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ChetwoodWM

Client Update - 16th February 2024

It is often argued that grappling with deflation is just as challenging as combating inflation, a lesson the Bank of Japan (BoJ) has learned all too well over the past 35 years. Like the well-known children's tale, global central banks strive for a Goldilocks inflationary scenario. This is an environment where inflation is neither excessively hot nor overly cool, but just right.


Before 2023 began, Japan was long considered to be the market that optimistic stock traders avoided. Investors are starting to radically rethink their views on Japan as the BoJ considers the upside shift in inflation. Global inflationary forces are finally feeding into Japan’s economy after decades of falling prices. With inflation having exceeded 2% for well over a year, many market players are starting to forecast a historic shift away from its prolonged ultra-low interest rates and Japan’s stock market has started to move on up.


In our view, the momentum of this positive trend shows no signs of waning. In a significant milestone, the Nikkei 225 index crossed the 38,000 mark this week, a feat not achieved since the bursting of Japan's asset bubble back in 1990. This reflects a renewed investor confidence in the Japanese market. We have benefited from the uptrend in Japanese stocks from our early investment allocations we initiated last year.


It seems the BoJ is not the only central bank to face tough interest rate decisions in the coming months. US inflation data, released on Tuesday showed US headline inflation has slowed to 3.1% in January, down from 3.4% in December. This was seen as disappointing as it was higher than the 2.9% forecasted by economists. This has challenged market expectations that the Federal Reserve (FED) will begin cutting interest rates in May.


US and Japanese interest rates remain at around 5.5% and -0.1% respectively, although they both aim for the same goal of a sustainable inflation rate of 2%. Yes, you did read that correctly. One would assume that achieving this goal would require rate cuts in the US and simultaneous rate hikes in Japan. This is an unusual situation to say the least.

Away from the global macro-economic picture, our attention is increasingly drawn to the healthcare sector. While many regions benefit from advancements in this field, both the United States and Japan emerge as prominent players, each uniquely positioned to reap significant benefits from recent advancements.


In September last year, Japan's health ministry followed the U.S. in approving Lecanemab (marketed as Leqembi), an Alzheimer’s disease treatment co-developed by Japanese firm Eisai and US based Biogen. This drug marks a significant milestone, being the first of its kind to address Alzheimer’s in countries like the U.S. and Japan, both of which rank in the top five globally for their large elderly populations.


The recent advancements in the healthcare industry have bolstered our team's confidence in this sector, particularly after the strong performance from our investments related to Novo Nordisk. This Danish pharmaceutical powerhouse has recently captivated the market with the launch of its weight loss medications, Wegovy and Ozempic, leading to a dramatic surge in its share price over the past year. Novo Nordisk projects a sales growth of 18% to 26% this year, fuelled by rising demand. Our confidence in Novo's potential for further expansion in the coming year is strengthened, especially with their promising developments in an oral pill for obesity treatment, offering a more convenient alternative to the current injectable methods.


Nevertheless, our team maintains a watchful eye in this dynamic market, especially as other companies are increasingly turning their attention to the weight loss industry, in the wake of Novo’s success. The competition is intensifying as the three companies battle it out to get their oral weight loss drugs on the shelf first. Among the key players we are closely monitoring are U.S.-based pharmaceutical giants Eli Lilly and Pfizer.


It would seem that many people that struggle with their weight are increasingly finding options beyond sensible eating and exercise, much to the benefit of their health, and our portfolio values. Do have a good weekend.

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