Quilter Cheviot|Weekly Comment

Japan leads on rising optimism

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Investor optimism grew last week as global stock markets moved higher, with the MSCI All Country World Index gaining 1.2%. Japanese equities jumped almost 5% to chalk up a sixth consecutive weekly gain, taking year-to-date returns to just shy of 20% and sending benchmarks up to 33-year highs. Elsewhere, German stocks also posted new all-time highs.

The strong performance of Japanese stocks has been underpinned by three key factors; a shift in corporate attitudes, the return of inflation and investors becoming more concerned with Chinese holdings. Japanese firms are starting to place a greater emphasis on satisfying shareholders, with increased pressure coming from authorities and activist investors, to focus on boosting market returns. Share buybacks are one of the clearest reflections of this, rising to their highest level in over 15 years in 2022 and on pace to top that this year.  

Secondly, while the impact of inflation has caused sharply higher interest rates in much of the western world, the Bank of Japan has become something of an outlier, steadfastly maintaining its benchmark rate close to zero. After a several decades-long battle with deflationary forces, Japan is in the almost unique position of being more focused on the positives that have come about due to rising price pressures. This dynamic has caused the Yen to depreciate significantly over the last 18 months, adding to the attraction of Japanese equities for foreign investors.

The third pillar is that recent developments in China have caused a relative increase in the attraction of Japan as a market offering exposure to the Far East. The Chinese re-opening has been widely touted as one of the key macro themes this year, but while economic activity has picked up, stock market performance has been fairly muted so far this year. Heightened geopolitical tensions between China and the West, along with a sense that the politburo may interfere with the free functioning of capital markets, has caused some foreign investors to pullback, with Japan finding itself as an appealing alternative.

UK jobs market remains tight

The latest UK employment figures showed continued strength, even though the unemployment rate ticked higher to 3.9% in the three months through March. Wage growth showed no signs of easing, as average weekly pay excluding bonuses increased to 6.7%, in annual terms, up from 6.6% previously.

Andrew Bailey repeated calls for further monetary policy tightening in a speech, as the Bank of England governor stated that higher interest rates would be needed if there is more evidence of persistent inflationary pressures. That said, base level effects are expected to provide good news on the inflationary front in the coming months, as large increases from 12 months ago begin to roll out of the annual calculations.

The hawkish rhetoric from Bailey was supported by several central bankers across the Atlantic – even though Federal Reserve chair Jay Powell was more neutral in his remarks – and contributed to rising bond yields. The 10-year gilt yield rose 21 basis points last week to 3.99%, while the US 10-year Treasury yield rose by the same amount to end last week at 3.68%. 

UK shares underperformed last week, rising 0.2% to take 2023 gains to 5.9%. The pound softened against the dollar, dipping to 1.24. US markets fared better, rising 1.7% on the week to take year-to-date gains to just under 10%, both slightly above returns for global indices. However, Wall Street benchmarks remain over 10% from all-time highs, with investors buying more into the recovery in continental Europe and Japan.

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