Our Thoughts on the Global Selloff

The decision by the Bank of Japan (BOJ) to hike its interest rate last week coincided with the release of soft economic data in the U.S. and, together, gave investors concerns over the prospects for Japanese exporters and about a sharper economic slowdown in the U.S. The BOJ’s rate hike and messaging that it may raise rates further also drove a surge in the Japanese yen and triggered a huge unwinding of entrenched carry trades which also rocked currency markets.

Amid this heightened volatility, we believe Japanese equities’ fundamentals are still intact. Japan’s corporate earnings profile remains resilient coupled with the ability to increase dividends and buybacks with better capital allocation. With the anticipation of a decline in U.S. interest rates, we expect the transition from value towards growth in Japanese equities to continue and we plan to take advantage of the volatility by seeking more quality companies.

“The markets took on a risk-off mode. In such circumstances, the areas of the market where investors funds are most concentrated tend to get hit the hardest.”

Looking at equity markets more generally, we would say investors have become more attuned to the condition of the U.S. economy and whether the Federal Reserve could be behind the curve with its interest rate strategy. In recent days, the markets took on a risk-off mode as investors worry about growth and jobs. In such circumstances, the areas of the market where investors funds are most concentrated tend to get hit the hardest. Large U.S. technology firms were hurt over concerns about their high valuations, mixed earnings season and AI-related CapEx. This selloff in turn negatively impacted the chip-heavy hubs of South Korea and Taiwan, as well as companies in Japan. We believe the fundamentals of Asia technology firms are sound. And now valuations are more reasonable it could be a good buying opportunity for long-term investors. 

We think China will hold up relatively well as it is very under-owned globally. In addition, Chinese markets have not been exposed to the AI-related CapEx from the so-called ‘Magnificent Seven’ and other U.S. tech firms. Much of the AI supply chain beneficiaries are listed in Taiwan not China albeit a lot of the factories are in China. We believe China valuations are very attractive but the government has not moved aggressively to tackle problems in the property market so a near-term catalyst is hard to find. China wouldn’t escape a more pronounced selloff if the U.S. economy shows more signs of weakness but we think it will perform relatively well.

It's too early to gauge the trajectory of the U.S. economy and whether the concerns of the market are justified. The global demand environment outside of AI in our view is relatively weak and there is a risk of the world economy slowing down. But we believe that in the weeks to come there is a good prospect that we will see quality stocks at cheaper valuations which could position emerging markets well in a Fed-rate cutting cycle starting in the fall.