A largely positive global macroeconomic scenario reinforced by the US Federal Reserve’s accommodative monetary policy is expected to buoy global equity prices and has prompted Nikko Asset Management to heighten its overweight position on global equities.
The Tokyo-based asset manager’s global investment committee decided to raise its overweight position on global equities on expectations that equity prices will rise even further in the coming months.
This was the second straight quarter that the committee arrived at an overweight stance on global equities since its previous meeting in June, after revising its stance to neutral in March for the first time in about two and a half years.
“There are certainly some worrisome issues, as always, but we find none of them convincing enough to halt the upside momentum in equity prices,” says John F Vail, chief global strategist and head of the committee. “Even rising US interest rates are consensus now, so although there may be volatility as such crystallises, it may be no more problematic than the nearly completed tapering process.”
Geopolitics remains a major risk factor, but the committee believes that the various conflicts, including the problems in Ukraine and Iraq, are not likely to escalate dramatically. This should underpin the growth prospects for the G3 (the US, eurozone and Japan) economies, in line with the consensus over the next two quarters. In addition, China’s economy will continue to slow faster than consensus, but it does not appear to be headed for a hard landing, the committee believes.
“Undoubtedly, geopolitics remains a significant risk factor and we will continue to be ready to adjust our view,” Vail says. “China’s economy must also be watched very carefully because the tail risk of a major downturn is far from negligible.”
Nikko Asset Management’s global investment committee met on 26 September for its quarterly review of global economic conditions. Based on the findings of its senior investment professionals around the world, the company periodically reconsiders house views on the major global markets and asset classes.
The committee’s main forecasts at this time are:
Japan: Half-year GDP growth (October 2014 to March 2015) of 2.8 to 2.9 per cent half-on-half, seasonally adjusted, with equities rising 12 per cent in yen terms over the next six months to March.
US: Half-year GDP growth of 2.9 to 3.1 per cent half-on-half, seasonally adjusted, with equities rising four per cent in dollar terms over the next six months to March.
Eurozone: Half-year GDP growth of 1.2 to 1.4 per cent half-on-half, seasonally adjusted, with equities rising seven per cent in dollar terms over the next six months to March
”We believe that Japan’s recovery is on track,” Vail says. “Our positive view on inventory building and net exports is likely what sets us apart from consensus, but our forecasts are hardly aggressive and seem completely logical.”
Prime Minister Shinzo Abe’s economic stimulus policy continues to support Japanese shares, which have risen in recent months in line with the yen’s fall, but Japan remains under-appreciated, according to Vail. “Abenomics has disappointed some investors and scepticism remains fairly high, but such is fading as more good news comes out, especially on corporate taxes and GPIF’s asset reallocation,” he adds.
A key part of Abenomics, BOJ policy-making, is seen as unchanged in terms of asset buying. Still, the effect of the yen’s decline has increased inflation prospects and thus reduced the need for the central bank to ease monetary policy further. “We do not expect major BOJ easing for the intermediate term, but it will very likely extend its current easing plan into 2015,” Vail says.
Meanwhile, the company’s analysts believe the US economy will continue to be resilient, backed by consumer spending, capital expenditure and housing construction. “As for employment, we continue to believe that payrolls will expand at a healthy rate, especially in the housing construction and related services areas,” Vail says. “Perhaps the strongest sign of growth in the US is in auto sales. Retail spending is also solid, new home sales are rebounding and ex-aircraft durable goods orders have accelerated further in recent month and are surging if you include aircraft.”