Resilience and attractiveness of Asian local bonds Nikko Asset Management April 2023 Asian local bonds have outshone global peers over the past five years From 2018 through 2022, financial markets around the world had to endure a prolonged trade war between the US and China, a global COVID-19 pandemic, rising inflation, elevated oil prices and widespread geopolitical upheavals—namely the Russian invasion of Ukraine. Another key stress factor global markets had to withstand since early 2022 was the aggressive monetary tightening by the US Federal Reserve (Fed) and other major central banks, many of which have implemented a series of interest rate hikes to quell decades-high inflation. Still, Asian local bonds (also known as Asian local currency bonds, as they are denominated in the currencies of their home countries) have shown great resilience under such trying times. As a group, these regional bonds have outperformed their global peers by a big margin over the past five years (see Chart 1). Local government bonds of India and Indonesia, for instance, turned in impressive gains of more than 43% and 40%, respectively, in local currency terms through 2018-2022, whereas those of Malaysia, the Philippines, China and Thailand all marked decent returns ranging from 9% to 21%. Conversely, most government bonds of the US, Europe and Latin America generated losses in local currency terms over the corresponding five-year period. Backed by strong fundamentals and high-quality yields (as most Asian local currency government bonds have investment grade credit ratings) coupled with lower foreign ownership (compared to five years ago) and the potential appreciation of local currencies versus the greenback, Asian local bonds currently look attractive as a fixed income asset class. In our view, regional local bonds will continue to perform well for the rest of 2023 and beyond as inflation rates in the region trend lower and Asian central banks refrain from further interest rate hikes. Moreover, we believe that the Fed, which recently hiked rates by 25 basis points (bps) at its Federal Open Market Committee (FOMC) meeting on 22 March, is near the end of its rate hike cycle. At the moment, given the ongoing global banking crisis, the market is pricing in less than a 50% chance of the Fed hiking rates at its next FOMC meeting in May. In addition, there are other supportive factors that are expected to increase the appeal of Asian local bonds, namely the post-pandemic narrowing of Asia's budget deficits, which will lead to lower issuance of local currency bonds, and the possible inclusion of these regional bonds in established global fixed income indices. Chart 1: Asian local bonds outshine global peers Source: Markit iBoxx, JP Morgan, Bloomberg For individual countries, we use Markit iBoxxGlobal Government Bond Indices as proxies except India, which uses iBoxxAsia India Government Index. For emerging markets composite indices, we use JPM GBI-EM Index and its sub-indices. For Global developed markets, we use JPM Global Bond Index (GBI) as proxy. *China bond index's inception was February 2019 and it has less than five years of track record. Budget deficits of Asian countries set to narrow As Asian fixed income investors, we are especially watchful of the fiscal stance of countries within in the region. During the COVID-19 pandemic, notably in 2020 and 2021, almost all Asian countries experienced increases in their fiscal deficits as they were implementing expansionary fiscal stimulus to support their respective economies during periods of lockdowns and social restrictions, which had a negative effect on business and economic activities. With the region's economies reopening amid a return to normalcy following the pandemic, various countries in Asia are now adhering to stricter fiscal discipline and have started to trim their fiscal deficits, which are forecasted to narrow this year (see Chart 2). Chart 2: Asia's budget deficits are likely to narrow going forward Source: MOF India, Moody's, official sources, Bloomberg, January 2023 Note: India's data comes from MOF India and Philippine's budget deficit forecast is from Fitch. A case in point is Indonesia, which has managed to narrow its fiscal deficit substantially, from -4.6% of GDP in 2021 to -2.4% in 2022. Moreover, for 2023 the Indonesian government has set a budget deficit target of 2.85% of GDP, below its statutory limit of 3%. But what implications will a reduction in the fiscal deficits of Asian economies have on regional local bonds? To start with, we expect lower fiscal deficits to ease the financing pressure faced by Asian governments and, as such, lead to a lower issuance of local currency bonds. A cutback in net issuance or supply of Asian local bonds is generally supportive of bond prices. We expect the net local currency government bond supply of most Asian countries to be lower in 2023, as compared to 2022 (see Chart 3), creating less downside price pressure for regional local bonds over the next few quarters. Chart 3: Net issuance of Asia local currency bonds projected to be lower in 2023 Source: ANZ, January2023 Ample room for inflows into regional bonds Since March 2022, when the Fed started to embark on an aggressive tightening of monetary policy with a series of outsized rate hikes to tame rising inflation, we have seen an outflow of funds from Asia, with the move exacerbated by the strengthening of the US dollar. However, in our view the aggressive rate hike cycle by the US central bank may not persist, given the ongoing banking crisis in the US and Europe. In addition, we believe that the Fed is now nearing the end of its tightening cycle as red-hot inflation in the US cools. Indeed, US annual inflation, as measured by the headline consumer price index (CPI), has been coming down since June 2022. For instance, the latest US annual inflation rate slowed for an eighth consecutive month to 6% in February 2023, the lowest since September 2021. Likewise, the magnitude of the Fed's interest rate increases has gradually shrunk since mid-2022, from a series of 75 bps hikes in June, July, September and November to 25-bps hikes in February and March 2023. At the moment, the Fed has to intricately balance the taming of inflation with its effort to avert a full-scale turmoil in the banking system. In the coming months, a possible pause in the Fed's tightening cycle amid a slowdown by the world's largest economy may help to stabilise the global rates market, resulting in an improvement in risk appetite. This could potentially prompt foreign funds to return to Asia as the greenback weakens. We believe that such developments will support Asian currencies and regional bonds. As at the end of 2022, foreign investors' positioning in Asian local bonds (see Chart 4) was light relative to previous years. But once the environment turns more conducive for regional bonds, we expect inflows to Asia to resume. Another factor that could spur more inflows of foreign funds into regional bonds in the near future is the possible inclusion of some Asian government bonds in established global fixed income indices. South Korea is seeking the inclusion of its government bonds to the FTSE World Government Bond Index (WGBI); similarly, India is pursuing the inclusion of its government bonds in the Bloomberg Barclays Global Aggregate Index and the JPMorgan Government Bond Index-Emerging Markets Global Diversified Index. Chart 4: Foreign holdings in Asian local currency government bonds remain low Source: ANZ, January2023 Regional central banks seen halting rate hikes as inflation in Asia eases Russia's invasion of Ukraine in February 2022 and the subsequent sanctions against Moscow by many developed countries have led to a diminished supply of major food staples, such as wheat and vegetable oils. As a result, Asia's inflation, which is largely driven by the volatile food component, rose steeply in the first three quarters of 2022. Although global food prices remain elevated amid the ongoing war in Ukraine, price pressure has eased of late, especially in the fourth quarter of 2022, as new supply chains were established. All in all, the pressure in the global supply chain is easing (see Chart 5). We see easing pressure leading to a decline in global inflation, especially in US CPI, as suggested by a recent research paper by economists from the Federal Reserve Bank of New York (New York Fed), which projects annual US CPI normalising to 3.8% within 12 months. Global supply factors are measured by the New York Fed's Global Supply Chain Pressure Index (GSCPI), which uses various global price indicators, including the producer price index and the CPI of the US and the EU. The New York Fed's academic projection of a substantial easing of US CPI in 2023 to below 4%, which is a level consistent with a soft-landing scenario, is based on the assumption that the GSCPI normalises to its historical average over 12 months. Chart 5: Global supply chain pressure is easing Source: Bloomberg, January 2023 At the same time, the cost-push pressure (namely the food price component) that drove Asian inflation is coming down and softening Asia's inflation outlook (see Chart 6). As inflation in the region ebbs (as evidenced in the February CPI of countries such as South Korea, Thailand, China, India, Singapore and the Philippines), Asian central banks are likely to slow the pace of monetary policy tightening. As of March 2023, several regional central banks, such as those of South Korea, Indonesia and Malaysia, have already suspended rate hikes as inflation in their countries has eased. Chart 6: Price pressure that drove inflation in Asia is easing Source: Morgan Stanley, January 2023 Note: Asia includes China, Hong Kong, India, Indonesia, South Korea, Malaysia, Philippines, Taiwan, Australia and Japan. Singapore and Thailand are excluded due to a lack of data. Moreover, the purchasing managers' indexes of many Asian countries are falling in line with the global trend, whereas Asia's exports, which are still largely dependent on demand from the US and the EU, have also started to come off as growth in developed countries slows. That said, a potential recovery of exports to China may offset the slowdown. But given the overall weaker growth outlook, we expect most of Asia's central banks to pause hiking rates. In our view, Asian central banks—cognisant of the slower economic growth outlook—are likely to be less hawkish in their monetary policy stance and will be more inclined to keep interest rates accommodative, all of which should bode well for regional bonds. Asia's FX reserves remain adequate; regional currencies look cheap Asian foreign currency (FX) reserves have decreased over the past few months. They remain adequate, however, and are in accordance with the International Monetary Fund (IMF) rule of thumb from of having at least three months of imports being covered by FX reserves (see Chart 7). This underscores the sound fundamentals of Asian economies. Chart 7: Asia's FX reserves remain adequate Source: Bloomberg, IMF, January 2023 In addition, Asian currencies, as measured by the real effective exchange rate (REER), currently look cheap relative to their historical long-term averages. As regional currencies weakened against the US dollar (USD) in 2021 and 2022, the USD-Asia REER had recently exceeded two standard deviations from its long-term averages, making Asian currencies cheap from a long-term perspective (see Chart 8). In our view, the environment surrounding regional currencies is improving. As mentioned, we think that dollar strength will start to fade as the Fed may be nearing the end its tightening cycle, and Asian currencies will have ample room to appreciate versus the greenback. In terms of regional currencies, we favour the Thai baht, which is seen benefiting from increased tourism inflows and current account improvement. We also like the renminbi. China's reopening and the imminent recovery in the world's second largest economy are likely to spur the renminbi to appreciate against the greenback, in our view. Chart 8: Asian currencies look cheap versus their long-term averages Source: Citibank, Bloomberg, January 2023 Positive on the local bonds of Indonesia, India and South Korea Within the region, we are most positive on the local currency bonds of Indonesia, India and South Korea. We expect Indonesian bonds to perform well on the back of strong foreign inflows—both portfolio fund flows and foreign direct investments (FDIs)—into the country. Indonesia is attracting considerable foreign investments on the back of its thriving electric vehicle supply chain ecosystem, which entails mining and the processing of metals all the way to the manufacturing of cathodes and battery cells. Strong FDIs into Indonesia are expected to support its economy and currency, as well as boost the appeal of its local currency government bonds, which also look attractive on a real yield (nominal yields minus core CPI) basis (see Chart 9). Chart 9: Asian local currency bonds offer attractive real yields Source: Bloomberg, January 2023 Local currency Indian bonds also look attractive from a real yield perspective and offer a good carry. Furthermore, we expect Indian bonds to receive a fillip when the Reserve Bank of India (RBI) ends its rate hike cycle in the near future. The RBI raised its benchmark repo rate by 25 bps to 6.5% in February. Like many other Asian central banks, the RBI is waiting for inflation to make a sustained decline before it stops hiking rates and revert to a more accommodative stance as the Indian economy slows. Likewise, we expect South Korea's local currency bonds to perform well. The Bank of Korea (BOK) was one of the first central banks in the world to hike interest rates to address soaring inflation; it embarked on its tightening cycle back in August 2021 and raised benchmark interest rates seven consecutive times. In February 2023, however, the BOK paused its rate hike cycle by keeping benchmark rate steady at 3.5%. We think that South Korea could be the first country in Asia to cut interest rates. The possibility of steady or declining rates coupled with the potential inclusion in the FTSE WGBI in the future will be supportive of South Korean local currency government bonds, in our view. Summary on why Asian local bonds may outperform On the whole, we expect Asian local bonds, which have outperformed their global peers over the past several years, to thrive in the remaining quarters of 2023 and beyond, supported by a conducive global environment of lower inflation, lower growth and steady interest rates. At the same time, slower but still positive growth in Asian economies and a pause in regional central banks' policy rate adjustments will benefit the Asian local bond market, in our view. We believe that Asian central banks are nearing the end of their rate hike cycles as inflation eases and growth prospects weaken. The prospect of stable or even falling interest rates in Asia bodes well for regional bonds. Strong fundamentals, high-quality yields and low foreign ownership (and hence more room for fund flows recovery) are other factors that are supportive of Asian local bonds, which are also seen doing well as regional currencies strengthen versus the greenback. Within the region, we favour Indonesian local bonds, which could benefit from strong inflows (both FDI and foreign portfolio fund flows) and fiscal consolidation. Indian bonds continue to offer good carry as the RBI looks to end their rate hike cycle, while South Korean bonds are also favoured to outperform on rate cut expectations over the longer term and their potential inclusion into bond indices. There are risks that could alter our positive views on Asian local bonds, such as a resurgence in inflation, a big flare-up in global geopolitics and full-blown turmoil in the global banking sector, which undoubtedly will lead to widespread risk aversion in global financial markets. Those risks, while possible, are not likely to transpire in our base case scenarios, which by and large look conducive for Asian local bonds. Author: Edward Ng, Senior Portfolio Manager Funds operated by this manager: Nikko AM ARK Global Disruptive Innovation Fund, Nikko AM Global Share Fund, Nikko AM New Asia Fund,  Important disclaimer information Please note that much of the content which appears on this page is intended for the use of professional investors only.

Today's surgical robot, tomorrow's robot surgeon Nikko Asset Management March 2023 Robotic surgery: from science fiction to reality In his 1976 novelette "The Bicentennial Man", the late science fiction writer and visionary Isaac Asimov kicked off the opening plot with the main character Andrew Martin (a humanoid who wants to live and die like a human) requesting a robot surgeon to perform an intricate operation on him so that he will not live beyond the age of 200. "The fingers were long and were shaped into artistically metallic, looping curves so graceful and appropriate that one could imagine a scalpel fitting them and becoming, temporarily, one piece with them. There would be no hesitation in his work, no stumbling, no quivering, no mistakes", wrote Asimov as he described the robot surgeon who altered Martin's positronic brain. Asimov's foretelling vision of surgeries performed autonomously by robots could in fact become a reality in the near future with the rapid advancement of robotic surgery, which is considered to be one of the greatest modern-day medical breakthroughs. Evidently, autonomous robotic surgery has already been initiated on animals, although it has yet to be done on humans. In a ground-breaking experiment in April 2019, bioengineers at the Boston Children's Hospital successfully deployed a self-driving robot which navigated autonomously along the walls of a throbbing, blood-filled heart to repair a leaky cardiac valve of a pig, all without a surgeon's guidance. Undeniably, robotic surgery is transforming the field of surgery and paving the way for a new era of precision medicine. Today's robotic surgery takes the form of a minimally invasive procedure that utilises cutting-edge robotic systems controlled by a surgeon to perform surgical procedures with great precision, control and vision, especially when operating in the very hard-to-reach areas. Unlike the popular science fiction depiction of a shiny, metallic and humanlike robot surgeon, the surgical robot of today is a more humdrum-looking compartmentalised system, which allows a (human) surgeon to control movements of multiple robotic arms—usually four—and cameras that provide 3-D stereoscopic vision via a hand-controlled console when operating on a patient. A typical robotic surgical system comprises a surgeon console with the high-resolution viewer to provide 3D vision; a patient-side cart that consists of manipulators or robotic arms; and a control system with a vision cart that can incorporate additional imaging technology that augments the surgeon's view of the anatomy. With all things revolutionary, robotic surgery—in recent years—has indeed become the buzzword in the medical arena and is increasingly popular with technology-embracing healthcare institutions, as it offers many advantages over traditional surgical techniques. Benefits and drawbacks A main advantage of robotic surgery is its distinct precision. Hand dexterity tends to decline with age, and as surgeons grow older, hand tremors can impede surgical procedure. With traditional surgery, a surgeon's shaky or unsteady hand can lead to slipups or accidental damage to surrounding tissues, leading to excessive blood loss and complications. However, with robotic surgery, the nimble robotic arms that are controlled by the surgeon can move in a smooth and steady manner, allowing for greater accuracy during surgery. In this aspect, robotic surgery has proven to be particularly useful for complex surgeries, as the thin robotic arms (instead of the bulky hands of a surgeon) are capable of making precise movements in tight spaces, enabling surgeons to perform procedures that may be difficult or impossible with traditional surgical techniques. The second benefit of robotic surgery is its minimally invasive nature. In traditional surgery, large incisions are made in the patient's body to access the surgical spots, and such procedures often result in considerable pain, scarring and a longer recovery time for patients. Robotic surgery, on the other hand, deploys mechanical arms, which are inserted into the patient's body through small incisions, allowing for a lesser invasive procedure. An example of minimally invasive surgery (MIS) is keyhole surgery or laparoscopy, which is a procedure that allows the surgeon to access the organs inside of the abdomen and pelvis without having to make a very large incision. Still, conventional laparoscopy, which makes small cuts and uses long, cumbersome tools and a camera to perform surgery, has its limitations. For instance, conventional handheld laparoscopic tools that enter the body through small incisions have a restricted range of motion and can be challenging to manoeuvre (given the difficulty to extend leverage) even for a seasoned surgeon. That is why robot-assisted laparoscopy techniques are increasingly employed by surgeons to overcome the difficulties faced in conventional keyhole surgeries. The increased precision and minimally invasive nature of robotic surgery over traditional open surgery tends to lead to better surgical outcomes, such as reduced trauma and incision-related complications, faster recovery time for patients, less pain and reduced hospital stay and improved cosmetic results (smaller scars). What is more, a robotic surgery can be carried out remotely by the surgeon away from the operating site of the patient. This is unlike traditional open surgery or a conventional MIS, where the surgeon has to be on-site to perform the operation. In fact, robotic applications to surgery started in 1970s when NASA initiated military projects to provide medical care remotely to astronauts and soldiers on the battlefield. Interestingly, in June 2022, a laparoscopic surgical robot developed by a Shanghai-based medtech company successfully completed two ultra-long-range robotic surgeries in urology through 5G connection between a hospital in Xinjiang and another in Jiangsu Province in China. These two hospitals were nearly 5,000 kilometres apart, making the surgical operations the longest 5G remote robotic surgeries in the world to date. Notwithstanding the many advantages of robotic surgery, there are also some drawbacks to such a progressive surgical procedure, notably the higher costs associated with it. Robotic surgical systems are generally expensive to buy, maintain, and operate, meaning that not all hospitals can afford to adopt this technology. Although operating overheads have come down in recent years, robotic surgeries are still relatively more expensive than traditional ones, making it inaccessible for patients who cannot afford it. Additionally, the use of robots in surgery raises bioethical questions about the role of technology in healthcare and the potential for robots to completely replace human surgeons. With increasing dependence on surgical robots, will humans lose surgical skills? How far do we want to go with surgical robots? Would patients be willing to entrust their lives into the hands of a sentient robot and trust that it can be programmed to handle issues of life and death from a moral perspective? The other potential drawback of robotic surgery is the additional learning curve for surgeons. As with any new technology, there is a learning curve associated with using robotic surgery systems. Surgeons must undergo extensive training and practice before they can become proficient in using the technology. Strong growth of the global surgical robot market Nonetheless, robotic surgery has the potential to take off in a big way in the years to come. US business consulting firm Frost & Sullivan (F&S) is forecasting the global surgical robot market to grow at a compounded annual growth rate (CAGR) of 21% from 2021 to 2030; F&S also predicts the market's size to exceed USD 60 billion by 2030 from nearly USD 11 billion in 2021 (see Chart 1). Chart 1: Global surgical robot market expected to exceed USD 60 billion by 2030 Source: Frost & Sullivan The COVID-19 pandemic in 2020 and 2021 had a significant impact on surgeries, resulting in a drop in worldwide surgical procedures, as many hospitals had to delay non-emergency operations and treatments to ensure adequate care was provided to COVID-19 patients. At the same time, due to restrictions implemented in many countries in 2020 and 2021, many patients had to put off routine, non-emergency diagnostic procedures, such as colonoscopies and PSA testing (a key biomarker for prostate cancer). But as global COVID-19 infections wane and normalcy returns, we have seen a speedy return in patient traffic back to pre-pandemic levels and a sharp recovery in usage of robotic surgical systems, where growth has already picked up from the second half of 2021 and throughout 2022. Presently, robotic surgery has numerous applications in the global medical field. The laparoscopic robotic system is the most commonly used programme worldwide, followed by the orthopaedic robotic system. In the US, an increasing number of prostatectomy procedures are done by surgical robots, in which robotic arms are used to remove the prostate gland (or part of it) in men with prostate cancer. Robotic surgery has also been used in gynaecological procedures, given its greater precision and less invasive techniques. According to F&S, the US and EU currently lead the global surgical robot market with an estimated market share of 55% and 21%, respectively (as at end 2020), while China, which is fast growing, still makes up only 5% of the global surgical robot market (see Chart 2). The growth of China's surgical robot market, however, is likely to be faster than that of the Western nations, in our view. Chart 2: The US and EU dominate the global surgical robot market Source: Frost & Sullivan, as at end 2020 China could be the next growth frontier China has already made rapid progress in robotic surgery over the years. The country's first robotic surgery system was introduced in the mid-2000s, and since then, the technology has advanced by leaps and bounds. Several Chinese surgical robotic companies have developed their own state-of-the-art robotic systems which have been used in a variety of laparoscopic and orthopaedic surgeries. Furthermore, China is investing heavily in the development of artificial intelligence (AI) and 5G technologies, which are expected to drive further advancements in robotic surgery. In our view, China is poised to be one of the fastest growing surgical robot markets over the next decade, owing to growing awareness of the benefits of robotic surgeries, a rise in patients' and surgeons' acceptance rate of such procedures and supportive government policies. As benefits of robotic surgery become more widespread in China, the rate of adoption of such procedure is set to rise in the technology-embracing nation, which is already making plans to accelerate the integration of information technology (IT) into its medical equipment industry by 2025. China's 14th Five-Year Plan, which was drafted in October 2020, introduced a slew of new policy directives and top-down initiatives for 2021 to 2025. Under the country's five-year development plan for its medical equipment sector, the Chinese authorities intend to speed up the assimilation of IT and robotics into medical devices by 2025, with the creation of more domestically produced medical robots and digital health platforms. Recent policies announced by China have been supportive of robotic surgeries in general. In 2021, the Chinese authorities approved an increase in the installation quota of laparoscopic surgical robots from 154 to 225. (Hospitals in China are allocated quotas to purchase and complete the tenders of surgical robots.) To alleviate the financial burden for patients, Shanghai and Beijing also widened the government-backed basic medical insurance coverage in 2021 to include laparoscopic and orthopaedic robotic surgeries, thereby enabling the scheme to partially cover the cost of these procedures. Moreover, in July 2022, China exempted innovative drugs and devices, including surgical robotic systems, from its diagnosis-related group (DRG) hospital payments system, which is being piloted in several cities. The DRG is a system used to classify various diagnoses for inpatient hospital stays into groups and subgroups so that national payors or private health insurance companies can better control hospital costs and determine reimbursement rates. The DRG exemption offers a favourable backdrop for wider application of robotic surgery as hospitals and surgeons will now have the flexibility to perform robot-assisted operations. We believe that China's public hospitals—following the directives of the country's central government—will likely implement more robot-assisted surgical procedures. Presently, China has around 1,500 Class 3A-rated hospitals, which are considered to be the best medical institutions with the highest level of medical technology, equipment, quality and service provision. The increased adoption of robotic surgeries in these high-quality hospitals, on the back of the government-led initiatives, may spur growth for both international and domestic surgical robotic manufacturers operating in the world's most populous nation. The rise of China's surgical robots The competitive pricing and localised strategies of up-and-coming surgical robot manufacturers in China to drive product penetration in the world's second largest economy are starting to have an impact on their global, more dominant rivals, such as US robotic surgical system manufacturer Intuitive Surgical Inc. Intuitive Surgical, the leading player in the global surgical robot market, was established in 1995 and is listed on Nasdaq. Its main product, the da Vinci robotic surgical system, currently dominates the global laparoscopic robot market by holding an estimated market share of over 80%. In 2000 the da Vinci robotic surgical system became the first robot-assisted laparoscopic surgical system to be approved by the US Food and Drug Administration. Intuitive Surgical builds its success using its "System+Consumables+Services" business model, with system installations allowing it to ramp up recurring revenues over the longer term. Essentially, the company sells its robotic surgical systems to medical institutions globally, and as its installation base grows over time, the revenue contributions from consumables (namely robotic arms) and maintenance services grow as well. Intuitive Surgical entered the Chinese market in 2006. Despite operating in China for nearly 17 years, the US robotic surgical manufacturer has only achieved limited success in penetrating the Chinese robotic surgical market; as at end June 2021, less than 10% of all Class 3A hospitals in China were using the da Vinci system, according to UBS data. The competition landscape may have changed with the recent entrance of four domestic surgical robotic companies, whose products are priced 30% to 40% cheaper than the da Vinci system. More products are coming as can be evidenced in Table 1. Table 1: Globally launched surgical robots* Source: FDA, MHRA, NMPA, EMA, companies' data and UBS, as at November 2022 * - This is not an exhaustive table and only representative companies are included. The table also includes representative companies in China with robots in clinical trials. In our view, the progressive and competitive Chinese surgical robot manufacturers have the potential to rapidly grow their market share not only in China but in the rest of the world, especially in emerging markets. As shown in Chart 2, the surgical robot market outside of the US, the EU and China remains highly under-penetrated. The future of robotic surgery The future of robotic surgery looks exciting. With a notable reduction in human error as robotic surgeries gain acceptance and become more widely adopted, many experts believe that going under the knife via a highly precise and less invasive procedure, with surgeons assisted by robots, will become the norm for more types of surgeries in the coming decades. Moreover, robotic surgery technology is expected to continue improving and its integration of AI could enable machines to make better and more accurate decisions, leading to safer and more efficient surgeries. With the help of high-speed internet, such as 5G, and advanced communication technologies, robotic surgery may also enable doctors to carry out surgeries remotely from anywhere in the globe or even in space. As with any innovative technology, the costs are likely to come down over time as more competitors enter the fray, breaking the monopoly enjoyed by Intuitive Surgical over more than two decades, to meet the demand of the mid-range value-for-money patient segment. Over time, as robotic surgery becomes more widely accepted around the world, it is likely that economies of scale will set in, driving costs down even further, making it more accessible to patients and healthcare providers. With the advent of autonomous robotic surgery, which will be made possible with advanced sensors, machine learning algorithms, and AI, the notion of today's surgical robots becoming tomorrow's robot surgeons could indeed come true in the not-too-distant future, just as Asimov envisioned in his science fiction novels. The question we need to answer is: Will the Three Laws of Robotics1 envisioned by Asimov be sufficient to protect humans from robots? Author: Kathy Ng, Senior Equity Analyst Funds operated by this manager: Nikko AM ARK Global Disruptive Innovation Fund, Nikko AM Global Share Fund, Nikko AM New Asia Fund,  Important disclaimer information Please note that much of the content which appears on this page is intended for the use of professional investors only. References to any particular security is purely for illustration purpose only and does not constitute a recommendation to buy, sell or hold any security or to be relied upon as financial advice in any way. 1 The following are Asimov's Three Laws: A robot may not injure a human being or, through inaction, allow a human being to come to harm. A robot must obey the orders given it by human beings except where such orders would conflict with the First Law. A robot must protect its own existence as long as such protection does not conflict with the First or Second Laws.

Thoughts on the BOJ you might not have heard, but should consider Nikko Asset Management February 2023 Firstly, due to its importance, although few seem to be discussing it in the heat of the moment, Japan's inflation outlook, like the rest of the world, should greatly improve in the coming quarters, with consensus expecting January's headline CPI announced this week, or February's, likely to be the peak in year-on-year (YoY) terms, and then drop below 2% in the 3Q and to 1.4% in the 4Q. This would put, unlike in the US or Eurozone, inflation back below Japan's target, and, thus, will greatly relieve pressure on the new leadership at the BOJ and the Government overall. Also noteworthy is that Japan's western-style core CPI, which also excludes all food items, is only around 2% YoY now. No consensus forecasts are available for this latter figure, but it certainly seems that it should be significantly lower later this year. Also crucially important to this topic is that Japan is likely the least inflationary country in the world, with workers hardly ever striking and rarely changing jobs for higher salary. Like current Governor Haruhiko Kuroda's stance, many in the BOJ will want to see more than just one round of substantial wage hikes before believing a virtuous cycle of disinflationary growth is sustainable. Indeed, many large companies are preferring to give special inflation bonuses rather than permanent, major wage hikes. Meanwhile, many SMEs apparently are not able to pay much more at all to labour this year, although minimum wage rates are rising. Furthermore, clearly Japan's GDP has been sluggish for decades and partly due to demographics, should not greatly excel after a quarter or two of acceleration due to increased tourism. Indeed, Japanese consumers currently are far from optimistic and have curtailed spending recently due to high inflation, with it likely requiring a sustained period of lower inflation before they become comfortable with spending more fully. It is important to note the BOJ's historical context, as tightening just before recessions has been the bane of several BOJ Governors in the past, with 20/20- hindsight critics lambasting such as "mistakes". Indeed, Kuroda would very likely have been right in rejecting a broadening the YCC band, given the fact that China's economy was weakening under the zero-COVID Policy, and that the G-7 looked likely to enter recession, not to mention war uncertainties, but Xi Jinping's pivot to re-open and accelerate the economy, coupled with the resilience of the G-7 economies, forced a change in the BOJ's outlook, so it took action in December to broaden the band. Clearly, the damage to many households and the government deficit would be quite large if official policy rate rises. The former have a very large portion of mortgages on a variable rate, and the monthly payments on such would greatly increase, thus harming the economy. Meanwhile, the Ministry of Finance (MOF) likely viewed the US Congressional Bureau Office's new fiscal budget projections on interest expenses with great concern given Japan's high debt to GDP ratio. No one except some wolfish hedge funds, wants Japan to experience a crisis, as such would likely have very negative global implications, with Japan likely selling large amounts of US Treasuries and other bonds, even after last year's major sales, to bolster its domestic markets. Lastly in this regard, it bears noting that fears of a JGB crisis have existed for two decades, but Japan's economic circumstances and domestic considerations have long confounded the JGB sceptics. New BOJ leadership and team effort The process for choosing the BOJ's leadership was confusing, as political developments in Japan often are, but optimists are calling the result a "dream team" and the nominees are all certainly highly qualified and capable. Shinichi Uchida, the Deputy Governor nominee basically in charge of internally-sourced advice and implementation of monetary policy, was an architect of the YCC policy and the negative interest rate policy (NIRP) as a senior BOJ Director since 2012. He will be a source of tremendous knowledge of the benefits and difficulties of both these and other policies, such that no BOJ decisions will be erroneously based and each will be implemented effectively. Ryozo Himino, the other Deputy Governor nominee, most recently headed MOF's Financial Services Bureau and held leadership posts there in its international division from 2016. He also was secretary-general of the Basel Committee on Banking Supervision and chaired the Financial Stability Board's Standing Committee on Supervisory and Regulatory Cooperation, which are amongst the highest posts in the international financial system. Thus, he is well known and respected domestically and internationally, and should easily be able to deal with all financial sector developments. Rather quiet and professorial, Governor-nominee Kazuo Ueda is greatly respected domestically, and given his academic credentials, a PhD under Stanley Fischer at MIT and a Tokyo University professor for many of the top BOJ and MOF staff over several decades, as well as serving on the BOJ board for seven years two decades ago, he should quickly garner international respect. Indeed, his academic qualifications are more robust than most G-7 central bankers. In public, he is likely to be somewhat arcane and highly technical in his explanations, a bit like Alan Greenspan was, when faced with questions in the Diet and by reporters. Press conferences might be rather short, not abounding in new information and somewhat inconclusive, partly due to his style but also because the BOJ and everyone else is waiting to see how this unique global situation develops in the next few months before making any momentous decisions. In the meantime, economists have been perusing Ueda's past comments and most of such have been quite dovish during the last few decades, but he has shown greater concern than Kuroda regarding the market distortions caused by some BOJ policies. However, once taking the mantle of responsibility, leaders often do not follow their ideals so strictly, especially when faced with a complex and critically important situation. This is especially applicable given that he is often called much more of a pragmatist than an ideologue, which should also affect the style and speed of policy. Lastly in this regard, the BOJ's future will be a team effort, including the Deputy Governors, the rest of the policy board and inputs from the public and private sector, so one should not place too much importance or criticism on one person. All central bank leaders rely heavily upon their professional staff, and success is never easy, especially in today's circumstances, so one should consider the capability of the entire team, which in Japan's case, seems very strong, well-balanced and likely very well coordinated. Outlook Currently, there is a wide variety of predictions for the BOJ's actions, with some expecting imminent hawkish decisions based upon some of Ueda's "anti-distortion" comments, but changes are more likely to be gradual and tentative assuming the global economy continues improving. However, if the global economy actually remains very sluggish, coupled with declining inflation, the BOJ may not need to change much at all. If there are any changes, it may first tinker with NIRP to make it less burdensome to the few institutions that are affected by it. This would conform with Ueda's desire to remove market distortions and also with the global trend away from negative rates. Further broadening the YCC band is possible this year, but not assured. Meanwhile, it doesn't seem that just shifting the target to 5-years from 10-years conforms with Ueda's "anti-distortion" preference. Conclusion Investors can be patient regarding predictions of the BOJ's actions over the coming months, while also analysing how the global economy transpires as a major factor in its deliberations. They can have confidence that skilled persons lead the effort and that Japan's circumstances will lead to substantially lower inflation, and, thus, reduced worries about BOJ policy and Japan's financial markets. Author: John Vail, Chief Global Strategist Funds operated by this manager: Nikko AM ARK Global Disruptive Innovation Fund, Nikko AM Global Share Fund, Nikko AM New Asia Fund,  Important disclaimer information Please note that much of the content which appears on this page is intended for the use of professional investors only.

The path to clean, secure and affordable energy Nikko Asset Management January 2023 The changing seasons are nature's way of reminding us that time moves on. And it is the same in the Russell household, where my youngest is approaching 18 and his late weekend nights are his way of telling me change is arriving in our home too. There is a dawning that I am heading into a new stage of life. It is exciting, but after 20 years of bringing up a family, I also admit to being a little scared of what the next chapter will bring. In markets we often get obsessed with short-term changes but it can be the slow structural moves—such as a child leaving the home—which can have a more profound longer-term impact. Bear markets exist for a purpose. They expose the heavy misallocation of capital that in this bear market happened because finance was too easy. While capital is now more rationed, energy too can no longer be taken for granted. Of course management teams of energy companies have been aware of this for some time, as they have witnessed their own cost of capital rise as the shale revolution unwound and climate change took hold. In bear markets time horizons are compressed and dreams are often shelved as rising costs force management teams to make difficult choices. These choices impact different stakeholders, often over different time horizons, which explains why companies adopting a stakeholder approach with purpose could be better equipped to navigate their way through difficult times and eventually, when the next bull market begins, may be better placed to solve the significant challenges facing society over the coming decades. Choice One: Energy affordability versus long-term energy transition Energy markets and policies have changed as a result of Russia's invasion of Ukraine, not just for the time being, but likely for decades to come. The environmental case for clean energy needed no reinforcement, but the economic arguments in favour of cost-competitive and affordable clean technologies are now stronger—and so too is the energy security case. But solving for clean, secure and affordable energy is not straight forward. Energy is an input to making substantively everything in the modern world. So when we have shortages—as we do now—the rising costs of everything acts like a tax on consumption. Primary energy costs at the start of the last century were about 4% of the global GDP. Today, primary energy accounts for about 12% of total GDP, which is similar to that achieved in the two oil shocks in the 1970s.1 Direct energy makes up about 45% of European inflation (Chart 1). However, we also know that 10%-15% of all primary energy goes into making food for the world's population—which adds to the inflationary pressure. If other associated links to energy are added, we can estimate that approximately 75%2 of inflation is driven directly and indirectly by energy costs. Our current energy crisis is a core element of today's inflation and until we solve energy's supply problems, we expect inflation to remain stubbornly above most central banks' 2% targets. Chart 1: Headline inflation rate with component contributions - Eurozone Source: Aurora Energy Research, GOV.UK, Eurostat, U.S. Bureau of Labor Statistics, MarketWatch Today, for every US dollar (USD) spent globally on fossil fuels, USD 1.5 is spent on clean energy technologies. But by 2030, under the net-zero emissions by 2050 scenario, every dollar spent on fossil fuels will be outmatched by USD 5 on clean energy supply and another USD 4 on efficiency and end-uses.3 If clean energy investment does not accelerate, higher investment in oil and gas will be needed to avoid further fuel price volatility, while also putting the 1.5 degrees Celsius goal in jeopardy. But if we accelerate clean energy today at the expense of fossil fuels, we will only exacerbate our energy shortages, given the short-term draw on valuable energy sources made by solar and wind. These are long-term versus short-term choices that even the experts have difficulty reconciling (Exhibit 1): Exhibit 1: IEA illustrates the challenge between short-term affordability and long-term energy transition International Energy Agency (IEA) executive director Fatih Birol: "If governments are serious about the climate crisis, there can be no new investments in oil, gas and coal, from now - from this year". ("No new oil, gas or coal development if world is to reach net zero by 2050, says world energy body", The Guardian, 18 May 2021) IEA's 2022 outlook: "Ahuge increase inenergy investmentis essentialto reducethe risksoffutureprice spikes and volatility, and to get on track for net zero emissions by 2050… an average of almost USD 650 billion per year 'will be' spent on upstream oil and natural gas investment to 2030, a rise of more than 50% compared with recent years". (IEA "World Energy Outlook 2022", November 2022) The most suitable near-term solutions include projects with short lead times that bring oil and gas to market quickly, but also includes areas such as capturing some of the 260 billion cubic metres of gas that is wasted each year through flaring and methane leaks4 to the atmosphere—a key driver of our investment in Emerson. Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in the strategy's portfolio, nor constitute a recommendation to buy or sell. 1Thunder Said Energy, "Energy Shortage: fear in a handful of dust?", November 2022 2Nikko AM estimates 3IEA, "World Energy Outlook 2022", November 2022 4IEA, "World Energy Outlook 2022", November 2022 Demand efficiency and productivity could also be key and in this field, there has been significant progress. A recent German IFO survey suggested that most companies—in this case 75% of those that use gas as a primary energy source in their production—have found ways to reduce gas usage in the last six months while still meeting production targets (Chart 2). Chart 2: Reduction of natural gas consumption in the production process (%) Source: IFO Business survey, October 2022 In fact energy efficiency is the number one place to look for solutions to this energy crisis. While energy costs soar, CEOs are expected to look at ways to make their businesses more resilient and reduce their energy burden. Paybacks on energy efficient investments will be very high, in our view, and are unlikely to be shelved if and when a recession starts. We see this providing tailwinds for long-term holding companies such as Schneider and opportunities within the energy services companies, where cash flow returns could accelerate to double-digit levels. This is certainly a significant part of the reason for our more recent investments in Worley & Schlumberger Choice two: ESG recession versus stakeholder capitalism Recent market history suggests that commodity prices will correct with a recession and if central banks have their way, a recession is exactly what we may get. Our own experience tells us that we should prepare for where the cuts might be. Some are obvious—such as advertising and marketing. These cuts have already started as can be seen by the demise of Google or Meta. For many others their earnings recession is just starting. Corporates are also expected to cut capital projects and the following June 2022 Gartner poll provides some insight into where these might be (Chart 3). The results are not surprising—but significant reductions in investment for improved sustainability and environmental impact is worth raising. Chart 3: Investment categories to be cut first—surveys Source: Gartner, July 2022 Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in the strategy's portfolio, nor constitute a recommendation to buy or sell. While corporates may sharpen the knife on sustainability, what is surprising to many is the backbone behind policy changes in Europe and the US (among others) which instead of accelerating fossil energy supply, are expanding incentives and targets for alternatives, such as wind, solar and hydrogen. The REPowerEU Plan was launched by the European Commission earlier in 2022 to reduce the European Union's (EU) dependence on Russian fossil fuels in a direct response to the Ukraine invasion. The plan calls for the EU to consume 20 million tonnes (mT) of hydrogen by 2030, instead of the 5mT target previously quoted in the Fit For 55 policy announced just a few months before, as an example. If we feared a clash between decarbonisation and short-term energy needs, decarbonisation seems to remain society's number one target. The bull market for ESG data and integration has been stratospheric. Changing demographics, rising inequality, the rise in the importance of externalities such as nature and increased influence of the state through regulation all have a part to play. But as was the case in prior recessions, we should expect ESG to be less of a focus for management teams as they divert their attention to short-term challenges or for some simply staying afloat (Chart 4). In our view, expensive virtue signalling does not perform well during recessions (e.g. Tesla). Chart 4: Long-term bull market for ESG—with a few blips Source: Bernstein research and Bloomberg, October 2022 In terms of energy shortages, we may play out the 1970s again. We also appear to have returned to that decade to question the role of shareholder primacy, with both business leaders and politicians (e.g. business round tables and the Davos Manifesto), suggesting we are on the verge of a fundamental reshaping of society. This slow, structural change is of course not new and ESG is a key cog if stakeholder capitalism is to work. Given the shift to stakeholder capitalism is such an ideological shift, it shouldn't surprise anyone that we are now seeing an ESG backlash, the most vigorous of which is targeted at greenwashing. Survey evidence around sustainability suggests trust is low. For example, three out of four institutional investors do not trust companies to achieve their sustainability targets and commitments.5 And of course, the measurement of ESG data is fraught with difficulty; while credit ratings correlate 99%, the correlation of external ESG ratings ranges between 38% and 71%.6 For some, ESG is leading to a significant misallocation of capital and is morally bankrupt. 7 8The situation has prompted some regulators, such those in the predominantly Republican US states, to try and alter the direction of travel and ban ESG investing altogether. Yet, many companies today are making major decisions, such as discontinuing operations in Russia and protecting employees in at-risk countries. They also continue to commit to science-based targets and to define and execute plans for realising these commitments. This indicates that ESG considerations are becoming more—not less— important in companies' long term decision making. In fact, at Nikko Asset Management we believe companies should adopt a stakeholder approach. Companies must approach externalities as a core strategic challenge, not only to help future-proof their organisations but to deliver meaningful impact over the long term. Some companies that have already built purpose into their business models and are demonstrating they benefit multiple stakeholders are already showing success, such as Microsoft or lesser known companies, such as Compass Group. Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in the strategy's portfolio, nor constitute a recommendation to buy or sell. 5Edelman, "2021 Trust Barometer Special report: Institutional investors", November 2021 6Florian Berg, Julian Kölbel and Roberto Rigobon, "Aggregate confusion: The divergence of ESG ratings", Review of Finance, forthcoming, updated 26 April 2022 7Bérengère Sim, "Ukraine war 'bankrupts' ESG case, says BlackRock's former sustainable investing boss", Financial News, 14 March 2022 8Steve Johnson, "ESG outperformance narrative 'is flawed,' new research shows", Financial Times, 3 May 2021 In recent years, boards of directors have become increasingly focused on corporate purpose. This is partly driven by a sense that purpose drives corporate culture, helps attract and retain talent and is increasingly a differentiator when it comes to customers and suppliers. External pressure on corporate boards to define purpose better has come from investors, who are themselves being asked to justify their own investments on the basis of ESG as well as financial considerations. A single, clearly marked path that every business should follow does not exist. Strong corporate leaders recognise that social expectations constantly evolve and we believe that it is the company's purpose that guides management, fund managers and owners through difficult times. A recent Mckinsey study developed a framework for summarising key ESG approaches. This highlights characteristics of those at the forefront of stakeholder capitalism, fully integrating ESG into strategy and operations—listed as "Next Level Practices". Companies adopting stakeholder capitalism are seen to be enhancing their company's competitive positioning. They have purpose and can articulate why stakeholder capitalism is creating a competitive edge (Exhibit 2). Exhibit 2: Corporate approach to ESG and stakeholder capitalism Source: "How to Make ESG Real", McKinsey, August 2022 They are a more attractive place to work for their employees—retention rates are higher than peers—successfully fighting the war for talent, while some are discovering new solutions needed to solve many of our current problems, such as climate change. We can already see success in many of our own holdings—such as Danaher, Sony or John Deere to name a few. These companies are creating their very own superpowers, enhancing their franchise and management qualities and creating value (Exhibit 3). Exhibit 3: Examples of Future Quality purpose statement "Helping realize life's potential" (Danaher) "Fill the world with emotion, through the power of creativity and technology". (Sony) "We must act with urgency today to make the lives of our customers, workforce, and all those we serve better tomorrow". (John Deere) Reference to individual stocks is for illustration purpose only and does not guarantee their continued inclusion in the strategy's portfolio, nor constitute a recommendation to buy or sell. Our own experience is supported by academic research. Work by Ariel Babcock et al. titled "Walking the Talk: Valuing a multi-stakeholder strategy" links the importance of stakeholders and stronger operating performance across a number of metrics.9 These management teams are committed, empathetic and demonstrate with full and transparent disclosure of data that they are on a journey of continuous improvement. They invest with a long term investment horizon and are prepared to make difficult decisions, some with potential trade-offs across different time periods. But when backed by a clear purpose statement that creates value for all key stakeholders, these management teams can "walk the talk". Remuneration and incentive schemes are linked to measurable ESG targets and integrated reporting—such as diversity targets or emission reduction targets. And they are preparing themselves for further regulation such as the introduction of separate ESG reporting under what is known as "Double Materiality". Conclusion In conclusion clean, secure and affordable energy is likely to be one of the major challenges of this decade. Given we need abundant energy to complete the energy transition, we believe fossil fuel companies that are actively enabling transition to low carbon society can be part of the solution. They often understand how to deliver global energy at scale and have the balance sheets capable of enabling the transition to clean energy. We also believe companies adopting a stakeholder approach will be better equipped to solve the significant challenges facing society over the coming years, and that a clearly defined purpose will help guide management teams through the challenges and choices they will have to make. After all, it is the choices made today that will define the Future Quality returns of tomorrow. 9Ariel Babcock et al., "Walking the talk: Valuing a multi-stakeholder strategy", FCLTGlobal, 17 January 2022 Author: Johnny Russell, Investment Director, Global Equity  Funds operated by this manager: Nikko AM ARK Global Disruptive Innovation Fund, Nikko AM Global Share Fund, Nikko AM New Asia Fund,  Important disclaimer information Please note that much of the content which appears on this page is intended for the use of professional investors only.