Identifier: Global Equity

While the focus of inflation is typically centered on rising raw material costs and wage increases, we are seeing transportation costs become an additional and significant part of the inflation problem, and one that is not as easily passed on to consumers.

Transportation affects every aspect of a company’s supply chain and the rising costs are unavoidable. Further, it has been a recent topic of conversation for our own holdings, as well as some of the largest companies in the world. At a recent conference, Molson Coors, the fifth largest brewer in the world, said transportation costs are the main contributing factor to inflation, while Proctor and Gamble warned that an announced price increase will not be enough to offset higher commodity and transportation costs due to not only the size, but the speed of the increases. Multinational conglomerate 3M is a good barometer, as it is seeing “a lot of pressure on logistics costs.” Dollar Tree is one of the largest retail importers in the United States (US) and at their recent quarterly earnings presentation, they spent a considerable amount of time discussing the global supply chain and higher freight costs, saying they were “not counting on material improvements in 2022, especially in the first portion of the year.”

The recovery from the pandemic has seen a huge increase in demand, but with continued quarantine controls, distancing measures at ports and labour shortages are causing severe backlogs. The Suez Canal blockage and summer typhoons off the Chinese coast did little to ease the problem. Another consideration is the consolidation of ocean shipping lines’ key shipping routes being dominated by a handful of companies, causing fewer vessels in general to be travelling between ports.

The ocean carriers have responded to the high demand by increasing container capacity by 22%, but this does not solve the problem of logjams and the waiting lines reaching record levels at some of the ports.[1] The order book for container ships has doubled in 2021, but the majority won’t be delivered until 2023.

So what does all this mean? Container rates seem to be stabilizing, yet remain extremely elevated. Freightos, a digital booking platform for international shipping, published containerized freight rates. The cost of a container from Asia to the US East Coast is over $20,000, an increase of 415% compared to last year. Shipping from Asia to the US West Coast is slightly less, but the cost is up 452% in comparison to a year ago. Shipping from Asia to North Europe has seen the largest year-over-year increase, up 714% to $13,855. Freight rates from Northern Europe to the US East Coast have been the least affected, up “only” 238% from the period last year to $5,929. In view of these rates, shipping companies are focusing on the most profitable trade routes, meaning reduced volumes crossing the Atlantic. The Baltic Dry Index is a benchmark for the price of shipping major raw materials by sea and is at its highest level since before the Great Financial Crisis.

Source: Bloomberg

The majority of companies are struggling to solve this logistical headache, but our portfolios contain two names that have been natural beneficiaries.

Clipper Logistics (CLG.LN) is a leading provider of value-added logistics solutions, e-fulfilment, and returns management services to the retail sector, primarily in the United Kingdom (UK), but with an expanding presence in Europe. Sales are comprised of the following: 60% of sales come from e-fulfilment and returns management, supporting the online activities of customers; 28% of sales come from non e-fulfilment businesses, supporting traditional brick and mortar customers; and the remaining 12% of sales comes from commercial vehicles sales. Of the logistics related revenues, 85% comes from the UK. Over 90% of Clipper’s contracts are on an open book basis (i.e. cost plus), or hybrid contract, protecting them from increasing costs. However, they are not immune to labour shortages, as they recently flagged the impact that a shortage of HGV drivers is having.

Kerry Logistics (636.HK) is a third-party logistics service provider based in Hong Kong with global exposure. The company provides many supply chain solutions, including integrated logistics, international freight forwarding (air, ocean, road, rail, and multimodal), industrial project logistics, cross-border e-commerce, last-mile fulfilment, and infrastructure investment. Revenue mainly comes from Asia-Pacific, which accounts for 74% of sales (Mainland China 32%, Hong Kong 13%, Taiwan 7%, and other Asia 21%). The Americas accounts for 16% and Europe about 10%. Their customers are mainly big multinational companies, across many industries, including fashion, electronics, food and beverages, FMCG, industrial, automotive, and pharmaceutical.

Perhaps the best advice we could give readers is that with supply chain and transportation issues showing little signs of abating, you would be wise to start your holiday shopping sooner, rather than later.

[1] https://splash247.com/more-than-40-ships-waiting-outside-la-and-long-beach-setting-new-record/

The global industrial slowdown signalled by a fall in manufacturing PMI new orders over June-August is now being reflected in a loss of earnings momentum.

The MSCI All Country World Index (ACWI) weekly revisions ratio, seasonally adjusted, fell below zero last week to its lowest level for more than a year – see chart 1.

Chart 1

With global real narrow money trends suggesting a further decline in manufacturing PMI new orders through early 2022, the revisions ratio is likely to remain in negative territory for the foreseeable future.

A falling PMI / weakening earnings momentum is typically associated with underperformance of non-tech cyclical equity market sectors (i.e. materials, industrials, consumer discretionary, financials and real estate) versus defensive sectors (consumer staples, health care, utilities and energy). The MSCI ACWI non-tech cyclical / defensive sector price relative has moved down in recent days, though remains above an August low – chart 2.

Chart 2

The latest decline, of course, reflects macro risk aversion due to the Evergrande crisis. The MSCI Emerging Markets non-tech cyclical / defensive sector price relative has crashed to a new low, with more modest weakness in the corresponding MSCI World (i.e. developed markets) relative – chart 3.

Chart 3

As the chart shows, the EM relative led moves down into lows in 2011-12, 2016 and 2018 (all associated with stockbuilding cycle downswings). The current wide divergence raises the possibility of a breakdown of the MSCI World relative; alternatively, the EM relative may have greater recovery potential.

Street research is discussing whether a looming Evergrande default represents a Minsky / Lehman moment (i.e. a tipping point into a financial crisis) or a Volcker moment (i.e. a policy decision to punish inflationary / speculative excess despite harsh macroeconomic consequences). The consensus is neither and that the authorities will be able and willing to contain the fallout.

The key issue, from a monetarist perspective, is whether tighter financial conditions due to the crisis persist and invalidate the previous central case scenario of a recovery in monetary trends in response to recent and prospective policy easing. Six-month growth rates of the private sector money measures calculated here fell back in August but remain above May lows – chart 4.

Chart 4

A useful indicator for assessing the potential monetary fallout is the corporate financing index from the Cheung Kong Graduate School of Business survey of private sector firms, a gauge of ease of access to credit. The index loosely correlates with money growth and has moved sideways (after seasonal adjustment) in recent months – chart 5. A sharp fall in the upcoming September survey would be a clear warning signal.

Chart 5

An FTarticle lists “Five big questions facing the Bank of England over rising inflation”. The most important one is missing: will broad money growth return to its pre-covid pace?

The current inflation increase, from a “monetarist” perspective, is directly linked to a surge in the broad money stock starting in spring 2020. Annual growth of non-financial M4 – the preferred aggregate here, comprising money holdings of households and private non-financial corporations (PNFCs) – rose from 3.9% in February 2020 to a peak of 16.1% a year later.

The monetarist rule of thumb is that money growth leads inflation with a long and variable lag averaging about two years. This is supported by research on UK post-war data previously reported here – turning points in broad money growth preceded turning points in core inflation by 27 months on average.

The lead time is variable partly because of the influence of exchange rate variations. For example, the disinflationary impact of UK monetary weakness after the GFC was delayed by upward pressure on import prices due to sterling depreciation.

The exchange rate has been relatively stable recently but the rise in inflation has been magnified by pandemic effects, which may mean that a peak occurs earlier than suggested by the February 2021 high in money growth and the average 27 month lag. The working assumption here is that core inflation will peak during H1 2022.

CPI inflation, however, is likely to overshoot the current Bank of England forecast throughout 2022 – chart 1 shows illustrative projections for headline and core rates.

Chart 1

The past mistakes of monetary policy are baked in. The MPC should focus on current monetary trends in assessing how to respond to its current / prospective inflation headache.

Annual broad money growth has fallen steadily from the February peak but, at 9.0% in July, remains well above the 4.2% average over 2010-19, a period during which CPI inflation averaged 2.2%. So monetary data have yet to support the MPC’s assertion that the inflation overshoot is “transitory”.

The pace of increase, however, slowed to 4.4% at an annualised rate in the three months to July – chart 2. Household M4 rose by 5.8% with PNFC holdings little changed. In terms of the credit counterparts, bank lending to households and PNFCs grew modestly (4.1%) while a continued QE boost was offset by negative external flows, suggesting balance of payments weakness.

Chart 2

With QE scheduled to finish at end-2021 (if not before), and a temporary boost to mortgage lending from the stamp duty holiday over, money growth couldbe gravitating back to its pre-covid pace.

An early interest rate rise, on the view here, is advisable to reinforce the recent monetary slowdown and push back against rising inflation expectations. It is premature, however, to argue that a sustained and significant increase in rates will be needed to return inflation to target beyond 2022 – further monetary evidence is required.

It would be unfortunate if, having fuelled the current inflation rise by questionable policy easing, the MPC were now to raise expectations of multiple rate hikes at a time when monetary growth could be returning to a target-consistent level.

Partial data indicate that global six-month real narrow money growth was little changed in August, following July’s fall to a 22-month low. Allowing for the usual lead, the suggestion is that the global economy will continue to lose momentum into early 2022, with no reacceleration before late Q1 at the earliest.

Global PMI results for August were consistent with the slowdown forecast, with the manufacturing new orders index falling for a third month – see chart 1.

Chart 1

The US ISM manufacturing new orders index unexpectedly rose in August but this appears to have been driven by a rise in inventories: the new orders / inventories differential, which often leads, fell to its lowest since January – chart 2.

Chart 2

The US, China, Japan, Brazil and India have released monetary information for August, together accounting for 70% of the G7 plus E7 aggregate calculated here*. CPI data are available for all countries bar the UK and Canada.

The stability of six-month real narrow money growth in August conceals a further slowdown in nominal money expansion offset by a small decline in CPI momentum – chart 3.

Chart 3

Previous posts discussed the possibility that real money growth would rebound during H2 2021, warranting optimism about economic prospects for 2022 and supporting another leg of the “reflation trade”. The monetary data have yet to validate this scenario.

The real money growth rebound scenario depended importantly on a pick-up in China in response to recent and prospective policy easing. Chinese six-month real narrow money growth does appear to have risen slightly in August** but there were offsetting declines in the US, Japan and Brazil – chart 4.

Chart 4

*The US number is estimated from weekly data on currency in circulation and commercial bank deposits.
**The household demand deposit component is estimated pending release of full data.

National accounts profits numbers for Q2 released last week mirror recent strength in company earnings reports. The concept closest to S&P 500 earnings – corporate profits after tax – rose by 13% in Q2 to stand 36% above its level in Q4 2019. The national accounts series covers all corporations but S&P 500 operating earnings also grew by 36% between Q4 2019 and Q2 this year – see chart.

The national accounts analysis additionally contains a measure of “economic profits”, i.e. excluding inventory gains and adjusted for the difference between reported and economic depreciation*. Reflecting commodity price strength, inventory profits have been significant in recent quarters, while overreporting of depreciation (to minimise tax bills) fell in 2020 and has remained at a lower level in H1 2021.

This economic profits measure, therefore, has performed less impressively than “headline” earnings, rising by 10% in Q2 to stand 16% above its Q4 2019 level.

This measure, however, still overstates underlying profits strength because it includes government subsidy payments to corporations under various pandemic response schemes, the most significant of which has been the now-closed Paycheck Protection Program. The subsidy payment to corporations under this scheme accounted for 10% of economic profits in Q2 but will fall to zero over coming quarters**.

Q2 profits were also supported by payments under the Employee Retention Tax Credit scheme and grants to air carriers, among other emergency measures.

Excluding only the PPP subsidy, growth of economic profits between Q4 2019 and Q2 this year falls to just 4%.

The level of headline national accounts profits was 22% higher than this adjusted economic profits measure in Q2. A reasonable base case assumption is that this overshoot will be eliminated by Q2 2022.

The consensus forecast is for S&P 500 operating earnings to rise by a modest-sounding 3% in the year to Q2 2022. For national accounts profits to grow at the same pace, underlying profits – i.e. excluding inventory gains, subsidies etc. – might have to increase by more than a quarter. Such strength is implausible, requiring the unlikely combination of rapid economic growth with no associated downward pressure on margins from a tightening labour market.

*Profits after tax with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj).
**The subsidy payment is recorded as occurring over the term of the loan, not when it is forgiven.

Eurozone monetary trends have been suggesting an economic slowdown through end-2021. A recent moderation of consumer price momentum, however, has stabilised six-month real narrow money growth, hinting at a bottoming out of business surveys and other coincident indicators in early 2022.

The Ifo manufacturing survey is a timely indicator of German / Eurozone industrial momentum, displaying a strong contemporaneous correlation with German / Eurozone manufacturing PMIs (but with a longer history). The business expectations component peaked in March, falling for a fifth month in August – see chart 1.

Chart 1

The March peak is consistent with an August 2020 peak in Eurozone six-month real narrow money growth. The implied seven-month lead is slightly shorter than the historical average – the correlation between Ifo business expectations and Eurozone real money growth is maximised by applying a nine month lag to the latter.

Real narrow money growth, however, has moved sideways since May (July money numbers were released yesterday). The suggestion is that the Ifo indicator – along with PMIs and other business surveys – will weaken further during H2 but bottom out in early 2022.

The recent stabilisation of real money growth is not entirely convincing: nominal money trends continued to weaken in June / July but this was offset by a slowdown in six-month consumer price momentum – chart 2.

Chart 2

The inflation slowdown, however, could extend, assuming that commodity prices (in euro terms) stabilise at their current level – chart 3.

Chart 3

A recovery in nominal money growth is required to warrant shifting to a positive view of economic prospects. Such a signal would relate to H1 2022 – earlier real money weakness has “baked in” likely economic disappointment over the remainder of 2021.

What could lift money growth? The most likely candidate is a pick-up in bank lending. Six-month growth of loans to the private sector recovered in July – chart 2 – while the most recent ECB bank lending survey reported the strongest expectations for credit demand since 2016.

The recent stabilisation of Eurozone six-month real narrow money growth contrasts with a further slowdown in the US – chart 4. The divergence / cross-over suggests improving Eurozone relative economic and equity market prospects, although US real growth could benefit from a faster inflation slowdown over coming months.

Chart 4

A further fall in Ifo manufacturing business expectations and other survey indicators during H2 would probably be associated with underperformance of European non-tech cyclical sectors relative to defensive sectors – chart 5.

Chart 5

Every now and then, we remind ourselves why we enjoy our work. To us, global small cap is a wonderful asset class that offers the widest array of companies in terms of style, valuations, and growth profiles. This helps us develop a philosophy and process that fits our investment background, without having to take unnecessary market-related risks and having too much of a narrowed spectrum of investment candidates. Moreover, this investment universe is comprised of many companies that are strongly impacted by secular themes, especially the technology-driven ones.

Technologically driven secular themes usually appear in our universe following a start-up phase where venture capital, serial entrepreneurs, and bankers play god with other people’s money, through conceptual and research-driven business plans. Following that phase, we start seeing the themes when more established companies decide the technology is mature enough to turn into real products.

Artificial Intelligence (AI) is a prime example. The market is already big and getting bigger. If we were to list all of the companies in our portfolio impacted by utilizing AI, the list would be long. In healthcare alone, the AI market is expected to reach USD 58.6 billion by 2028.[1]

Let’s dig deeper and look at a field that will greatly benefit – radiology. Radiology features a high degree of specialty mixed with high throughput that fits AI’s problem-solving capabilities. As a key part of medical practice and research, radiology interprets most human biological ailments. Its complexity has skyrocketed due to biomarkers that are now available to radiologists, especially in the field of oncology.

Radiology and machine learning will prosper in many markets, such as prostate cancer diagnostics, thanks to greater precision in comparison to the conventional PSA test. New AI-assisted markers are set to help radiologists read CT scans for colon cancer. In addition, AI is expected to increase radiology productivity (volume of readouts performed per hour) and the amount of new products (volumes from new diagnostic initiatives).

Speaking of new products, radiology and AI will be a key part of the new Alzheimer treatment paradigm, representing an estimated USD 10 billion market in 2026. The recently approved Alzheimer’s drug Aduhelm, from biotech company Biogen, requires a specialized CT confirmation scan, as well as monthly scans during treatment. As a market, radiology has an above-average growth rate of 5.2%, with a substantial market size of USD 20 billion.[2]

Raffles Medical (RFMD: SP)

Raffles Medical (RMG) is a private healthcare provider operating in 14 cities across Asia, including Singapore, China, Japan, Vietnam, and Cambodia. In China, RMG is present in eight cities.

Hospitals are core users of radiology in the majority of departments. Radiology productivity is linked to efficiency with most procedures, especially in the private sector where RMG operates. With EBITDA margins already at 21% versus mid-teens for its hospital peers, RMG remains a first-mover when it comes to technology driven productivity. Radiology AI will have an important impact on the sustained growth in profitability going forward. RMG operates two hospitals, the 380-bed Raffles Hospital Singapore, which opened in 2003, and the 700-bed Raffles Hospital Chongqing, which opened in 2020. RMG also just opened its third hospital, the 400-bed Raffles Hospital Shanghai. According to management, the new hospitals in Shanghai and Chongqing are starting with 100-150 operational beds.

In Singapore, RMG operates the Raffles Specialist Centre, adjoined to Raffles Hospital, and it has a total bed capacity of 380. Centers of excellence in the Chongqing hospital include gastrointestinal surgery, obstetrics & gynecology, pediatrics, cardiovascular surgery, neuroscience, and oncology, which all feature significant radiology practices.

Our next holding corroborates the kind of AI productivity gains that Raffles could be able to obtain in the near future.

Radnet (RDNT: US)

RadNet is the largest provider of outpatient imaging services in the United States, with 346 centers nationwide.

The company has an AI subsidiary called DeepHealth, which focuses on developing machine-learning applications for the radiology industry. RadNet recently announced the FDA’s approval of its AI mammography triage software. This software acts as a screening tool, enabling radiologists to more effectively manage their mammography cases using AI. DeepHealth’s powerful new AI technology automatically identifies suspicious screening exam results that may need priority attention, allowing radiologists to optimize their workflow for efficiency and effectiveness.

According to the company, RadNet’s first AI approval should translate to a 25% gain in productivity covering its two million annual mammography scans. This should therefore enable the company to expand its capacity and grow without having to hire additional staff.

[1] Market Insight Reports, July 28, 2021

[2] Grandview Research, December 2020

The economic / market view here remains cautious based on 1) an expected slowdown in global industrial momentum through H2 (already apparent in Chinese data) and 2) recent less favourable “excess” money conditions.

Global six-month real narrow money growth, however, may have bottomed in May / June. A Q3 rebound would signal a stronger economy in H1 2022. An associated improvement in excess money could reenergise the reflation trade in late 2021.

The issue can be framed in cycle terms: does the recent top in the global manufacturing PMI new orders index mark the peak of the stockbuilding cycle (implying a shortened cycle) or will the peak be delayed until H1 2022?

Possible drivers of a real money growth rebound include Chinese policy easing, a slowdown in global consumer price momentum and a pick-up in US / Eurozone bank loan expansion.

The H2 industrial slowdown view remains on track. The global manufacturing PMI new orders index fell further in July, confirming May as a top. Chinese orders were notably weak and have led the global index since the GFC – see chart 1.

Chart 1

Global six-month real narrow money growth fell steadily between July 2020 and May but a stabilisation in June has been confirmed by additional monetary data released over the last week – chart 2.

Chart 2

Will PBoC policy easing drive a recovery in Chinese / global money growth? The hope here was that the 15 July cut in reserve requirements would be reflected in an early further fall in money market interest rates and easier credit conditions. Three-month SHIBOR, however, has moved sideways while corporate credit availability is little changed, judging from the July Cheung Kong Graduate School of Business survey – chart 3. July money data, therefore, could show limited improvement.

Chart 3

Global six-month real money growth should receive support from a slowdown in consumer price momentum as commodity price and bottleneck effects fade. Eurozone six-month CPI inflation eased on schedule in July, with further moderation suggested and the move lower likely to be mirrored in other countries (Tokyo July numbers also showed a slowdown) – chart 4.

Chart 4

US monetary prospects are foggy. Disbursement of stimulus payments boosted nominal money growth over March-May but there was a sharp slowdown in June. Weekly data indicate a reacceleration in July as the Treasury ran down its cash balance at the Fed to comply with debt ceiling legislation – chart 5. This effect, however, will be temporary and an improving fiscal position suggests a reduced contribution from monetary financing during H2 and into 2022.

Chart 5

Stable or higher US money growth, therefore, may require a pick-up in bank loan expansion. The Fed’s July senior loan officer survey, released yesterday, is hopeful, showing a further improvement in demand balances across most loan categories (not residential mortgages) – chart 6. The ECB’s July lending survey gave a similar message – chart 7. The survey indicators, however, are directional and the magnitude of a likely loan growth pick-up is uncertain. Actual lending data remained soft through June.

Chart 6

Chart 7

Failure of global real money growth to recover in Q3 – and especially a further slowdown – would suggest that the stockbuilding cycle is already at or close to a peak. The cycle bottomed in Q2 2020 and – based on its average historical length of 3.33 years – might be expected to reach another low in H2 2023, in turn implying a peak no earlier than H1 2022. As previously discussed, however, the current upswing could be short to compensate for a long (4.25 years) prior cycle.

Proponents of the consensus view that replenishment of stocks will underpin solid industrial growth in H2 cite the still-low level of the global manufacturing PMI finished goods inventories index – chart 8. Research conducted here, however, indicates that the stocks of purchases index (i.e. raw materials / intermediate goods) is a better gauge of the stockbuilding cycle and tends to lead the finished goods index. The former index is already at a level consistent with a cycle top and the rate of change relationship with the new orders index is another reason for expecting orders to weaken significantly during H2 – chart 9.

Chart 8

Chart 9

Among companies globally, which country accounts for the highest percentage of companies that are over 100 years old? The answer is Japan, with about 33,000 companies at least a century old (approximately 40% of total companies). These companies tend to prioritize values such as commitment, quality, community, and tradition over financial logic.

Business longevity is one of the benefits of sustainability, a concept that is deeply rooted in Japan. Japanese culture also has a profound appreciation of nature. Corporations and individuals have a strong attachment to their community and wider society. Many companies promote lifelong employment, environmentally-friendly processes, product safety, and harmonious relationships among stakeholders.

Regarding ESG investing, a concept developed in Europe, Japan is a late starter, but has made impressive leaps thanks to joint efforts from the government, the financial regulator, and key market players. According to the Global Sustainable Investment Review 2020, Japan’s sustainable assets increased by 34% from 2018, six times the 2016 level, now standing at US$2.9 trillion.

Global Sustainable Investment Assets

Source: Global Sustainable Investment Alliance

Japan’s ESG journey officially started in 2014 when it adopted a Stewardship Code to encourage investors to promote sustainable returns and growth by using shareholder voting and engagement. In 2015, Japan issued its first Corporate Governance Code. In the same year, its Government Pension Investment Fund (GPIF) became a signatory to the Principles for Responsible Investment (PRI). GPIF, the largest pension fund in the world, started investing in ESG assets in 2017. As of March 31, 2020, it had 151 trillion yen (US$ 1.37 trillion) in total assets under management (all with ESG integration), of which 5.7 trillion yen (US$ 52 billion) was invested in tracking ESG indexes and 440 billion yen (US$3.6 billion) in green bonds.

In October 2020, Japan pledged to achieve carbon neutrality by 2050. A month later, the Japanese House of Representatives and the House of Councilors declared a climate emergency, indicating that tackling climate change is not a partisan issue. We believe such policy continuity builds a solid foundation for Japan to execute its Green Growth Strategy.

Currently, Japan’s ESG performance is lagging behind Europe and North America. McKinsey assessed the ESG performance of 621 companies in Europe, Japan, and North America from 2019 to 2020, based on 120 third-party ESG indicators, from carbon emissions to community relations to shareholders’ rights.

ESG Performance (Large and Smaller Companies Combined)

Source: McKinsey analysis 2021

We believe the above results are more or less expected, considering Japan’s late start. The good news is that from governments to corporations, the topic of ESG is now front and center.

In a recent survey conducted by the GPIF, the 6th annual survey of Japanese listed companies regarding institutional investors’ stewardship activities, the results showed continuous progress in ESG activities.

  1. Many companies pointed out the following common issues as the major themes in their ESG activities: corporate governance (71.7%), climate change (63.6%), and diversity (43.2%).
  2. Themes that surpassed the ratio in the previous survey include climate change (+9.7%), health and safety (+8.0%), and environmental opportunities (+3.8%).
  3. Companies are more proactively working on information disclosure, not only through integrated reports, but also through new disclosure criteria, such as the Task Force on Climate-related Financial Disclosures (TCFD); 31% of respondents have endorsed the TCFD.

Japan has been making regular revisions to strengthen the ESG guidelines. Last April, a new proposal was published by the Council of Experts regarding the revision of Corporate Governance Code and Guidelines for Investor and Company Engagement. We are glad to see more stringent guidelines than before to enhance board independence, diversity, ESG reporting and many other areas. Japan is also expected to announce its 6th basic energy plan to lay out details towards carbon neutrality.

As a long-term investor in Japan, we’ve definitely witnessed companies improving ESG practices since 2015. With many new initiatives coming, we believe Japanese companies have great potential to improve their ESG practices and create more value.

Global six-month real narrow money growth appears to have moved sideways in June and could be bottoming after a 10-month slide. If confirmed, and allowing for the usual lead time, this would suggest a stabilisation of industrial momentum in early 2022 following a H2 2021 slowdown.

The June real narrow money growth estimate is based on monetary data covering 70% of the G7 plus E7 aggregate tracked here and near-complete inflation numbers. The prior fall in real money growth is expected to be reflected in “surprising” weakness in global PMI manufacturing new orders and other coincident indicators of industrial momentum during H2 2021 – see chart 1.

Chart 1

Global stabilisation conceals a June recovery in Chinese six-month real narrow money growth offset by further slowdowns in the US and Japan, with European data yet to be released – chart 2.

Chart 2

The recent cut in reserve requirements is judged here to confirm a trend shift in Chinese monetary policy, probably heralding a sustained rebound in money growth. Another indication of a policy turn is a rise in the differential between the loan approvals and loan demand indices in the PBoC Q2 bankers’ survey, suggesting that banks have been instructed to loosen credit – chart 3.

Chart 3

Street claims that last week’s Chinese activity data were solid, implying no need to adjust policy settings, are puzzling. GDP grew by only 3.4% annualised between Q4 and Q2. Monthly indicators are stagnant in real seasonally adjusted level terms – chart 4.

Chart 4

The view here is that the economy faced a “hard landing” without a policy change but the authorities have recognised the risk and will act to avert it.

Support to global real money growth from Chinese easing should be supplemented by a slowdown in global six-month CPI inflation in H2, assuming stable commodity prices – chart 5. Commodity prices could weaken as industrial activity decelerates.

Chart 5

China continues to lead US / global economic momentum. The six-month rate of change of the OECD’s US leading indicator peaked four months after that of a Chinese indicator – chart 6*. This fits with a four-month interval between peaks in 10-year government bond yields – November in China, March in the US.

Chart 6

Street descriptions of US June retail sales as “robust” are also questionable. With prices surging, sales fell for a third month in real terms, consisent with a fading boost from March / April stimulus payments – chart 7.

Chart 7

Markets have already partially discounted a H2 economic slowdown, with quality stocks outperforming and bullish flattening of yield curves. Non-tech cyclical sectors of developed equity markets have so far held up against defensive sectors and could be the next shoe to drop – chart 8.

Chart 8

*The indicators shown use the OECD’s methodology but are calculated independently.