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Nikko Asset Management expects Japan, Europe and developed Asia-Pacific equities to outperform

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A cautious outlook for US equities has led Nikko Asset Management’s Global Investment Committee (GIC) to revise its stance on global equities to neutral from moderately overweight. 

However, the GIC is positive on Japanese and developed Asia-Pacific ex-Japan equities, the Tokyo-headquartered asset manager’s latest house view showed.
 
“We went neutral on global equities in September and then went cautiously overweight in December, so we have not been very bullish for a while, but we certainly were negatively surprised by the volatility and bearish action in equities and commodities,” says John Vail (pictured), chief global strategist and chairman of the GIC. "Our new macro-backdrop scenario results in a cautious view on global equities, expecting relatively flat performance in the United States, but positive on other regions, especially Japan and Pacific ex-Japan.”
 
The GIC members, who are senior investment professionals from the company’s global offices, noted that the US equities market is overpriced. US corporate earnings were not expected to improve very much making the current price-earnings ratio unattractive. The S&P 500 is trading at 17 times NTM (next twelve months) bottom-up consensus earnings, which is historically high.
 
The firm’s key investment committee  has an overweight stance on Eurozone equities. The positive earnings effect of euro weakness, expected relief from a vote to reject Brexit and continued regional growth being the main factors to support the Eurozone equities’ overweight view.
 
With regards to Japan, the committee maintained a positive view that a weaker yen and moderately improved global growth will drive earnings and stock price growth. Also, Japanese equities are supported by strong pretax profit margins which remained at record highs, on an annual basis, as of the fourth quarter.
 
The committee said it will maintain an overweight stance on developed Asia-Pacific ex-Japan equities amid expectations of significant strength in Hong Kong and Australian equities over the next six months as both benefit from increased confidence in the Chinese economy.
 
The committee said the US Federal Reserve will raise its interest rates twice this year, once in June and again in December but there is a chance that the June hike could be delayed until July if the central bank wishes to wait for the Brexit vote. The GIC’s forecast of two interest rate hikes this year is more hawkish than expected, thus negative for global bonds but positive for the US currency.

As for oil, the GIC expects Brent crude to trade at $45 per barrel at the end of September and to rise slightly in the following quarters. The committee believes production in the US shale sector will likely decline more rapidly than expected, but Iran is expected to export even more, which should cap prices to a large degree.
 
Nikko Asset Management’s GIC met on 30 March 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.

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