“For Japanese equities, after the surprise move to negative interest rates back in January, we have seen the correlation between the yen and the Japanese shares is quite high; so this is the first negative,” he said. “The second negative is the earnings momentum; we have seen the earnings forecast has turned more negative and this is a headwind to Japanese shares.”
“In Europe, following the Brexit, the political uncertainties going forward and business uncertainties that it has created, we are now more cautious.”
“For now we prefer to be quite neutral [in equities of the two places],” he told a media briefing in Hong Kong.
The firm’s earlier positive view on Japanese and European equities was supported by a belief that expansionary monetary policies would continue to weaken their respective currencies, improving relative global competitiveness, and providing support for nascent local economic recoveries and strong corporate profits.
As predicted, policy support was extended with a move to negative interest rate in Japan in January and deeper negative rates in the eurozone in March, along with an expanded bond buying programme, to include corporate bonds, he said.
The market reaction, however has been somewhat counter-intuitive, with the Japanese yen and euro both strengthening relative to the dollar, and Japanese and European equities broadly underperforming the MSCI World Index, he added.
Higher volatility
On the global markets, central bankers have blunted all their tools and so have lost the ability and political backing to smoothly manage the global economy, Kevin Anderson, head of investments for Asia Pacific, said at the same briefing.
This new state of affairs was clearly shown in market activity at the start of the year, when uncertainties around China, oil, economic growth and the upcoming US presidential election together fed market volatility, he said.
“Our prediction of a higher background level of volatility was an obvious call to make. More surprising was the fact that, for once, developing economies like China and Brazil sneezed, and the advanced economies caught a cold. Also going against consensus was the crumbling dollar, which defied expectations of appreciation as the tailwind of a tightening cycle quickly petered out.”
In terms of performance of different asset classes, Anderson said while growth assets rebounded during the first quarter following their initial weaknesses at the start of the year, safe-haven assets surprisingly held ground and in some cases continued to rally, suggesting continued demand for hedges by investors, he said.
Gold, long-maturity US Treasuries and the Japanese yen returned 15.0%, 8.5% and 9.0%, respectively, during the first five months of 2016, which all easily beating developed market equities, the firm said in a recent report.
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The Nikkei 225 and the Euro STOXX have been underperforming the MSCI World since the start of 2016, according to FE Analytics.
