According to Luca Paolini, Chief Strategist at Pictet Asset Management: “Japanese stocks are a bright spot in an otherwise uninspiring global equity market”.
Investors are rediscovering Japan. Inflows into the country’s equity market from non-domestic investors are the strongest they’ve been in a decade. We raise Japanese equities to overweight from neutral based on a strong Japanese economy and changes to domestic investment rules. The US economy’s resilience appears to have led to a reappraisal of how soon the US Federal Reserve might start to ease policy, driving up real interest rates, which in turn has weighed on equities. Investors have concluded that the Fed is likely to keep rates higher for longer in the face of surprisingly strong data. In our view, economies are starting to feel the pinch from tighter policy so we expect growth to slow to anaemic levels. Partly for this reason, we continue to hold an overweight in bonds – with US Treasury bond yields above our 3.5 per cent fair value estimate, US government debt looks increasingly attractive. At the same time, we remain neutral on equities. US, European corporate earnings have remained strong thanks to surprisingly resilient economic growth, but we are doubtful this can continue.
The Fed should soon be able bring an end to its most aggressive tightening campaign in four decades. Therefore, we remain overweight US Treasuries as yields remain above our fair value estimate and US interest rates have likely peaked.
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