Philipp Bärtschi, Bank J Safra Sarasin
“We had been quite optimistic in Japan, but we have given up on that,” he said at a media briefing in Hong Kong last week.
The bank has gone to neutral or slightly underweight in the asset class as the market “is no longer interesting”, Bärtschi said.
“It lacks a bit of momentum and the whole story which has carried the market through Abenomics and quantitative easing has run out of steam.”
He added that Japan’s tight labour market and the strengthening of the yen could become a headwind for Japanese equities.
However, not everyone shares Bärtschi’s view on the asset class. For example, Aisa Ogoshi, portfolio manager at JP Morgan Asset Management, has been overweight Japan equities for five years on the back of the broader adoption of the stewardship code among Japan’s listed companies.
"The whole story which has carried the market through Abenomics and quantitative easing has run out of steam"
“Listed companies that improve corporate governance, including independence of the board of directors and adding sensible dividend return policies, will have a tendency to deliver better returns,” Ogoshi said in a previous interview.
Despite improving corporate governance, choosing Japanese stocks remains difficult. Seth Fischer, chief investment officer at Oasis Capital, recently said that it is difficult to analyse corporate governance changes in Japan as there are two-to-three people making decisions.
“I spend a lot of my time in Japan analysing corporate governance changes,” he said.
Year-to-date, Japan equities outperformed the broader equity market, with the MSCI Japan Index returning 2.68% versus the MSCI AC World’s 1.61%, according to FE data.
Besides Japanese equities, J Safra Sarasin’s Bärtschi’s view on emerging market corporate bonds also changed.
“Six months ago, the sentiment was quite positive and emerging markets went up in fixed income and also in equities.”
However, the strengthening US dollar has made the bank cautious on emerging market credit and in general local currency fixed income products are out of favour, he said.
Equities over bonds
Overall, the bank prefers equities over fixed income due to rising inflation and the tightening monetary policies of central banks. He added that bond yields are expected to drift higher.
In equities, the bank is overweight emerging markets, Bärtschi said, adding that valuations have become more attractive after the correction and the expectation is for earnings growth on average to increase 5%-10% this year.
“It makes more sense to take your risk in a portfolio on the equity side because in our view, they have more upside potential. Although they are a bit more volatile than credit instruments, we see quite limited upside in credit with prices as spreads are likely to widen a bit.”
Bärtschi noted that he likes alternatives, particularly commodities, in the portfolio as they can provide a hedge against inflation.
“To invest some amount in commodities can give you a protection against the rise in bond yields,” he said.