Japan: Oasis of (political) stability

In February 2026, Japan’s first female prime minister Sanae Takaichi announced a snap election in the National Diet’s Lower House. She proceeded to win a commanding majority of roughly two-thirds of seats for her ruling conservative party, the Liberal Democratic Party (LDP). With conservative Osaka-based coalition partner, the Japan Innovation Party (JIP), the ruling coalition control about three-quarters of seats, providing a strong mandate to advance policy plans. After cycling through four prime ministers (including Sanae Takaichi) since the pandemic, Japan finally has political stability. In contrast, G7 peers like France, Germany, the UK and Italy are beset by fragile ruling coalitions or political infighting.
 

Figure 1: National Diet Lower House seats split by party before and after the snap February 2026 election

Source: Nikkei Asia

Fiscal investment, not consumption

The Takaichi administration is taking advantage of this electoral supermajority to pursue a more growth-oriented fiscal strategy with a ¥370+ trillion fiscal investment package into 17 strategic sectors through FY 2040E. Previous fiscal stimulus programs focused on consumer support and public works projects to prevent economic stagnation or to alleviate downturns and associated unemployment. However, Prime Minister Takaichi’s plan is aimed at boosting Japan’s long-term productive capacity.
 

Figure 2: Estimates of Japan’s real GDP potential growth rate from Bank of Japan and the Cabinet Office

Source: Bank of Japan, Cabinet Office via Bloomberg Economics

Figure 3: Annualized potential real GDP growth estimates across major economies

Sources: International Monetary Fund, Bank of Japan, Bank of Canada, Bank of Korea, USA Congressional Budget Office

Automation to offset a shrinking labour force

Against other advanced economies, Japan’s economic growth potential is low. This is partly due to its aging and falling population, but also because of low productivity relative to peers. The government and private firms both see automation, rather than mass immigration, as the solution to low productivity and structural labour shortages caused by an aging and declining population as well as insufficient technological adoption. By directing capital toward sectors such as automation, semiconductors, data centres, batteries and advanced healthcare, Prime Minister Takaichi’s fiscal plans seek to lift productivity, which will drive Japan’s long-term economic growth. Specifically, Prime Minister Takaichi’s fiscal roadmap includes allocations toward themes such as physical AI, advanced health care and soft power.
 

Figure 4: The Japanese economy’s capital intensity stagnated for two decades despite labour shortages

Sources: Bank of Japan, Cabinet Office, Ministry of Internal Affairs & Communications via Bloomberg

Figure 5: Prime Minister Takaichi’s fiscal stimulus plan through public-private partnerships into FY 2040E

Source: Cabinet Secretariat via Bank of America Global Research

Physical AI

Prime Minister Takaichi’s fiscal roadmap allocates ¥10.5 trillion to “physical AI.” This refers to the manifestation of Artificial Intelligence (AI) in the physical realm through robotics and automation. In Japan, labour shortages are concentrated in sectors where robots struggle to displace workers. For example, manufacturers have advanced machining tools, but too few operators to handle them. Logistics firms have sufficient trucks but too few drivers. Humanoid robotics and autonomous vehicles should eventually enable Japan to expand productivity via a capital-for-labour substitution.

In total, physical AI, semiconductors, data centre and battery investments comprise ¥101.6 trillion of the government’s 15-year ¥370 trillion fiscal investment plan. Our portfolios’ exposure to these core themes is concentrated in semiconductor production equipment makers and semiconductor material producers.

Tokyo Seimitsu Co. Ltd. (7729 JP)

Founded in 1949, Tokyo Seimitsu manufactures and sells metrology instruments and semiconductor production equipment for automotive, machine tools, semiconductors and aerospace, as well as charge and discharge testing systems for BEVs.

Micronics Japan Co. Ltd. (6871 JP)
Micronics Japan designs, produces and sells probe cards, which are used to inspect integrated circuits (ICs). The firm also manufactures wafer probers, probe card testers, IC handlers and inspection and testing devices used for liquid crystal display (LCD) manufacturing.

Horiba Ltd. (6856 JP)
Horiba manufactures and markets metrology instruments and analyzers. Key product lines include scientific/medical/emissions analyzers, environmental monitors for air/water and semiconductor testing equipment. Horiba has a local presence across China, Japan, Korea, India, Singapore, Thailand, Austria, France, Germany, the UK, the United States, Canada and Brazil.

Sumitomo Bakelite Co. Ltd. (4203 JP)
Sumitomo Bakelite Limited is an integrated processor of synthetic resins and a member of the Sumitomo Chemical Group, which retains a 10.5% equity stake. The firm’s materials are used during the production of electronic components such as chips and PCBs as well as in automotive where BEVs use more encapsulants. With an industry-leading 50% market share after acquiring Kyocera’s encapsulant business, the company is well-positioned to expand further, supported by the growth in automotive applications.

Kurita Water Industries Ltd. (6370 JP)
Kurita Water manufactures, sells and maintains water treatment equipment and facilities. It produces chemical consumables for precision cleaning and water purification. The company also manufactures equipment for wastewater treatment, purification, sanitation, soil remediation, sanitation and HVAC applications. Kurita Water remains Japan’s largest water treatment engineering firm.

Advanced health care

As Japan is a pioneer leading the world in aging, its government recognizes their firms’ “first-mover advantage” in tackling ailments. “Advanced health care” refers to pharmaceutical solutions and medical devices that improve human health. Prime Minister Takaichi’s fiscal plan allocates ¥64.1 trillion to pharmaceutical therapeutics such as antibody drug conjugates, bispecific antibodies, infectious disease vaccine R&D and AI-enabled medical device diagnostics. We have portfolio holdings that are positioned to benefit from the investments in this theme.

Asahi Intecc Co. Ltd. (7747 JP)
Asahi Intecc is a Japanese medical device manufacturer. Asahi operates through two segments. The medical segment develops, manufactures and sells private-label and OEM SKUs. The industrial devices segment develops, manufactures and sells components related to both medical and industrial products. It is the leading producer of interventional guidewires and microcatheters, perfected over 40 years with a longstanding presence in niche steel wire tech.

Sysmex Corporation (6869 JP)
Founded in 1968, Sysmex is the leader in hematology, hemostasis, invitro diagnostics, immunochemistry, urinalysis and the challenger in surgical robotics. The company designs, produces and supplies reagents, instruments, services and other products used in diagnostic tests.

Soft power

The government also understands the importance of “soft power.” This is the phenomenon of exerting geopolitical influence through cultural content such as manga, anime, music, and games. The fiscal plan outlines content investments worth ¥33.7 trillion to enable intellectual property (IP) monetization and new IP development, as well as the localization of Japanese cultural IP overseas, IP exports and tourism.

Sega Sammy Holdings Inc. (6460 JP)
Sega Sammy is the second largest gaming software and hardware producer by revenue, after Nintendo. Their entertainment content segment develops and sells games on third-party platforms (mobile, PC, consoles), licenses IP to film producers and goods manufacturers and sells equipment to arcade operators. Sega’s pachislot and pachinko machine segment manufactures and sells its products to game parlours. The resort segment operates hotels and golf courses at integrated resorts. The firm owns IP of major gaming franchises like Sonic the Hedgehog, Virtua Fighter, Yakuza and Angry Birds since 2023.

Kotobuki Spirits Co. Ltd. (2222 JP)
Kotobuki Spirits is a Japanese firm engaged in the manufacture and sale of confectioneries. It operates six segments: Sucrey, KCC, Seika Tajima, Sales Subsidiary, Kujuku Island and others. The firm is entering into retail after successfully operating via wholesalers.

The post Investing in Japan’s next chapter appeared first on Groupe financier Connor, Clark & Lunn ltée.

Japan: Oasis of (political) stability

In February 2026, Japan’s first female prime minister Sanae Takaichi announced a snap election in the National Diet’s Lower House. She proceeded to win a commanding majority of roughly two-thirds of seats for her ruling conservative party, the Liberal Democratic Party (LDP). With conservative Osaka-based coalition partner, the Japan Innovation Party (JIP), the ruling coalition control about three-quarters of seats, providing a strong mandate to advance policy plans. After cycling through four prime ministers (including Sanae Takaichi) since the pandemic, Japan finally has political stability. In contrast, G7 peers like France, Germany, the UK and Italy are beset by fragile ruling coalitions or political infighting.
 

Figure 1: National Diet Lower House seats split by party before and after the snap February 2026 election

Source: Nikkei Asia

Fiscal investment, not consumption

The Takaichi administration is taking advantage of this electoral supermajority to pursue a more growth-oriented fiscal strategy with a ¥370+ trillion fiscal investment package into 17 strategic sectors through FY 2040E. Previous fiscal stimulus programs focused on consumer support and public works projects to prevent economic stagnation or to alleviate downturns and associated unemployment. However, Prime Minister Takaichi’s plan is aimed at boosting Japan’s long-term productive capacity.
 

Figure 2: Estimates of Japan’s real GDP potential growth rate from Bank of Japan and the Cabinet Office

Source: Bank of Japan, Cabinet Office via Bloomberg Economics

Figure 3: Annualized potential real GDP growth estimates across major economies

Sources: International Monetary Fund, Bank of Japan, Bank of Canada, Bank of Korea, USA Congressional Budget Office

Automation to offset a shrinking labour force

Against other advanced economies, Japan’s economic growth potential is low. This is partly due to its aging and falling population, but also because of low productivity relative to peers. The government and private firms both see automation, rather than mass immigration, as the solution to low productivity and structural labour shortages caused by an aging and declining population as well as insufficient technological adoption. By directing capital toward sectors such as automation, semiconductors, data centres, batteries and advanced healthcare, Prime Minister Takaichi’s fiscal plans seek to lift productivity, which will drive Japan’s long-term economic growth. Specifically, Prime Minister Takaichi’s fiscal roadmap includes allocations toward themes such as physical AI, advanced health care and soft power.
 

Figure 4: The Japanese economy’s capital intensity stagnated for two decades despite labour shortages

Sources: Bank of Japan, Cabinet Office, Ministry of Internal Affairs & Communications via Bloomberg

Figure 5: Prime Minister Takaichi’s fiscal stimulus plan through public-private partnerships into FY 2040E

Source: Cabinet Secretariat via Bank of America Global Research

Physical AI

Prime Minister Takaichi’s fiscal roadmap allocates ¥10.5 trillion to “physical AI.” This refers to the manifestation of Artificial Intelligence (AI) in the physical realm through robotics and automation. In Japan, labour shortages are concentrated in sectors where robots struggle to displace workers. For example, manufacturers have advanced machining tools, but too few operators to handle them. Logistics firms have sufficient trucks but too few drivers. Humanoid robotics and autonomous vehicles should eventually enable Japan to expand productivity via a capital-for-labour substitution.

In total, physical AI, semiconductors, data centre and battery investments comprise ¥101.6 trillion of the government’s 15-year ¥370 trillion fiscal investment plan. Our portfolios’ exposure to these core themes is concentrated in semiconductor production equipment makers and semiconductor material producers.

Tokyo Seimitsu Co. Ltd. (7729 JP)

Founded in 1949, Tokyo Seimitsu manufactures and sells metrology instruments and semiconductor production equipment for automotive, machine tools, semiconductors and aerospace, as well as charge and discharge testing systems for BEVs.

Micronics Japan Co. Ltd. (6871 JP)
Micronics Japan designs, produces and sells probe cards, which are used to inspect integrated circuits (ICs). The firm also manufactures wafer probers, probe card testers, IC handlers and inspection and testing devices used for liquid crystal display (LCD) manufacturing.

Horiba Ltd. (6856 JP)
Horiba manufactures and markets metrology instruments and analyzers. Key product lines include scientific/medical/emissions analyzers, environmental monitors for air/water and semiconductor testing equipment. Horiba has a local presence across China, Japan, Korea, India, Singapore, Thailand, Austria, France, Germany, the UK, the United States, Canada and Brazil.

Sumitomo Bakelite Co. Ltd. (4203 JP)
Sumitomo Bakelite Limited is an integrated processor of synthetic resins and a member of the Sumitomo Chemical Group, which retains a 10.5% equity stake. The firm’s materials are used during the production of electronic components such as chips and PCBs as well as in automotive where BEVs use more encapsulants. With an industry-leading 50% market share after acquiring Kyocera’s encapsulant business, the company is well-positioned to expand further, supported by the growth in automotive applications.

Kurita Water Industries Ltd. (6370 JP)
Kurita Water manufactures, sells and maintains water treatment equipment and facilities. It produces chemical consumables for precision cleaning and water purification. The company also manufactures equipment for wastewater treatment, purification, sanitation, soil remediation, sanitation and HVAC applications. Kurita Water remains Japan’s largest water treatment engineering firm.

Advanced health care

As Japan is a pioneer leading the world in aging, its government recognizes their firms’ “first-mover advantage” in tackling ailments. “Advanced health care” refers to pharmaceutical solutions and medical devices that improve human health. Prime Minister Takaichi’s fiscal plan allocates ¥64.1 trillion to pharmaceutical therapeutics such as antibody drug conjugates, bispecific antibodies, infectious disease vaccine R&D and AI-enabled medical device diagnostics. We have portfolio holdings that are positioned to benefit from the investments in this theme.

Asahi Intecc Co. Ltd. (7747 JP)
Asahi Intecc is a Japanese medical device manufacturer. Asahi operates through two segments. The medical segment develops, manufactures and sells private-label and OEM SKUs. The industrial devices segment develops, manufactures and sells components related to both medical and industrial products. It is the leading producer of interventional guidewires and microcatheters, perfected over 40 years with a longstanding presence in niche steel wire tech.

Sysmex Corporation (6869 JP)
Founded in 1968, Sysmex is the leader in hematology, hemostasis, invitro diagnostics, immunochemistry, urinalysis and the challenger in surgical robotics. The company designs, produces and supplies reagents, instruments, services and other products used in diagnostic tests.

Soft power

The government also understands the importance of “soft power.” This is the phenomenon of exerting geopolitical influence through cultural content such as manga, anime, music, and games. The fiscal plan outlines content investments worth ¥33.7 trillion to enable intellectual property (IP) monetization and new IP development, as well as the localization of Japanese cultural IP overseas, IP exports and tourism.

Sega Sammy Holdings Inc. (6460 JP)
Sega Sammy is the second largest gaming software and hardware producer by revenue, after Nintendo. Their entertainment content segment develops and sells games on third-party platforms (mobile, PC, consoles), licenses IP to film producers and goods manufacturers and sells equipment to arcade operators. Sega’s pachislot and pachinko machine segment manufactures and sells its products to game parlours. The resort segment operates hotels and golf courses at integrated resorts. The firm owns IP of major gaming franchises like Sonic the Hedgehog, Virtua Fighter, Yakuza and Angry Birds since 2023.

Kotobuki Spirits Co. Ltd. (2222 JP)
Kotobuki Spirits is a Japanese firm engaged in the manufacture and sale of confectioneries. It operates six segments: Sucrey, KCC, Seika Tajima, Sales Subsidiary, Kujuku Island and others. The firm is entering into retail after successfully operating via wholesalers.

The post Investing in Japan’s next chapter appeared first on Groupe financier Connor, Clark & Lunn ltée.

Chart 1

The pick-up is consistent with marked monetary acceleration since the start of the year, which continued last month. Six-month growth of the broad “M2+” measure calculated here reached 8.1% annualised in July, with expansion of narrow money M1A hitting 10.2% – chart 2*.

Chart 2

The rise in broad money growth appears to have been driven a combination of firmer commercial bank credit expansion, the Fed’s reserve management securities purchases and external monetary inflows, reflecting large-scale foreign buying of US equities.

Monetary strength suggests that near-term economic news will remain robust, while medium-term inflation risks (i.e. for 2028 and beyond) are rising.

Could money momentum be peaking? Three-month growth of commercial bank loans and leases has fallen since April, although the impact on overall credit expansion has been softened by a pick-up in securities purchases – chart 3. The slowdown has been focused on C&I loans and the “all other” category, which includes lending to non-bank financial institutions.

Chart 3

Additionally, the boost from Fed bill buying is moderating, with purchases suspended for the current operating period (ending 14 September) and uncertain prospects for a subsequent resumption at the previous $10 billion per month pace.

*M1A = currency in circulation + demand deposits. M2+ = M2 + large time deposits at commercial banks + institutional money funds.

The post US money update: more strength appeared first on Groupe financier Connor, Clark & Lunn ltée.

Chart 1

The pick-up is consistent with marked monetary acceleration since the start of the year, which continued last month. Six-month growth of the broad “M2+” measure calculated here reached 8.1% annualised in July, with expansion of narrow money M1A hitting 10.2% – chart 2*.

Chart 2

The rise in broad money growth appears to have been driven a combination of firmer commercial bank credit expansion, the Fed’s reserve management securities purchases and external monetary inflows, reflecting large-scale foreign buying of US equities.

Monetary strength suggests that near-term economic news will remain robust, while medium-term inflation risks (i.e. for 2028 and beyond) are rising.

Could money momentum be peaking? Three-month growth of commercial bank loans and leases has fallen since April, although the impact on overall credit expansion has been softened by a pick-up in securities purchases – chart 3. The slowdown has been focused on C&I loans and the “all other” category, which includes lending to non-bank financial institutions.

Chart 3

Additionally, the boost from Fed bill buying is moderating, with purchases suspended for the current operating period (ending 14 September) and uncertain prospects for a subsequent resumption at the previous $10 billion per month pace.

*M1A = currency in circulation + demand deposits. M2+ = M2 + large time deposits at commercial banks + institutional money funds.

The post US money update: more strength appeared first on Groupe financier Connor, Clark & Lunn ltée.

Chart 1

Renewed weakness is unsurprising because the BoJ is continuing to ramp up QT, with monthly JGB purchases falling further behind the run-rate of redemptions – chart 2.

Chart 2

Recent f/x intervention will be a further drag on August numbers. (Yen purchases occurred on 30-31 July, so settled on 3-4 August.)

A post-covid fall in annual money growth accelerated from Q1 2024. This has been reflected in a slowdown in annual nominal GDP expansion since Q2 2025, to 3.1% last quarter – chart 3.

Chart 3

Nominal GDP growth may soon be at or below a pace consistent with the 2% inflation target, based on the BoJ’s estimate of potential expansion of 0.7% pa.

Annual money growth bottomed in Q2 2025, with a tepid recovery into Q2 2026 probably now reversing.

Money growth rates are far below 2010-19 means, when nominal GDP expansion averaged 1.4% pa, a pace associated with average annual CPI inflation of just 0.5%.

Optimists cite strong bank credit growth. Commercial banks’ domestic loans and discounts grew by an annual 6.7% in June, with corporate lending up by 7.8% – chart 4.

Chart 4

The “monetarist” view is that stronger lending has limited economic effects unless accompanied by faster monetary expansion. Otherwise, any rise in demand associated with the lending is balanced by weaker spending elsewhere – a monetary “crowding out” effect.

Lending buoyancy, in any case, is partly a consequence of the monetary squeeze imposed by QT, rather than being an independent positive signal. Rising yields due to the JGB dump have encouraged corporations to switch from bond market funding to cheaper bank borrowing.

Corporations may also have been borrowing domestically to finance rising FDI, contributing to downward pressure on the yen.

What would happen if QT were suspended? With the distortion of BoJ supply removed, domestic and foreign demand for JGBs would likely revive, resulting in lower yields and a rally in the yen. Money growth would recover but probably only to a moderate level, reflecting an associated slowdown in bank lending. Excessive monetary acceleration could be countered by raising rates. A stronger yen would damp near-term inflation while a recovery in money growth would reduce the risk of a medium-term undershoot.

Worth pushing for, Secretary Bessent?

The post Japanese money update: further weakness appeared first on Groupe financier Connor, Clark & Lunn ltée.

Chart 1

Renewed weakness is unsurprising because the BoJ is continuing to ramp up QT, with monthly JGB purchases falling further behind the run-rate of redemptions – chart 2.

Chart 2

Recent f/x intervention will be a further drag on August numbers. (Yen purchases occurred on 30-31 July, so settled on 3-4 August.)

A post-covid fall in annual money growth accelerated from Q1 2024. This has been reflected in a slowdown in annual nominal GDP expansion since Q2 2025, to 3.1% last quarter – chart 3.

Chart 3

Nominal GDP growth may soon be at or below a pace consistent with the 2% inflation target, based on the BoJ’s estimate of potential expansion of 0.7% pa.

Annual money growth bottomed in Q2 2025, with a tepid recovery into Q2 2026 probably now reversing.

Money growth rates are far below 2010-19 means, when nominal GDP expansion averaged 1.4% pa, a pace associated with average annual CPI inflation of just 0.5%.

Optimists cite strong bank credit growth. Commercial banks’ domestic loans and discounts grew by an annual 6.7% in June, with corporate lending up by 7.8% – chart 4.

Chart 4

The “monetarist” view is that stronger lending has limited economic effects unless accompanied by faster monetary expansion. Otherwise, any rise in demand associated with the lending is balanced by weaker spending elsewhere – a monetary “crowding out” effect.

Lending buoyancy, in any case, is partly a consequence of the monetary squeeze imposed by QT, rather than being an independent positive signal. Rising yields due to the JGB dump have encouraged corporations to switch from bond market funding to cheaper bank borrowing.

Corporations may also have been borrowing domestically to finance rising FDI, contributing to downward pressure on the yen.

What would happen if QT were suspended? With the distortion of BoJ supply removed, domestic and foreign demand for JGBs would likely revive, resulting in lower yields and a rally in the yen. Money growth would recover but probably only to a moderate level, reflecting an associated slowdown in bank lending. Excessive monetary acceleration could be countered by raising rates. A stronger yen would damp near-term inflation while a recovery in money growth would reduce the risk of a medium-term undershoot.

Worth pushing for, Secretary Bessent?

The post Japanese money update: further weakness appeared first on Groupe financier Connor, Clark & Lunn ltée.

Investors remained captivated by the AI capex cycle through a July selloff in tech hardware names across North Asia. A parabolic rally in tech hardware stocks controlling bottlenecks in the AI supply chains was followed by a sharp correction during the month. Pundits ascribed market jitters to concerns that hyperscaler capex may be curtailed, reflecting speculation that returns from investment in the technology might be less than compelling.

Second-quarter results from the megacap US tech companies flew in the face of these fears, with firms broadly reporting robust earnings growth in cloud computing services and hinting at healthy returns from their bets on AI. However, doubts are creeping in over whether earnings upgrades can be sustained, adding to concerns over the rising use of debt to fund the capex boom and the competitive threat posed by cheap open-source Chinese LLMs to more expensive frontier model providers in the United States.

Hyperscaler capex estimate by year (USD bn)

Source: Mizuho Securities Equity Research, July 2026.

Artificial Analysis Index – higher is better

Source: Artificial Analysis, August 2026.

Fragile liquidity backdrop

In our view, these risks were well understood before the sell-off. The unwind may instead have been driven by a deterioration in the global liquidity backdrop and an associated deleveraging in crowded trades. NS Partners Chief Economist Simon Ward flagged the risk early in the month (A “monetarist” perspective on current equity markets):

“Global six-month real money growth has fallen back since early 2026, crossing below industrial output expansion in April (see below chart). This suggests that the global economy will lose some momentum during H2, while the monetary backdrop for markets has become less favourable, at least temporarily.”

G7 + E7 industrial output & real money (% 6m)

Source: NS Partners & LSEG Datastream.

South Korean retail speculators driving parabolic rallies in AI hardware winners added to the vulnerability, with the correction appearing to coincide with systematic quarter-end repositioning. This triggered weakness in “speculation of choice” names that fed deleveraging and forced selling. According to Citi, more than 360,000 South Korean margin accounts were forced into liquidation with 62% of those individuals wiped out under the age of 35.

Leverage in South Korea

Source: Jefferies Equity Research, July 2026.

We had been trimming our AI exposure into the event, but in hindsight we should have been more aggressive ahead of what was the largest pullback in Asia momentum since 1999.

Asia Momentum (L/S) – monthly performance

Source: Bernstein Equity Research, August 2026.

Little has changed by way of the growth and profitability drivers of our tech hardware companies in Taiwan and South Korea

For example, TSMC is forecast to generate 30% EPS in 2027 with a gross profit margin of over 55% and trades on a PE of 15.8x 2027 and 12.7x 2028. Elsewhere in Taiwan a number of companies in the tech hardware supply chain continue to deliver EPS upgrades, with the recent de-rating providing some attractive entry points.

In South Korea, DRAM giant Samsung Electronics reported record revenues and operating profits for the quarter with the latter beating estimates driven by exponential growth in AI server demand. The company expects supply constraints to tighten further in 2027 despite investments in supply. The company has no debt and trades on a free cash flow yield of c.16% for 2026, with a PE of 3.1x for 2027 and 2.9x for 2028. We anticipate that the company will announce a shareholder return plan for c.50% of FCF in August including a special dividend, which should provide some support for valuations and reduce capital misallocation concerns.

Caveat: TSMC and the memory giants are very different beasts

TSMC is the monopoly in advanced semiconductors that power all of the latest technological innovations, boasting structural competitive advantages that underpin lower earnings volatility through customer lock-in. While the dominant memory companies SK Hynix, Samsung Electronics and Micron exist in an oligopolistic industry enjoying a demand supercycle powered by AI spending, they remain at the mercy of severe supply-demand swings. Although we expect this memory cycle to go on longer than most expect, nothing cures high prices like high prices.

Tech monopoly vs. memory super cycle

Source: NS Partners & Bloomberg.

We maintain a modest overweight to the AI supply chain on a view that sharply accelerating demand for compute will continue to support growth and profitability for companies dominating key tech hardware chokepoints. However, navigating the cycle successfully will require disciplined adjustments of conviction levels as fundamentals shift, and ensuring this is tightly aligned with portfolio risk.

EM performance is broadening out

In our last commentary, Taking stock of EM performance, we highlighted the extent to which EM outperformance has been dominated by the tech trade. There are signs the rally is starting to broaden out with a number of regional bull markets bubbling away, as illustrated below.

EM MTD and YTD Returns

Source: MSCI

Over the year to the end of July, 18 of the 24 EM markets above delivered positive returns, while 17 of the 24 rose in July. Latin America was the most consistent region across both periods with Colombia the standout, followed by Greece, Hungary and Poland in emerging Europe. In MENA, the GCC was weak across the board, positive momentum returned in Egypt, while returns in South Africa have been negative over both periods.

EPS growth in Taiwan and South Korea has been explosive, the trend in the rest of EM is improving

Source: HSBC Equity Research, July 2026.

EM valuations are low both in absolute terms and relative to DM

Price to Forward Earnings Ratios MSCI Indices, 12m Forward Earnings, Source: IBES

Source: NS Partners & LSEG Datastream.

Style rotation?

After years of outperformance, quality stocks within EM equities are showing signs of an upturn.

MSCI EM Style Indices relative to MSCI EM, 5y ago = 100

Source: NS Partners & LSEG Datastream.

Overvalued exchange rates are a headwind for Mexico, Brazil and Eastern Europe, with Asian currencies mostly cheap

Real broad effective exchange rates
% deviation from 5y ma, Source: BIS

Source: NS Partners & LSEG Datastream.

Emerging market equities have been resilient despite Gulf War III pressuring energy prices, yields and the dollar higher. As noted earlier in this piece, a cross-over of global real narrow money growth below industrial output growth (what we call negative excess liquidity, or less money than economies need) has historically been a negative performance indicator for the asset class. While real narrow money growth reconverged with output in May / June, this has not yet reversed the April cross-over.

Global real money growth on a par with output growth

G7 + E7 industrial output & real narrow money (% 6m)

Source: NS Partners & LSEG Datastream.

Strength amid these headwinds could reflect the combination of earnings upgrades, valuations and cheap currencies, and may be a signal of good things to come if the United States, Iran and Israel can broker a peace in the coming months.

The post AI reflexivity and EM rotation appeared first on Groupe financier Connor, Clark & Lunn ltée.

Investors remained captivated by the AI capex cycle through a July selloff in tech hardware names across North Asia. A parabolic rally in tech hardware stocks controlling bottlenecks in the AI supply chains was followed by a sharp correction during the month. Pundits ascribed market jitters to concerns that hyperscaler capex may be curtailed, reflecting speculation that returns from investment in the technology might be less than compelling.

Second-quarter results from the megacap US tech companies flew in the face of these fears, with firms broadly reporting robust earnings growth in cloud computing services and hinting at healthy returns from their bets on AI. However, doubts are creeping in over whether earnings upgrades can be sustained, adding to concerns over the rising use of debt to fund the capex boom and the competitive threat posed by cheap open-source Chinese LLMs to more expensive frontier model providers in the United States.

Hyperscaler capex estimate by year (USD bn)

Source: Mizuho Securities Equity Research, July 2026.

Artificial Analysis Index – higher is better

Source: Artificial Analysis, August 2026.

Fragile liquidity backdrop

In our view, these risks were well understood before the sell-off. The unwind may instead have been driven by a deterioration in the global liquidity backdrop and an associated deleveraging in crowded trades. NS Partners Chief Economist Simon Ward flagged the risk early in the month (A “monetarist” perspective on current equity markets):

“Global six-month real money growth has fallen back since early 2026, crossing below industrial output expansion in April (see below chart). This suggests that the global economy will lose some momentum during H2, while the monetary backdrop for markets has become less favourable, at least temporarily.”

G7 + E7 industrial output & real money (% 6m)

Source: NS Partners & LSEG Datastream.

South Korean retail speculators driving parabolic rallies in AI hardware winners added to the vulnerability, with the correction appearing to coincide with systematic quarter-end repositioning. This triggered weakness in “speculation of choice” names that fed deleveraging and forced selling. According to Citi, more than 360,000 South Korean margin accounts were forced into liquidation with 62% of those individuals wiped out under the age of 35.

Leverage in South Korea

Source: Jefferies Equity Research, July 2026.

We had been trimming our AI exposure into the event, but in hindsight we should have been more aggressive ahead of what was the largest pullback in Asia momentum since 1999.

Asia Momentum (L/S) – monthly performance

Source: Bernstein Equity Research, August 2026.

Little has changed by way of the growth and profitability drivers of our tech hardware companies in Taiwan and South Korea

For example, TSMC is forecast to generate 30% EPS in 2027 with a gross profit margin of over 55% and trades on a PE of 15.8x 2027 and 12.7x 2028. Elsewhere in Taiwan a number of companies in the tech hardware supply chain continue to deliver EPS upgrades, with the recent de-rating providing some attractive entry points.

In South Korea, DRAM giant Samsung Electronics reported record revenues and operating profits for the quarter with the latter beating estimates driven by exponential growth in AI server demand. The company expects supply constraints to tighten further in 2027 despite investments in supply. The company has no debt and trades on a free cash flow yield of c.16% for 2026, with a PE of 3.1x for 2027 and 2.9x for 2028. We anticipate that the company will announce a shareholder return plan for c.50% of FCF in August including a special dividend, which should provide some support for valuations and reduce capital misallocation concerns.

Caveat: TSMC and the memory giants are very different beasts

TSMC is the monopoly in advanced semiconductors that power all of the latest technological innovations, boasting structural competitive advantages that underpin lower earnings volatility through customer lock-in. While the dominant memory companies SK Hynix, Samsung Electronics and Micron exist in an oligopolistic industry enjoying a demand supercycle powered by AI spending, they remain at the mercy of severe supply-demand swings. Although we expect this memory cycle to go on longer than most expect, nothing cures high prices like high prices.

Tech monopoly vs. memory super cycle

Source: NS Partners & Bloomberg.

We maintain a modest overweight to the AI supply chain on a view that sharply accelerating demand for compute will continue to support growth and profitability for companies dominating key tech hardware chokepoints. However, navigating the cycle successfully will require disciplined adjustments of conviction levels as fundamentals shift, and ensuring this is tightly aligned with portfolio risk.

EM performance is broadening out

In our last commentary, Taking stock of EM performance, we highlighted the extent to which EM outperformance has been dominated by the tech trade. There are signs the rally is starting to broaden out with a number of regional bull markets bubbling away, as illustrated below.

EM MTD and YTD Returns

Source: MSCI

Over the year to the end of July, 18 of the 24 EM markets above delivered positive returns, while 17 of the 24 rose in July. Latin America was the most consistent region across both periods with Colombia the standout, followed by Greece, Hungary and Poland in emerging Europe. In MENA, the GCC was weak across the board, positive momentum returned in Egypt, while returns in South Africa have been negative over both periods.

EPS growth in Taiwan and South Korea has been explosive, the trend in the rest of EM is improving

Source: HSBC Equity Research, July 2026.

EM valuations are low both in absolute terms and relative to DM

Price to Forward Earnings Ratios MSCI Indices, 12m Forward Earnings, Source: IBES

Source: NS Partners & LSEG Datastream.

Style rotation?

After years of outperformance, quality stocks within EM equities are showing signs of an upturn.

MSCI EM Style Indices relative to MSCI EM, 5y ago = 100

Source: NS Partners & LSEG Datastream.

Overvalued exchange rates are a headwind for Mexico, Brazil and Eastern Europe, with Asian currencies mostly cheap

Real broad effective exchange rates
% deviation from 5y ma, Source: BIS

Source: NS Partners & LSEG Datastream.

Emerging market equities have been resilient despite Gulf War III pressuring energy prices, yields and the dollar higher. As noted earlier in this piece, a cross-over of global real narrow money growth below industrial output growth (what we call negative excess liquidity, or less money than economies need) has historically been a negative performance indicator for the asset class. While real narrow money growth reconverged with output in May / June, this has not yet reversed the April cross-over.

Global real money growth on a par with output growth

G7 + E7 industrial output & real narrow money (% 6m)

Source: NS Partners & LSEG Datastream.

Strength amid these headwinds could reflect the combination of earnings upgrades, valuations and cheap currencies, and may be a signal of good things to come if the United States, Iran and Israel can broker a peace in the coming months.

The post AI reflexivity and EM rotation appeared first on Groupe financier Connor, Clark & Lunn ltée.

GDP (gross value added) rose by 1.1%, or 2.2% annualised, in the six months to June, having shown no growth in the prior six months (i.e. between June and December 2025).

Energy prices spiked at the end of Q1 with the increase only now feeding through to household tariffs, so the claim of resilience is premature, even ignoring monetary considerations.

Both the economic stagnation of H2 2025 and the H1 2026 pick-up were signalled by money trends. Six-month rates of change of real narrow and broad money turned negative in spring 2025 but rebounded into early this year – see chart 1.

Chart 1

Momentum has since softened again, with real narrow money returning to contraction. Trends are not yet as weak as a year ago but still suggest a significant H2 economic slowdown.

As an aside, the latest Monetary Policy Report included an analysis of broad money developments, focusing on whether the current stock is out of line with its “equilibrium” level, implying future changes to spending / prices to restore balance. The conclusion was that any “money gap” is small, in contrast to 2022, when the analysis would have suggested significant inflationary potential.

While any discussion of money in the MPR is welcome, the view here is that a focus on uncertain estimates of stock disequilibrium risks neglecting the information content of changes in money growth for future activity and inflation. Monetary acceleration / deceleration carries a message for policy even in the absence of an underlying stock imbalance.

The post More UK stop-go appeared first on Groupe financier Connor, Clark & Lunn ltée.

GDP (gross value added) rose by 1.1%, or 2.2% annualised, in the six months to June, having shown no growth in the prior six months (i.e. between June and December 2025).

Energy prices spiked at the end of Q1 with the increase only now feeding through to household tariffs, so the claim of resilience is premature, even ignoring monetary considerations.

Both the economic stagnation of H2 2025 and the H1 2026 pick-up were signalled by money trends. Six-month rates of change of real narrow and broad money turned negative in spring 2025 but rebounded into early this year – see chart 1.

Chart 1

Momentum has since softened again, with real narrow money returning to contraction. Trends are not yet as weak as a year ago but still suggest a significant H2 economic slowdown.

As an aside, the latest Monetary Policy Report included an analysis of broad money developments, focusing on whether the current stock is out of line with its “equilibrium” level, implying future changes to spending / prices to restore balance. The conclusion was that any “money gap” is small, in contrast to 2022, when the analysis would have suggested significant inflationary potential.

While any discussion of money in the MPR is welcome, the view here is that a focus on uncertain estimates of stock disequilibrium risks neglecting the information content of changes in money growth for future activity and inflation. Monetary acceleration / deceleration carries a message for policy even in the absence of an underlying stock imbalance.

The post More UK stop-go appeared first on Groupe financier Connor, Clark & Lunn ltée.