Growing headwinds for Asian equities; But we see grounds for longer-term optimism

Lee Kuan Yew, although somewhat a polarising figure, perhaps understood state power and the human condition better than anybody. Consequently, Singapore has often been criticised as much as it has been greatly admired.

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Given inflation levels are picking up around the world, why is this not a problem in Japan? There are fundamental differences in Japan’s economy to explain this. First, underlying consumption has stood still in the past decade or so.
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The FSSA Japan Equity strategy declined by 3.0% in December and 18.8% over the month of January, driven first by a sharp “growth to value” rotation and then a sell-off by foreign investors from mid-January onwards. This has been a global phenomenon, with high-valuation growth stocks in most developed markets facing similar sell-offs on concerns about inflation and interest rate hikes.
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In our last client update in February 2021, we discussed the reasons we resisted the temptation to switch into pure cyclicals and so-called “value” stocks — even though we had anticipated a sector rotation in the market (the TOPIX subsequently peaked in March 2021).
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Strategists often argue that Japan is perhaps the most cyclical market amongst the major global economies, with profits highly correlated to global trade. We disagree.
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Looking back over 2020, a challenging year for many reasons, there were two key investment decisions that helped the performance of the FSSA Japan Equity strategy.
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The performance of the FSSA Japan Equity strategy has been under pressure year-to-date, driven by a violent style and sector rotation from quality growth to financials and cyclical companies.
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