“We can’t ignore the fact that there are emerging-market-type risks in some of the actions the US has been taking.” This is former Morgan Stanley Chief Economist Ellen Zetner’s take on how policy uncertainty and fiscal trajectory in the United States are increasingly mirroring traditional EM risk factors.

Fiscal incontinence and financial repression are macro risks that investors typically associate with emerging markets. Their developed counterparts have enjoyed valuation premiums in their stock and bond markets based on a perception of stronger fiscal and monetary discipline, as well as better institutional protections.

The current flare-up in sovereign bonds yields in developed markets partly reflects their governments’ failure to curb rising debt burdens by cutting public spending back to pre-Covid levels, coupled with anaemic growth (with the exception of the United States). Investors fear that, lacking the political will to rein in spending, governments in developed countries will adopt policies of financial repression, keeping interest rates below the rate of inflation to slow or reverse the rise in debt-to-GDP ratios.

Relative to developed markets, many emerging markets have become more fiscally and monetarily disciplined over the past decade. Having learnt the consequences of fiscal and monetary incontinence the hard way, they have strengthened central bank credibility, maintained positive real interest rates and improved macroeconomic resilience.

China’s export boom risks a backlash from trading partners

We having been gradually reducing portfolio exposure to leading Chinese exporters in recent months as risk grows of an international backlash to overproduction of high-end manufactured goods.

The internal contradictions in Beijing’s model for economic growth model have fuelled an export boom that is nearing the end of the road. While the Chinese Communist Party (CCP) has acknowledged that involution – or excessive levels of competition by firms producing more at low or negative margins – is unsustainable, we are yet to see any concrete measures to curb overcapacity.

“The world is not enough”

The issue is that China now accounts for 30% of global industrial production with the share set to grow to 45% by 2030 according to the UN. As noted by Council on Foreign Relations President Michael Froman in a piece for Foreign Affairs this month, this is a level of industrial dominance not seen since the United States at the end of the Second World War. He also emphasised that in 2025 China recorded the largest trade surplus in history in US dollar value terms, with exports growing at three times the rate of global goods trade.

China has outgrown its economic model and the global economy’s capacity to absorb its exports. It must take decisive steps to rebalance towards an economy driven by consumption. Unfortunately, CCP policy incentives underpinning rigid GDP growth targets and local government financing create powerful and entrenched feedback loops that fuel overcapacity, which is vented to the rest of the world through exports.

While flooding the world with cheap goods has been a disinflationary force over several decades, it has also created huge trade imbalances leading to de-industrialisation and rising debt in many of China’s trading partners. China’s economic model suppresses domestic consumption in order to maximise industrial output through an undervalued currency, subsidies and preferential financing (among other measures). Peking University economist Michael Pettis argues that this system defies David Ricardo’s principle of comparative advantage, explaining why free trade maximises global output. To quote from a Substack post by Pettis in February this year:

Competitive advantage is not the same as a comparative advantage. The former means an economy is able to produce more cheaply than its trade partners. The latter means that the relative “cheapness” with which an economy produces some goods is greater than the relative “cheapness” with which it produces other goods, so that it can only have a comparative advantage in roughly half the goods it produces.

This is because comparative advantage is about relative costs, not absolute costs, and while an economy can have lower absolute costs in most or even all things, by definition it cannot have lower relative costs in much more than half of what it produces. Ricardo’s example shows this very clearly. In his model. Portugal produces both textiles and wine more cheaply and efficiently than England, which means that Portugal has a competitive advantage in all goods, and England a competitive disadvantage in all goods.

But Ricardo did not argue that the world would benefit if Portugal produced both wine and textiles, with England producing neither and acquiring them by running trade deficits with Portugal. Instead, he showed that because the relative “cheapness” with which Portugal produces wine is greater than the relative “cheapness” with which it produces textiles, Portugal only has a comparative advantage in producing wine, and England has a comparative advantage in producing textiles. He showed that if Portugal only produces wine, and exports some of it to England to buy textiles, and if England only produces textiles, and exports some of it to Portugal to buy wine, trade would be balanced and total output would be maximized – and as counterintuitive as it may seem, this is the case even though Portugal can produce textiles more cheaply and efficiently than England.

Looking at today’s global trading system, Ricardo might argue that China’s exploitation of its competitive advantage is creating persistent global imbalances, as a result of which global production falls and unemployment rises, or “debt must rise in deficit countries to make up for weak demand in the surplus country and to prevent unemployment from rising.”

We can see both of these outcomes occurring in Europe. France relies on debt to prop up demand while Germany’s industrial giants are announcing the largest layoffs since the Global Financial Crisis.

Volkswagen flags 50,000 job cuts across group as board approves turnaround plan (Reuters, September 3, 2026)

Volkswagen’s supervisory board on Thursday approved a transformation plan that will include cutting another 50,000 jobs in its attempt to counter painful tariffs, overcapacity and aggressive Chinese ​rivals.

The plan, the most extensive restructuring in Volkswagen’s 89-year history, includes exploring alternatives for four German plants ​that will eventually run out of models during the next decade.

As Stein’s Law goes, “if something cannot go on forever, it will stop.” China’s domestic economic imbalances are provoking social and political responses among its major trading partners. In response, governments in virtually all advanced economies have taken their first steps to address the issue, enacting stronger import duties, local content requirements, and even bans on Chinese equipment in sensitive sectors such as telecoms. However, these measures will fall short without structural change in China.

Layoffs in the German auto industry virtually guarantee a more forceful and coordinated response from Europe.

Italian lobby group calls for 80% EU tariff on Chinese cars and parts (Reuters, September 10, 2026)

The head of Italian auto suppliers lobby Anfia has urged the European Union to impose 80% tariffs on Chinese-made vehicles and parts above a certain threshold to safeguard Europe’s ​car industry.

Anfia President Roberto Vavassori told Reuters that Chinese imports to the European Union ‌should be tariff-free up to 8% of annual European vehicle registrations, but with an 80% tariff on imports above that limit.

It should cover both vehicles and components, he said, as parts account for roughly 80% of a vehicle’s value. “We have ​maximum respect for what the Chinese industry has achieved,” Vavassori told Reuters. “But that respect has ​now turned into fear.”

“Europe cannot lose an industry which is essential for its ⁠strategic autonomy.”

His comments come days after Volkswagen approved a major restructuring in the face of slumping demand and ​increasing competition from China. Figures from the European Automobile Manufacturers’ Association (ACEA) showed that the share of Chinese-branded cars sold ​in the EU rose to top 9% in the first half of this year.

Other countries fearing the damage of a China supply shock to their leading manufacturing industries may also seek to collaborate with Europe and the United States to address the issue. There are strong incentives for both China and major trading partners to collaborate with the aim of engineering a gradual rebalancing over decades, lest more sudden measures trigger an external demand collapse for Chinese exporters, and globally inflationary supply chain disruption.

We remain admirers of the Chinese entrepreneurs that have built outstanding businesses across autos, renewable energy, batteries, heavy industries and other advanced manufacturing processes. The leaders in these industries have been innovators able to scale across a continental-sized economy amid ferocious competition and go global to challenge incumbents. In our view, their long-term prospects remain bright and they would continue to prosper in a more balanced environment for international trade, and in a domestic environment where competition is rationalised through the re-alignment of economic policy incentives that promote more sustainable growth. However, portfolio changes including reducing exposure to battery manufacturer CATL and avoiding automaker BYD altogether for the past year or more reflect lower conviction levels over the short to medium term as we move through a period of realignment in international trade.

October’s presidential election in Brazil will be a tight contest

Source: Polymarket, 10 September 2026

We wrote previously on how political uncertainty has weighed on Brazilian equities:

Brazilian Blackjack: Decoding the allure of a high-risk, high-reward market

Brazilian Blackjack revisited

Crunch time is approaching with the presidential election set to take place in less than a month. Picking up the blackjack analogy, it is safe to say there are no high cards (more moderate and economically conservative candidates stepping up to make a run) left in the deck to be dealt in this political cycle. Voters are set to choose between two deeply flawed candidates in incumbent Lula and Flavio Bolsonaro, who are both fending off corruption allegations.

Nevertheless, our view was that political risk was reflected in extremely cheap valuations for some high-quality businesses, which led us to move to a modest overweight in Brazilian equities. The market has been rallying in recent weeks, partly reflecting a betting-market lead for Flavio Bolsonaro, perceived by investors as more market friendly (debatable in our view).

We read the market move with some caution. The betting-market odds are out of line with the polls, which remain a statistical tie in second-round simulations, and much of the recent shift tracks an internal Supreme Court dispute and leaked communications weighing on Lula rather than a durable realignment of the electorate.

With a first round on 4 October and a probable runoff on the 25th, event risk is high and early, contrarian positioning has been rewarded already. Our exposure remains focused on quality names trading below intrinsic value, and sized to give us room to take advantage of volatility in the months ahead.

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The key measure used to track the cycle is the annual change in G7 stockbuilding, expressed as a percentage of GDP. This is supplemented by a more timely indicator derived from business surveys, which displays a strong correlation with the GDP measure – see chart 1.

Chart 1

The GDP indicator last bottomed in Q1 2023, implying that the current upswing is mature, already matching the historical average duration of a whole cycle (of 3.5 years).

The GDP measure reached a level consistent with a peak in Q1 2025 but stockbuilding behaviour around that time was distorted by front-running of US tariffs. A correction over subsequent quarters has run its course, with the business survey indicator signalling a strong rebound in Q3 2026. This is supported by other evidence, e.g. the Atlanta Fed US GDP nowcast currently estimates that stockbuilding will contribute 2.0 pp to annualised Q3 growth.

The judgement here, therefore, is that the cycle is reaching a final peak in Q3 ahead of a multi-quarter downswing.

The cycle describes demand for production inputs – both raw materials and semi-manufactures, including electronic components – so is strongly correlated with their prices. A further rise in year-on-year growth of industrial commodity prices and global semiconductor sales in Q3 is consistent with the cycle reaching a peak – chart 2.

Chart 2

The suggestion is that the cycle about to shift from providing a tailwind to global economic momentum and pricing power to acting as a progressive headwind, with a maximum negative impact in mid-to-late 2027.

The risk of economic weakness next year is magnified by signs that a downswing in the long-term housing cycle is on track to accelerate into a 2027-28 low. The cycle has averaged 18 years historically, with the last trough reached in 2009.

The behaviour of homebuilding stocks may provide a clue to the timing of the next low. Chart 3 shows that an average of stock prices of US and UK homebuilders reached a peak 47 and 37 months respectively before lows in the last two housing cycles, in 1991 and 2009, while UK prices peaked 33 months before a previous trough in 1975.

Chart 3

The most recent peak in the average occurred in September 2024, suggesting a cycle trough between June 2027 and August 2028.

UK homebuilding stocks broke below a 2025 low in March and have yet to regain this level. US stocks currently remain above the corresponding low; an equivalent breakdown would suggest an acceleration of the cycle downswing – chart 4.

Chart 4

Joint weakness of the stockbuilding and housing cycles in 2027 would likely overpower and / or shorten the current business investment cycle upswing.

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If AI hasn’t already struck fear in the minds of the general population, humanoid robots are threatening to break the confines of the lab and enter the real world. It’s been hard to ignore those funny humanoid robot videos but it’s not all about party tricks and dance moves. Deployments are expected to surge from today’s tens of thousands to millions in the next decade, driven by broadening commercial and industrial applications.

What’s stopped full-scale adoption in the past?

Robots themselves are not new. They have been performing singular mechanical tasks like painting, welding or assembling for decades. There is no shortage of demand for real-world applications, but the biggest constraint for full-scale, multipurpose adoption remains a lack of real-world training data.

Unlike LLMs where most of the training data resides on the internet, robots need data from the physical world, including watching humans performing various mundane and complex tasks in unpredictable environments (called physical AI). However, the race is on to use real-world and synthetic data to create the data flywheel that will enable rollout at scale. AI-based simulation algorithms can now replicate physical-world training data and compress the learning cycle from years to days.

Additional constraints to humanoid robot adoption are the lack of dexterity and limited battery life that prevent robots from taking up complex and mission critical tasks – for now.

What’s changed now to drive full-scale adoption?

As per CLSA, there are four key trends beneath the surface that could be changing the paradigm when it comes to full-scale commercialization of humanoids.

1. Actuators used to convert electrical energy into kinetic energy (movement) are being standardized across the industry with energy efficient and precise electric actuators (vs. leaky hydraulic actuators).
2. A move toward modularization where the motor, reducer, inverter and controller are housed in one integrated unit which is easier to mass produce.
3. Reducers are what give robotic joints the power to lift weights. Advances in AI software are helping decrease inaccuracies in low-cost planetary reducers, therefore enhancing performance while bringing overall costs down.
4. Finally, the adoption of linear actuators which use convert rotational energy into straight-line thrust, mimicking the contraction and extension of human muscles. This helps with heavy load bearing capacity and better shock absorption on ground impact.

Where will demand come from?

• Manufacturing – particularly in automotive industries which have both the scale and assembly line processes to enable large-scale adoption. We also see auto component companies as fertile ground for the emergence of humanoid robot opportunities, given their scale manufacturing and quality control experience.
• Retail and facilities management – from tasks like customer service, cleaning and delivery-related work.
• Logistics – tasks around assembly, packaging, inspection and transportation.
• Defence and hazardous tasks – from mine clearing to dangerous material handling.

We have several holdings in the emerging market small cap portfolio that could potentially benefit from the coming robotics revolution. Sinbon Electronics Co. Ltd. (3023 TT) supplies sensors and connectors for both battery charging and signal transmission, and video capture harnesses directly to humanoid robot OEMs. Reliability and quality requirements are stringent and Sinbon is a sole supplier for at least two US humanoid clients.

Similarly, pneumatic actuators and linear motion components are among the most widely used parts in humanoid robot joint and limb assemblies and Airtac International Group (1590 TT) is an important supplier in this space. We also believe holdings such as WeRide Inc. (WRD US) and Dongguan Yiheda Automation Co. Ltd. (301029 CH) could potentially benefit from increased investment in humanoid robotics.

We believe emerging markets will be at the heart of the humanoid revolution. According to Bloomberg, China accounted for almost all global humanoid shipments so far this year. Just as how Asian supply chains deliver the picks and shovels enabling the current AI buildout, we think a similar story will play out in robotics as the current supply chain leverages its scale and manufacturing excellence to mass produce everything from actuators, reducers, sensors and cables that are needed to power this revolution.

The companies discussed are provided for illustrative purposes to demonstrate the investment team’s research into the robotics theme and are not intended as investment recommendations. There is no assurance that these companies will benefit from increased adoption of humanoid robotics or that the investment thesis will develop as anticipated.

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Trade wars rarely create winning outcomes. They raise costs, disrupt investment and inject unnecessary uncertainty into business decisions. The renewed US-Canada confrontation is no exception, and, in the near term, it is likely to weigh on Canadian growth. But the longer-term implications may actually be more constructive. For years, Canada has struggled to convert all its advantages, including abundant resources, political stability and enormous pools of institutional capital into stronger investment and productivity. Regulatory barriers, slow project approvals and heavy reliance on the neighbouring US marketplace have perpetually held the economy back. The current trade dispute may provide the pressure needed to make change.

Short-term shock, longer-term catalyst

The latest negotiations broke down after the terms of a potential agreement shifted late in the process. Ottawa ultimately walked away, arguing the proposed deal would weaken key industries and constrain Canada’s ability to diversify its trade relationships. The Trump administration then announced 50% tariffs on roughly US$20 billion of Canadian exports, prompting Canada to respond with matching counter-tariffs on US goods beginning September 8. The immediate economic impact should not be dismissed, but it also remains relatively contained. To be clear, the total impact is manageable. Roughly 85% of Canadian exports remain exempt under USMCA, while the newest tariffs affect approximately 5% of total exports. Trade uncertainty will likely delay some investment and weigh on growth, but this is not yet an economic disaster. Canada also has more fiscal capacity than many developed economies to cushion the near-term shock while supporting investment, and enters this trade war with relatively more subdued inflation.

What may matter more is how Canada responds. Prime Minister Carney entered office with an ambitious agenda to accelerate infrastructure and resource projects, reduce barriers to investment and attract significantly more private capital. The persistent question has been whether Canada could overcome the regulatory and political hurdles that have slowed major projects in the past.

This trade dispute could catalyze change. New pipelines, LNG infrastructure, critical-mineral projects and electricity transmission can increasingly be framed not simply as economic development, but as national resilience. Removing internal trade barriers becomes urgent when external trade is less dependable. In that sense, the dispute raises the cost of doing nothing. A unified political environment could give Ottawa the room to advance projects that have been discussed for years but rarely delivered upon.

The result is an unusual two-horizon outlook: weaker growth in the near term, but potentially stronger domestic investment and productivity over time.

Canada looks different from the outside

The global investment backdrop is also evolving as trade and capital flows become increasingly influenced by politics. Investors are paying more attention to institutional stability, access to resources and the reliability of counterparties. Against that backdrop, Canada’s relative strengths are becoming more valuable. There are tentative signs that international capital is becoming more receptive to Canada. Foreign direct investment reached just under C$26 billion in Q2, rising from the prior four-quarter average of C$21 billion. Foreign demand for Canadian financial assets has also been strong. Most of that buying has been in bonds, but foreign flows into Canadian equities have recently turned positive after several years of persistent selling (see Chart 1).

Chart 1 – Foreign flows in Canadian equities turn positive

Source: Statistics Canada

Canada has an unusually timely opportunity to capture more interest. In mid-September, Toronto will host the inaugural Canada Investment Summit, which was designed to attract capital into Canadian businesses and infrastructure. It now arrives as global investors are actively reconsidering geographic concentration and supply-chain exposure. Canada does not need to replace the US as a global investment destination. It simply can become more attractive at the margin.

The capital is already here

Canada also has an enormous domestic source of capital. The country’s major pension funds collectively manage roughly C$2.5 trillion, yet only about one-quarter of their assets are currently invested in Canada. A domestic investment case, however, cannot simply rest on a “Buy Canada” argument. It requires better opportunities. That is why policy reform and project development matter. Infrastructure, energy, power generation, critical minerals and transportation are long-duration assets that can be well suited to pension investors. If Canada can accelerate approvals and create more commercially attractive projects, greater domestic investment could follow because the opportunities themselves are compelling.

Making the most of the moment

The trade confrontation remains a near-term economic headwind, but it may also expose some of the structural weaknesses Canada has spent years discussing without fixing. That is the opportunity. There is no guarantee that Canada will convert this moment into lasting change. Project announcements still need to become actual projects, and regulatory reform still needs to produce lasting results. But the investment case has certainly become more interesting.

Portfolio strategy

Canadian markets have been notably resilient despite the escalation in trade tensions. Canadian equities have continued to perform well, with the S&P/TSX Composite Index outperforming the S&P500 on both a quarter-to-date (see Chart 2) and year-to-date basis (in local currency). Meanwhile, the Canadian dollar has held up better than expected since the trade war reignited, given what would normally be a significant negative shock to the domestic outlook. This resilience suggests investors may be looking beyond the immediate growth impact. At the same time, bond yields have moved higher globally, reflecting continued pressure from solid nominal GDP growth, fiscal spending and, perhaps most notably, the rising combination of public- and private-sector financing needs. In the US, the move in yields became significant enough (see Chart 3) that Treasury Secretary Bessent increased purchases of long-dated Treasuries through the buyback program. The direct flows were small relative to the market, but the signal was notable: Treasury officials are becoming increasingly uncomfortable with disorderly rises in long-term yields. Long bonds initially rallied, but the move faded quickly, suggesting policy intervention may not remove the underlying pressure on longer-term rates. At the same time, increasingly hawkish Fed communication, most recently from Chair Warsh at the Jackson Hole Economic Policy Symposium, suggests persistent US inflation could still force a tightening in monetary policy.

Chart 2 – Canadian equities outperform despite trade war

Source: Toronto Stock Exchange, S&P Global, MSCI, Nasdaq, Macrobond

Chart 3 – US 30-year yields reached highest level in nearly 20 years

Source: U.S. Department of Treasury, Macrobond

Against this backdrop, balanced portfolios maintain a broadly defensive stance, with flat equity exposure. Within equities, we have a preference for Canadian equities relative to global equities.

Within fixed income, softer Canadian growth and trade uncertainty provide some tactical support for duration, but continued pressure at the long end argues for caution. We currently see relatively attractive opportunities in Canadian yield curve steepening.

Fundamental equity portfolio strategy remains constructive, supported by positive earnings revisions and resilient economic activity. We continue to favour themes including AI infrastructure, rare earths and defence, while monitoring key risks including potential inflation pressures and any slowdown in AI capital spending.

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The global manufacturing PMI new orders index rose in August, though remains below an April high – see chart 1.

Chart 1

The solid August result is consistent with a rise in global six-month real narrow money momentum into early 2026. Growth, however, has eased since February, suggesting a moderation in new orders over the remainder of the year.

A July fall in real money momentum reflected deepening contractions in Europe and Japan, which offset a further pick-up in the US – chart 2.

Chart 2

The suggestion is that the US economy is running hot with the Fed behind the curve, while ECB and BoJ policy tightening is misguided, risking a sharp economic slowdown, or worse.

Meanwhile, six-month growth of global real narrow money is estimated to have fallen below that of industrial output in July, implying a less favourable liquidity backdrop for markets – chart 3.

Chart 3

A previous undershoot in April preceded a sharp correction in momentum stocks but real money growth recovered to close the gap in May / June, following which equity indices reached new highs.

The global services PMI survey for August was stronger than for manufacturing, with new business reaching a 20-month high. Services buoyancy, however, has little implication for manufacturing prospects. Granger-causality tests show that manufacturing new orders predict services new business but not vice versa. Manufacturing deceleration is likely to be reflected in services cooling.

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In a recent Investment Executive Soundbites interview, Lisa Conroy, CFA, Product Specialist on our Fundamental Equity team, discusses the outlook for Canadian equities and why a number of structural trends are creating compelling opportunities for Canadian companies. From onshoring and electrification to AI infrastructure investment, Lisa explains why Canada is well positioned to benefit from forces reshaping the global economy and where our team is finding opportunities across the Canadian market.

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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.

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The manufacturing PMI reached a 51-month high in August, according to flash data released last week. Recent strength was signalled by an upswing in six-month real narrow money momentum into July 2025 followed by a consolidation into early 2026 – see chart 1.

Chart 1

Real money momentum, however, has fallen sharply since February, turning negative in April and weakening further in July. Allowing for the usual six to 12 months lead, this suggests that the PMI is entering a time window to begin another sustained decline.

The fall in real narrow money momentum reflects a combination of a slowdown in nominal growth, probably explicable by misguided ECB policy tightening, and an energy-driven pick-up in six-month consumer price inflation – chart 2.

Chart 2

A country breakdown is available for the deposit component of narrow money but not currency in circulation. Six-month real deposit momentum is negative across the big four, with the largest contractions in France and Italy.

Chart 3

French monetary weakness suggests rising economic / fiscal risks, appreciation of which may explain a fall in demand for French government debt. Bond purchases by Eurozone banks in the 12 months to July were smaller than in the other big four markets, a reversal of the position a year ago – chart 4.

Chart 4

Further details show that purchases of French bonds by both French banks and other Eurozone institutions have slowed. French banks bought only €7.0 bn in the year to July, down from €48.9 bn in the prior 12 months.

The fall in demand for French bonds by French banks follows a reduction in the ownership percentage of French insurers and other domestic investors in recent years. Accordingly, the share of debt owned by non-residents rose to 57.5% in Q1 2026, a nine-year high – chart 5.

Chart 5

The post Eurozone money update: French weakness appeared first on CC&L Financial Group Ltd..

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.

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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?

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