Spain’s messy political situation – Paul Brain, lead manager of the Newton Global Dynamic Bond Fund, Newton Investment Management

“For a while now we have seen a fragmentation of the political system in Europe. The longer the period of unemployment, the greater the chance of seeing fringe parties gaining electoral votes. At this point there is no clear party in Spain that has got a majority and there is no clear collection of parties that could form a coalition. In the past you might have had more centralist parties, now you have more extreme anti-austerity and anti-corruption far left and far right parties coming through, which makes it harder to form a coalition given their different ideological beliefs.”

“We have been underweight in Spanish bonds in our portfolios but we have a target level which we want to get back to. The reason we want to invest there in the long term is because of the continued support from the ECB’s bond buying programme, which should put the spread lower.”

“Investors should take a step back and look at the gradual economic improvement that has been going on in Spain over the past 18 months. The underlying strength of the economy is still good and there are opportunities on both the equity and bond side, and a lack of leadership should not de-rail this momentum.”

Japan’s productivity paradox – Simon Cox, investment strategist, Asia Pacific, BNY Mellon Investment Management

“In September, Japan’s prime minister, Shinzo Abe, announced a bold target to increase Japan’s nominal GDP by about 20 per cent. It was one of three new “arrows” of Abenomics, his campaign to revive Japan’s economy, complementing the original arrows of monetary stimulus, fiscal pragmatism and structural reform. To achieve this growth, Japan will have to defeat deflation, prevent the workforce shrinking too fast, and increase labour productivity (GDP per worker) by roughly 2 per cent a year.

“Because Japan’s productivity level is so low, it also has ample scope to grow. Japan could increase its GDP by 20 per cent merely by replicating the productivity performance of the European Union’s older members (i.e., the 15 countries in the EU before the May 2004 enlargement). A lack of competitive “push” in Japan’s economy may, however, be less important than a shortage of demand “pull”. Japanese firms can get away with hoarding workers in unproductive jobs partly because those workers have few better options. Japanese unemployment may be low, according to the official statistics, but underemployment, as abundant anecdotal evidence attests, is rife, especially in Japan’s service sector.

“If Japanese spending picked up, activity quickened, and hiring strengthened further, these workers might find more interesting and lucrative things to do with their time. Japan’s firms would then adapt to life without them—perhaps by employing the same labour-saving technologies that other countries embraced long ago.”

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