Investment Research & Strategy

Our Global Strategy team delivers insightful, bespoke, and thought-provoking market commentary with viewpoints that span all global markets and asset classes and supplement our Fixed Income and Equity product-specific research. APEX also provides relevant and timely content to clients through regular email commentary, weekly publications, long-term macroeconomic forecasts, one-on-one meetings and speaking engagements, including our Global Macro Speaker Series.

Our economists analyze U.S., European, and Asian monetary and fiscal policy developments and provide macroeconomic forecasts. Our economists sit with the respective government securities traders on the trading floor and regularly discuss their views and outlook with clients from across the firm.

• The U.S. Economics team is responsible for the Jefferies U.S. economic, Federal Reserve, Treasury financing and fiscal policy analysis and outlook.
• The European Economics team covers the Eurozone and the UK, with a heavy focus on the implications of fiscal, regulatory and monetary policy debates.

Our top-ranked Equity Research team produces alpha-creating, high-conviction content that leads investment debates across our global coverage universe. We’re known for best-in-class coverage of core sectors including Consumer, Energy, Financials, Healthcare, Industrials, Materials and TMT as well as our expertise across Business Services, ESG, REITs, Macro and Micro, Natural Resources and Thematic.

Evidence-based primary research: APEX has made substantial investments in data- and evidence-based content across our global platform, which enhances our ability to generate alpha.

• Analyst teams are provided with broad sets of alternative and traditional data to help forecast more accurately, call stocks more effectively and answer investor questions on an evidence-based basis.
• These techniques—including using alternative data sets, web-scraping, credit card and web-traffic data together with fieldwork, experts, panels and surveys—help our clients maximize efficiency and returns.

Longitudinal analysis: We provide a long view on all securities that APEX covers. This allows us to flex assumptions and scenarios and to assess the potential upside and downside pressure that a stock might experience over a 12-month period. We include realistic base cases, upside and downside scenarios—including stock price levels those scenarios imply—and likely dates of catalysts.

In addition to sales, trading and capital markets capabilities, APEX Fixed Income has a leading strategy team. Our strategists work closely with APEX’s sales and trading teams to deliver tailored and customized service, including facilitating direct and indirect access to issuers and institutional investors around the globe.

• Our product-focused desk strategists provide in-depth and relative-value analysis in a variety of market conditions and across the credit spectrum.
• We seek to build client value by providing relevant and timely analysis and commentary, particularly early identification of market opportunities and market reaction or overreaction to current developments.
• We publish strategies across the following markets: Emerging markets, Foreign exchange, Investment grade corporate credit, Leveraged credit, Municipal securities and Securitized markets.

Our top-ranked team delivers customized guidance to clients, rooted in the firm’s deep understanding of specific ESG issues—including include net-zero, natural capital, human capital and corporate culture, and ESG policy and regulation—followed by actionable and timely investment insights.

• Our team advises some of the largest private equity firms, global hedge funds, and Fortune-250 companies on pressing issues in ESG and Sustainability.
• We provide unique access to public and private sector ESG thought leaders for investors and corporate boards.
• We bring specialized expertise in structuring, marketing, and distributing ESG municipal securities and advising clients on energy transition.

After three decades of darkness, the sun is rising for investors in Japan.

A confluence of factors – including the taming of deflation and a dramatic push for corporate reform by the Tokyo Stock Exchange (TSE) – has Japan poised to deliver some of the world’s best global investment returns through 2030.

The TSE’s ambitious reforms include a 2021 revision of its corporate governance code to emphasize the importance of corporate boards and their committees in enhancing shareholder value. And in early 2023, the TSE reforms expanded to require companies to show evidence they are taking action to improve shareholder returns, or else face delisting in 2025.

Although change in Japan can seem incremental by Western standards, once a new consensus has been formed, the resulting change in behavior can be both durable and dramatic. All the evidence is that such a consensus has now been formed and the changes underway should prove “irreversible,” according to Chris Wood, Global Head of Equity Strategy at Jefferies.

As Japan executes its ambitious internal reforms, it is also the one developed country where inflation is a net positive, since it is ending Japan’s decades-old deflation difficulties. “Japan finds itself getting a relative easing in monetary policy by doing nothing,” according to David Zervos, the Chief Market Strategist at Jefferies.

This has led to a relative devaluation of the yen that could finally take Japan out of the quagmire (of loan growth, high real rate, debt deflation) that it has been in for 30 years.

Global investors are already taking notice of the emerging opportunities in Japan. Although foreign direct investment has historically been small as a share of Japan’s economy, it is growing fast, reaching $47.5 billion in 2022. Berkshire Hathaway also recently announced it was increasing its stake in five Japanese trading houses by about 70%. It now owns an average of 8.5% of Mitsubishi Corp., Mitsui & Co., Itochu, Marubeni and Sumitomo Corp, and Berkshire founder Warren Buffet has said, “we’re not done” investing in Japan.

The opportunity for global investors is just beginning and there at least four consequential developments to expect in the years to come.

1. Japan will be one of the best equity markets through 2030: The next 12-18 months will likely generate superior returns as the TSE’s March 2025 deadline for corporate improvement approaches.
2. More regulatory reforms to come: TSE says it will remain “relentless” in pushing for reforms and we predict that more than 80% of companies will respond to the TSE's asks.
3. Consolidation will accelerate domestic and cross-border: Initially, expect more domestic consolidation (largely friendly M&A) with more cross-border partnerships and joint ventures over time.  
4. Japan Inc.’s new religion is Return on Equity. With prudent guidelines from TSE, Japan Inc. will reallocate capital toward assets that generate returns greater than the cost of capital.

In this moment of tremendous uncertainty, it is always possible that cyclical headwinds from a global recession could offset some of Japan’s structural gains.

But these are truly dramatic times in Japan’s capital markets, and reforms are already far enough along to suggest that this is a generational opportunity to invest in Japan, Inc.

1. Economic cycle: Lower growth for longer?
2. Political cycle: Change in emphasis
3. Inventory cycles: The beginning of the end?
4. Technology cycle: Beware the bubble!

Investors have often seen China as a one-way bet on growth. That is perhaps unsurprising: since Deng Xiaoping began his far-reaching economic reforms in the late 1970s, the country has averaged annual GDP growth of 9%. But having emerged from COVID lockdown, China has struggled to get its economy back on track.

This year, the government is targeting GDP growth of just 5% – a far cry from the heady heights of the preceding decades. The slowdown in the economy has led to huge fund outflows this year, with geopolitical tensions and a debt-stricken property sector adding to the malaise. Chinese stock markets have fallen to their lowest levels since before the COVID pandemic.

However, we think that investors’ macroeconomic focus is misplaced. The macroeconomic cycle is just one of four key cycles in China, each of which offers structural alpha opportunities both long and short. A long/short approach potentially captures a differentiated source of returns and complements a beta-driven strategy while improving risk-adjusted returns across different market cycles.

• China’s GDP growth target is a modest 5%, signaling a departure from historical highs.
• Demographic shifts, falling return on invested capital (ROIC) and artificial intelligence (AI) development challenges contribute to the evolving economic landscape.

China’s organic GDP growth appears to be heading toward a naturally lower level. The country’s ageing population and falling birth rate mean that it is subject to considerable demographic shifts, with knock-on consequences for growth. Although the one-child policy has been abolished, single-child families are now a long-established norm.

Meanwhile, the return on invested capital (ROIC) is falling. This is because China’s markets now offer fewer assets that can generate the eye-catching yields once available from property developers and local-government financing vehicles. Also, many Chinese firms are investing heavily in research & development, constraining ROIC in the near term.

And in the age of artificial intelligence (AI), there are also pressures on development from bottlenecks in the semiconductor industry as China struggles to produce the chips required to harness the computational power of generative AI.

• Recent market volatility stems from government priorities shifting toward de-risking and social stability.
• Structural reforms aimed at achieving “common prosperity” indicate short-term market volatility.

One explanation for the recent volatility in Chinese markets is the difference in perspectives between the government and investors. Since the pandemic, de-risking and social stability have clearly taken priority over economic efficiency.

Given this, we should expect more volatility in the short term as Chinese policymakers implement structural reforms to expand the drivers of the economy and pursue the goal of “common prosperity” and a more equal society.

• China approaches the trough of its destocking cycle, suggesting a boost in the job market and consumer activity.
• Opportunities may arise along the supply chain as companies adjust their inventories.

China’s inventories are an important indicator of nascent economic trends. It’s always hard to call the turn precisely, but in our view the country now appears to be approaching the trough of its current destocking cycle.

When companies start to build up their inventories once more, the job market, the consumer, and the overall economy should all receive a boost. In the meantime, the inventories of individual companies can help to point investors towards long and short opportunities along the supply chain.

• Hurdles like limited computational power and geopolitical risks challenge China’s technological advances.
• Alpha opportunities lie in discerning between companies with transformative potential and those facing valuation corrections.

At present, China faces several hurdles in its attempts to make technological advances. Obstacles include limited access to advanced computational power, geopolitical risks and the trade sanctions imposed by the US. These could cloud the outlook for commercialization by domestic technology companies for some time.

Earlier this year, generative AI prompted frenzied buying in the Chinese markets. Here, we should be aware of a familiar pattern when new technologies emerge. Recent examples include 5G, virtual reality, and antimicrobial fabrics. In each case, the initial frenzy gave way to a correction once the excitement abated.

Many investors appear confused and have struggled to invest in China successfully as some of the well-known investment principles to trade the China market seemed to have broken down; hence four consecutive down years in equity market performance. In our view, this actually implies a new playbook and investment paradigm are needed.

The same tech cycle looks set to play out in generative AI. Although it is still in its nascent stages, we are confident that AI will transform the Chinese economy by improving productivity. So it is in the government’s interest to remove impediments to its adoption.

We believe that some Chinese companies that are producing large language models (LLMs) are likely to proceed rapidly to commercialization. However, LLMs facing challenges in usability and cost-effectiveness may present shorting opportunities. Following this year’s surge in AI-related stocks, signs of potentially inflated valuations are emerging. This may create attractive entry points in companies with genuine transformative potential, requiring careful stock selection.

Meanwhile, we think that the troubled property sector offers shorting opportunities in privately owned developers, which may not benefit from the support that their state-owned peers are now receiving from the authorities. More broadly, reforms at state-owned enterprises are allowing them to return more capital to investors – making them attractive long-book investments in China’s low-interest-rate environment.

Chinese markets shifted in August 2023, prompted by real estate and healthcare challenges. Our strategy showed resilience with strong alpha, thanks to a defensive portfolio and strategic short exposures. Policymakers responded with accelerated supportive measures, leading to a more constructive outlook, especially in the real estate sector. Positive signals from the private sector and expected recoveries in financing and prices contribute to a cautiously optimistic view.

As the costs of raw materials rise, leading to margin squeezes in traditional Chinese medicine companies, our focus on the healthcare sector gains significance. Amid China’s pharmaceutical industry’s low single digit growth, its resilience during the pandemic, robust balance sheets, and financial activities suggest a favorable environment. The biotech industry’s first mover advantage, especially in Contract Development Manufacture Organization (CDMO) and Clinical Research Organization (CRO) businesses, is strengthening. We acknowledge potential challenges with the rate hike-cycle and emphasize selective investment, focusing on R&D quality and cash burning rates in biotech. Exciting opportunities may arise in therapeutic drug development, addressing gaps in hypercholesterolemia and HBV treatments. In our view, China’s efforts to strengthen intellectual property rights, evident in increased Patent Cooperation Treaty (PCT) submissions, position it as an efficient and competitive market, which we see creating alpha opportunities through our relative value approach.

Navigating China’s cycles demands a discerning eye. Alpha opportunities may emerge in the troubled property sector, state-owned enterprises, and industries grappling with rising raw material costs. We believe that strategic stock-picking is vital, offering investors a pathway through the complexities of China’s evolving economic landscape.