May 22, 2017

Inflation is back on a number of policymakers’ agendas around the world, but structural change and policy reform remain more important, and more elusive.

In Asia Pacific, many central banks look to be in no hurry to counter inflation with interest rate rises, with New Zealand and Malaysian central banks keeping interest rates on hold last week.

The Reserve Bank of New Zealand said developments since February have remained neutral for monetary policy, while the pickup in New Zealand consumer price inflation to 2.2% YoY in Q1 was due to a surge in food and energy prices—which the bank believes is likely to be temporary.

Meanwhile, the Malaysian central bank, Bank Negara Malaysia, also kept its policy rate unchanged, explaining that a rise in inflation to more than 4% is transient.

According to the bank, higher inflation has been due to higher energy and food prices, and should ease as the year progresses. Core inflation is expected to only accelerate modestly.

Likewise, the Philippine central bank maintained its stance, keeping the overnight borrowing rate at 3.0%, while pledging to watch economic data. It made no changes to its 2017 and 2018 inflation forecasts, but said that inflation risks were to the upside.

Christian Nolting, Global CIO, Deutsche Bank Wealth Management, said, “Some other central banks that cut aggressively last year, such as the Reserve Bank of India (RBI), have now turned more neutral as they assess current price conditions. 

Improving global macro conditions and rising U.S. interest rates are also factors. But we think that rate hikes will come more in 2018 rather than 2017 and the big economies of China and Japan are not under any immediate pressure to turn hawkish.”

Asian equities

Meanwhile, the global equity rally at the start of the year is showing signs of maturity. The MSCI Asia ex-Japan has hovered around 590 in May, close to Deutsche Bank Wealth Management’s 12-month target of 600 in March 2018.

Tuan Huynh, CIO APAC and Head of DPM APAC, Deutsche Bank Wealth Management, commented, “Asian valuations are higher than a few months ago and selectivity will be important. Although event risks have reduced, some remain. A near-term possible headwind would be a continuation of the recent fall in commodity prices.

“However, Asia ex-Japan equities seem likely to be supported by further advances in global growth: we believe that U.S. and European growth will improve in the quarters ahead. Besides, export growth, positive earnings and profitability should remain supportive of Asian equities,” he added.

Japan equities

In Japan, equities have rebounded in May after a brief dip in April. Previously, Japanese equities had been kept in a tight range mainly due to foreign selling and yen strength. Despite this, Japanese valuations remain attractive on both absolute and relative basis, and appear underpinned by strong fundamentals.

Huynh noted, “The upcoming earnings season for Japan will be important. We expect positive earnings growth in Q1, supported by global macroeconomic trends and a weak Japanese yen. Japanese earnings revisions have been upwards. We will also watch for share buybacks, which usually peak in May. We believe that there is scope for Japanese equities to catch up with the global rally.”