James Aitken, an expert in the plumbing of the financial system, takes us on a world tour of hotspots in global finance. Topics include why he is relaxed about the US, Japan's program for greatness and its possible effects on global bond markets, and the challenges faced by China's property sector.
The US economy's strong nominal GDP growth has kept interest rates high, supported by fiscal transfers during the pandemic, resulting in healthy household and corporate balance sheets and sustained aggregate demand.
China's focus on making its financial system robust and sustainable despite challenges in the property sector suggests a traditional financial crisis is unlikely, with Xi Jinping's leadership greatly influencing the direction of the Chinese economy.
Japan's transformation towards shareholder-friendly reforms presents long-lasting investment opportunities, attracting both domestic and international capital, as the country aims to make Japan great again.
Deep dives
US Nominal GDP and Interest Rates
The US economy is experiencing strong nominal GDP growth, which is keeping interest rates relatively high. This is due to the fiscal transfers and direct payments made to households and businesses during the COVID-19 pandemic. As a result, household and corporate balance sheets in the US are in good shape, which has helped sustain aggregate demand and prevented a significant increase in credit defaults. This higher nominal GDP also supports the ongoing growth and resilience of businesses, as long as interest rates remain aligned with this economic growth.
China's Financial and Property Sector
China's ongoing efforts to make its financial system fit for purpose have significant implications for its property sector. Despite the challenges and problems in the property market, China's nominal GDP is still expected to be around 4.5% to 5%, which suggests that a traditional financial crisis is unlikely. While there may be concerns and fluctuations in Chinese equities, it's important to recognize that Xi Jinping's leadership and focus on making the financial system robust and sustainable greatly influence the direction of the Chinese economy.
Geopolitical Risks in Taiwan
The geopolitical situation in Taiwan is complex and significant. Despite recent discussions and efforts to de-escalate tensions between China and the US, there are ongoing challenges and risks regarding Taiwan. Xi Jinping's recent statements and actions have demonstrated a higher level of determination and insistence on peaceful reunification with Taiwan. Incursions into Taiwanese airspace and sea space have been increasing, raising concerns about the potential for a military confrontation. Investors and market participants should closely monitor these geopolitical developments as they have the potential to significantly impact regional stability and global markets.
Japan's push for change and investment potential
Japan is undergoing a significant transformation, moving away from Japanese-style shareholder capitalism and embracing reforms to make Japan great again. These reforms include creating a more shareholder-friendly environment and addressing inefficiencies in the system. This paradigm shift presents an investable theme, with opportunities for equity investors who recognized the deep value in Japan's market and the catalyst for change. The focus on making Japan great again is likely to have a long-lasting impact, attracting both domestic and international capital.
Risk in Australia's housing market
Australia's economy has long been driven by the housing market, which has been fueled by tax incentives and negative gearing. Housing and residential construction play a critical role in the country's economy and household wealth. However, risk is accumulating as market share becomes a primary concern for banks, even as they monitor mortgage risk. The excessive leverage in Australia's housing market raises concerns, especially if interest rates rise. Investors should keep an eye on the potential challenges in this levered house economy.
James Aitken is an expert in the plumbing of the financial system. We go on a world tour of the hotspots in global finance. You will learn why James is relaxed about the US; why the Japanese government will Make Japan Great Again and why this could have serious repercussions for global bond markets; and why China will likely muddle through, in spite of massive problems in its property sector.
