part of the third arrow of Abenomics’ approach to growth. What factors hinder inward direct investment in Japan? In opinion surveys of foreign companies conducted by the Japan External Trade Organization (JETRO), the Ministry of Economy, Trade, and Industry and others, the problem most commonly cited by foreign companies seeking to operate in Japan is the high cost of doing business. Specifically, the high corporate and other tax rates applicable to companies and high office rents. Among the other obstacles noted were: the closed and peculiar nature of the market and administrative procedures, the complexity of approval and licensing systems, the difficulty of securing needed personnel, and, in particular, the scarcity of staff capable of communicating in English.Screenshot 6

Surveyed companies pointed out that M&A in Japan is sluggish. They said that this is due in part to tax regimes and procedures that make it harder to pursue M&A than in other developed countries and in part, to the significant barrier of closed corporate governance in Japanese companies that inhibits M&A. Recognizing the need to expand inward FDI, since the 1980s, the Japanese government has been pursuing a variety of policies to encourage such investment - offering foreign companies low-interest loans, tax breaks, debt guarantees, and useful information. The second Abe administration, inaugurated in 2012, sought to reduce or eliminate factors inhibiting investment in Japan by setting targets to double inward investment, creating a council for foreign direct investment promotion to help achieve these targets, and implementing regulatory reforms. Japan is still leading the Southeast Asia infrastructure race against China, with pending projects worth almost one-and-a-half times its rival, according to the latest data from Fitch Solutions. Japanese-backed projects in the region’s six largest economies – Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam – are valued at US$367 billion, the figures show. China’s tally is US$255 billion. The figures underline both the rampant need for infrastructure development in Southeast Asia, as well as Japan’s dominance over China, despite President Xi Jinping’s push to spend on railways and ports via his signature Belt and Road Initiative. The Asian Development Bank (ADB) has estimated that Southeast Asia’s economies will need US$210 billion a year in infrastructure investment from 2016 to 2030, to keep up the momentum in economic growth. The latest Fitch figures count only pending projects – those at the stages of planning, feasibility study, tender, and currently under construction. Fitch data in February last year put Japan’s investment at US$230 billion and China’s at US$155 billion.

Topix earnings

Portfolio Rebalancing Global Investors
The portfolio rebalancing channel – achieved through large-scale purchases of assets – is one of the major transmission channels envisaged by a central bank under the zero or effective lower bound (Joyce et al. 2012). To realize this channel, the Bank of Japan (BOJ) launched quantitative, qualitative monetary easing (QQE) in April 2013 by the large-scale purchase of Japanese Government Bonds (JGBs) with the maturity extended to the maximum 40 years. In September 2016, the BOJ shifted the official guideline for market operations from the monetary base (hence the amount of JGB purchases) to the 10-year yield (with a negative interest rate of -0.1%). At the same time, the BOJ emphasized a continuation of an annual pace of JGB purchases of about ¥80 trillion – suggesting its high evaluation of this channel. This column will assess whether the portfolio rebalancing channel has been active in Japan by focusing on the three entities – financial institutions, firms, and households, separately.

The portfolio rebalancing channel raises aggregate demand, and hence inflation, by encouraging investors to change the composition of their portfolios, thereby lowering funding costs and raising various asset prices directly. The BOJ expanded its degree of monetary accommodation substantially (as evidenced by the ratio of the BOJ’s assets to GDP has exceeded 90%), and has also purchased risk assets directly, such as exchange-traded funds and real estate investment trusts. Therefore, the BOJ has envisaged that portfolio rebalancing of financial institutions would take place forcefully, from safe assets (i.e., JGBs) to risk assets (such as bank loans, M&A, outbound foreign direct investment, and other domestic and international securities investment). Together with the banking sector’s provision of innovative financial services, households’ portfolios would be rebalanced from safe assets (such as bank deposits and cash) to risk assets (such as residential investment, investment in equity investments, and investment trusts, etc.). Firms would be encouraged to shift from holding bank deposits and cash to expanding business fixed investment, M&A domestically and overseas, R&D, outbound foreign direct investment (FDI), and so on. In other words, the unprecedented massive monetary easing is aimed at energizing Japan’s economy by promoting ‘healthy’ risk-taking behavior among financial institutions, households, and firms, which has been lacking since the collapse of the equity and real estate bubbles in the early 1990s.

The bank loans to deposit ratio declined rather than increased is unique among advanced economies in terms of the abundance of deposits relative to the size of the financial industry. For example, deposits and currency held by Japanese banks accounted for 45% of the total liabilities of all financial intermediaries (covering depository corporations, pension funds and insurance firms, and other financial institutions) in June 2016. The ratio is higher than that of the Eurozone (34%) and the U.S. (16%), according to the BOJ estimate using the flow of funds data (BOJ 2016). Focusing on depository corporations in Japan, bank deposits have substantially exceeded bank loans. The limited demand for credit relative to abundant bank deposits is a structural phenomenon, as evidenced by the persistently low bank loans to deposit ratios. The ratio dropped from 66% in 2000 to 53% in 2016 (Figure 1). This reflects that the pace of an increase in bank deposits has been faster than the speed of growth in bank loans.

dividendsshare buyback

The Outlook For The Shrinking Markets Of Goods And Services

JGB holdings mainly fill the gap between loans and deposits. This suggests that abundant capital has not been utilized efficiently for productive purposes in the private sector. Long-standing limited demand for credit reflects not only the actual rapid pace of aging and its declining population but also the outlook for the shrinking markets of goods and services.
Since 2013, Abenomics and QQE have enabled stagnant loan growth to turn positive, and the year-on-year loan growth has since remained at around 2%–3%. As for corporate loan growth, more than 50% of the growth has been allocated to the real estate sector. Growth of households’ mortgage loans showed a moderate pick up. Growing bank lending to the real estate sector has been related to loans to real estate investment trusts, construction activities (partly related to the 2020 Tokyo Olympic Games), as well as loans to housing for rent (mainly driven by tax-saving purposes as a result of the tighter inheritance taxation). Nevertheless, loan growth remains too moderate to offset a decline in the interest rate margins. Deposit growth, rather than slowing, grew even faster than bank loans as explained below; thus, the already low loan-deposit ratio dropped even further – contrary to the phenomenon expected under the portfolio rebalancing channel.

Figure 2 indicates that the ratio of loans to total financial assets has declined over the past four years. The decline in the ratio of debt securities’ holdings (comprised mainly of the JGBs) – mostly as a result of selling the JGBs to the BOJ – was replaced by an increase in deposits (primarily comprised of the current account balances at the BOJ). The ratio of foreign investment did not show a rising trend over the same period. This reveals that the portfolio rebalancing channel has not been reliable to the extent expected by the BOJ, although it has been successful in lowering lending rates. Households traditionally prefer bank deposits. Deposits and currency accounted for around 50% of households’ total financial assets from 2000 to 2016 (Figure 3). Such large-scale holdings of deposits are quite remarkable, given that the deposit interest rate is about 0%. The household sector has remained a substantial net creditor as households’ deposits (about ¥940 trillion currently) have significantly exceeded their loans (about ¥310 trillion) for a long time. Since their deposits grew faster than their loans, the deposits to loan ratio rose moderately over the period since the adoption of the QQE – contrary to the phenomenon expected under the portfolio rebalancing channel.

QQE contributed to raising households’ equity and investment fund shareholdings as a share of total financial assets moderately from around 12% in 2013 to 13%–14% in 2016. However, the ratio did not exceed the maximum (17%) reached in 2007 before the Global Crisis. The household sector remained a net seller of stocks most of the time over the past four years – partly because stock prices rose but achieved only about a half of the historically highest level achieved in the past, and partly because of large fluctuations of the stock prices. Households’ holdings of debt securities accounted for only 1%–2% of total financial assets over the same period partly because a wide range of JGBs and other corporate bonds are available to professional investors as compared with households. Also, the corporate bond market is too small.

Japanese Firms, Highly Risk-Averse

The risk-averse behavior of Japan’s households is in contrast with that of households in the U.S. and the Eurozone. According to the BOJ’s estimates, deposits and currency accounted for 52% of households’ total financial assets in Japan in September 2016 while they accounted for only 14% in the U.S. in September 2016 and 35% in the Eurozone in June 2016. Equity holdings and investment trusts accounted for 46% in the U.S. and 25% in the Eurozone, while only accounting for 13% in Japan.

Japanese firms are known to be highly risk-averse, as demonstrated by their vast holdings of deposits and currency. The amount of deposits and currency held rose at an accelerated pace from 2013, owing to an increase in corporate profits. In 2016, the number of deposits and currency exceeded ¥240 trillion – about one-fourth of the firms’ total financial assets and about 45% of GDP. The high profitability was attributable to various favorable factors: the yen’s substantial depreciation, low lending rates, a series of corporate tax cuts, a sharp decline in commodity prices and imported materials in 2014–2016, and an increase in foreign demand since 2015.
This reflects firms’ choice to accumulate profits in the form of retained earnings rather than allocating them more intensively to expanding business fixed investment, M&A, R&D, foreign portfolio investment, and outbound FDI. While firms increased their non-residential fixed investment over the past four years, the amount of increase was moderate and remained well below cash flows or change in deposits and currency. Since 2013, firms have expanded outbound FDI, but the growth was average, and foreign assets related to FDI accounted for only half of deposits and currency in 2016. In the U.S., meanwhile, firms also increased their holdings of deposits due to an increase in profits over time and achieved about US$1 trillion in December 2016. However, the outstanding amount of deposits is relatively small compared with Japan, accounting for only 5% of firms’ total financial assets and 5% of US GDP. Besides, U.S. firms actively engaged in outbound FDI so that the number of foreign assets related to FDI recorded US$5 trillion, which is about five times as large as deposits. Firms’ non-residential fixed investment exceeded cash flows or change in deposits.

Equity Market: Profits Are Up, Deflation Is Over

Yet Japan’s stock market is widely reviled, valued even more cheaply than the struggling Eurozone.
Investors think Prime Minister Shinzo Abe’s “three arrows” of loose monetary policy, fiscal stimulus and reform of capital and jobs markets have misfired since he started Abenomics in 2012, and that they won’t reach their mark any time soon. Japan’s stock market is dominated by economically, and currency-sensitive cyclical stocks whose profits have soared but could crash back to the ground if the global slowdown worsens. Investors don’t value such cyclical benefits very highly anywhere, and they value Japan’s cyclical profits even less. Yet Abenomics isn’t such a dud as many investors seem to think it scored some hits—and Japan’s stocks merit watching if the global economy turns up.
It is both evident that Abenomics hasn’t hit its target, and at the same time, overly harsh to deem the prime minister’s efforts a complete failure. Inflation remains well below the 2% goal set shortly after his election, despite some of the loosest monetary policy ever seen outside Zimbabwe. But after almost two decades of deflation, the fact that there’s any inflation at all is a triumph.
Government spending didn’t offer much of a boost, and Mr. Abe shot the fiscal arrow into his foot in 2014 when his sales-tax rise caused a recession. The overall government budget is on track for the smallest deficit next year since the post-bubble recession of 1993, according to estimates by the International Monetary Fund, something which can’t help inflation. The reform program has helped encourage better allocation of capital by companies and supporting the existing trend of more women joining the workforce.
Earnings per share have risen faster even than in the U.S. recently, according to MSCI data. And figures collected by the Ministry of Finance show operating profit margins for big nonfinancial companies not far from the peak of 8.6% reached in the second quarter of last year, far above the 2007 high of 5.7%.
Historically, shareholders wouldn’t give companies credit for high profits because they could never get their hands on the money. Better corporate governance gives hope that less of it will be frittered away, and should support valuations. At the same time, Japanese manufacturers have improved their productivity since Abenomics began, at a time when most of the developed world has seen productivity growth slow, according to Conference Board data. (The Bank of Japan puts part of the blame for too-low inflation on productivity growth.)But there’s still a problem: Japan’s huge manufacturers are heavily exposed to global trade troubles and the value of the yen, and profit margins have been falling fast as both moves against them.


Japan’s Manufacturing Productivity

Real value added per hour worked in manufacturing, annual change
The nonmanufacturing sector hasn’t been hit the same way, but its operating profit margin of 5.4% has been flat since 2016. That doesn’t support a story of continuous improvement, even if it is far above the pre-Abe norm.
Shigeto Nagai, a former BoJ official now at Oxford Economics, argues that the single most significant change produced by Abenomics was to correct the overvaluation of the yen, which helped exporters most. The relatively muted gains of the yen in the race to safety this summer supports the idea that there’s less danger to Japanese stocks from a stable currency, but it’s too early to be sure.
The overall valuation of the market shouldn’t mislead investors looking for cheap stocks. MSCI Japan trades at 13.3 times estimated 12-month-forward earnings, precisely in line with the world excluding the U.S., and far behind the U.S.’s 17.4 times.
The country has the cheapest financials, the cheapest industrials, and the most affordable consumer discretionary companies, a sector that includes upmarket retailers and carmakers. Those three sectors account for half the market, more than the U.S., U.K., Eurozone, or emerging markets. If the world economy picks up, these stocks should do well, but few want to make that bet at the moment.
Look at the more defensive sectors, and the bargains are hard to see. Makers and sellers of consumer staples (such as toothpaste, alcohol, and tobacco) are more expensive than in other developed markets, as are health-care stocks. Japan’s energy and utility sectors are cheap. Still, the fourth-biggest utility by market value is Tokyo Electric Power Co., of Fukushima meltdown infamy, which trades at just 3.7 times forecast earnings. The energy sector is tiny, and its most significant stock barely profitable.
Investors who think the world economy can escape the doldrums and trade wars be resolved should consider Japanese stocks. Others should take heart from improving productivity and corporate governance and the possibility that the yen is losing some of its haven statuses, but shouldn’t get too excited by the cheapness.




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