Investment Insights Podcast – Japan: Sunset on the Horizon?

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager & International Strategist

On this week’s podcast (recorded April 29, 2016), Stuart puts the focus on Japan and their struggling economy especially on the current political climate and its economic impact.

Why talk about Japan?

  • It’s the third largest economy in the world.
  • It’s one of the world’s leading lenders to the rest of the world, including the U.S.
  • Political fallout and economic downside loom if monetary easing policy is not accompanied with fiscal progress.

What’s the latest?

  • On April 27, the Bank of Japan decided not to add to currently high quantitative easing, greatly disappointing the markets.
  • The Japanese Yen appreciated over 2% (versus the U.S. dollar), that’s a negative given that two-thirds of the equity market is based towards overseas earnings.

How did Japan get here?

  • Back in 2013, Shinzo Abe inspired hope to reinvigorate the economy through the three arrows: monetary policy, fiscal stimulus, and structural reform.
  • The reality is there has been little-to-no follow through on fiscal policy or structural reform.
  • Bank of Japan has created a massive QE program, owning one out of every three long-duration government bonds.

Japan_Chart_1

So, did the quantitative easing measures work?

  • QE helped asset prices, but did not reset inflationary expectations nor economic growth (GDP around 1%).
  • Japanese corporations aren’t investing back into Japan, but rather overseas.
  • Negative interest rates have resulted in a deceleration in bank lending.

That’s not great, but what does that mean exactly?

  • Failure in Japan could also have implications for global markets.
  • Despite stagnant growth for parts of the last three decades, Japan remains the third largest economy and second largest equity market.
  • Japan is also one of the largest holders of U.S. Treasuries.

Shoot me straight here, has Japan entered into the “sunset” phase?

  • It appears likely that Japan still has liquidity to muddle through its problems for now, but one cannot rule out a more negative scenario with the latest inaction and failure to improve the economy.
  • Fiscal stimulus could come in light of the recent earthquake, but progress on tax code reform and increased spending would provide longer-lasting relief.
  • One potentially negative scenario could come in July if a larger-than-expected victory for the opposition happens–this could lead to general elections and the departure of Abe causing policy uncertainty and higher volatility.

Please click here to listen to the full recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.

It’s Official: China’s Currency Admitted to IMF Major Leagues

Stuart QuintStuart P. Quint, CFA, Senior Investment Manager & International Strategist

Here are the quick takes:

  • The IMF formally approved inclusion of the Chinese renminbi (RMB) into Special Drawing Rights (SDR)
  • Chinese RMB will not replace the U.S. dollar (USD) in the near term
  • Impact more symbolic near term, but progress will be measured over many years

The IMF formally indicated on November 30 it would include the Chinese RMB into its basket of approved reserve currencies. As stated in a previous blog, the inclusion of the RMB would appear to have limited near-term economic impact to the U.S. dollar.

Even with limited economic near-term impact, the inclusion of the RMB certainly has symbolic significance. Clearly, there is political benefit to the IMF’s recognition of the RMB in terms of enhancing China’s global prestige. The inclusion of the RMB might also serve as a carrot to deepen further structural reform as evidenced by China’s promise to have fully open capital accounts by 2020.[1]   Other countries hostile to the U.S., such as Russia and Iran, might view RMB investment as a way to hedge themselves against the risk of U.S.-led economic sanctions by conducting more trade away from the U.S. dollar.

However, the overall effects of the IMF SDR should not be overstated. The SDR is akin to a “recommended list” that cannot be enforced on central banks or markets. As an example, the weight of the USD was basically held flat at around 41%. (The new RMB weight was added at the expense mostly of the EUR). Furthermore, current holdings of central bank reserves deviate quite a bit from the SDR, with USD comprising 60% of total reserves (vs. 41% weight in the IMF SDR).[2] For comparison, central banks hold roughly 20% of reserves in EUR (vs. 31% weight in the IMF SDR). Some central banks hold currencies such as the Australian dollar (AUD) that are not in the IMF SDR.

Major potential shifts into the RMB will take place over a protracted period of years, but here are some milestones to watch:

  • Progress on further structural reform
  • Deeper liquidity in local Chinese bonds
  • Longer track record on responsible governance.

[1] http://www.bloomberg.com/news/articles/2015-10-22/china-said-to-weigh-pledge-for-opening-capital-account-by-2020-ig1sbvez .

[2] http://www.wsj.com/articles/proportion-of-euros-held-in-foreign-exchange-reserves-declines-1435686071

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast – Here Comes the Renminbi

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded November 20, 2015), we focus on the likelihood that the International Monetary Fund (IMF) will add the Renminbi (RMB) as an approved currency in its Special Drawing Rights (SDR) basket. Will this displace the U.S. dollar as the world’s reserve currency?

What we like: We don’t believe the RMB will supplant the dollar as the favored reserve currency, at least not anytime soon; law and precedent in our judicial system is more structured and supportive–not the case in China; debt markets aren’t well-developed in China; Chinese don’t necessarily want the RMB to be a much stronger currency relative to the U.S. dollar as it would impact their ability to export; approval would likely lead to more reform in China, which would add to global stability

What we don’t like: This won’t necessarily solve China’s current growth problems; would likely have some type of ripple effect (Australian dollar)

What we’re doing about it: Standing pat; announcement may come soon, but would not take shape for another year or so; no need to rush into portfolio changes; not a major concern to the U.S. dollar at this time

Click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.