“Earnings and valuations both look very attractive in Japan, and the economy in Japan is performing very well. We think the weakness in the first quarter in Japan is going to start to reverse, and we’ve started seeing that over the last few weeks, and that should generate some very attractive returns for investors,” said Norman Villamin, chief investment officer of private banking at UBP.
“Right now, underweights in Japan are actually quite large. Combining that with the idea that the economy is doing well, earnings are doing well, we expect positioning and flow to start to come and buy this market,” he said.
However, a key hurdle for Japan — and why the market underperformed in the first quarter of 2017 — has been the strength of the yen. Such strength is merely supported by the fact that investors view the yen as a safe haven currency, and is not tied to fundamentals in the Japanese economy.
“Now that French presidential candidates, Emmanuel Macron and Marine Le Pen have moved on, let’s assume that Macron wins, this headwind to the yen should start to dissipate and the fundamentals can start coming through, and we’ve been starting to see some of the money flow back to Japan. Japan has done quite well since the French elections, so we think a lot of dynamics are coming in place in favour of Japan as we move into the summer,” Villamin said.
The Japanese yen this year reached a high of $0.009223 in mid-April, but has since fallen to its current level of $0.008922.
But it’s not just Japan where Villamin expects to see good returns. Emerging markets are also expected to continue to perform well during the coming months in 2017, with key markets like Brazil and India already doing well.
“We went into the year long emerging markets. We thought the valuations story looked very good … and what’s really helped emerging markets has been this upside surprise we’ve seen in Chinese growth and what we’re starting to see in Chinese earnings.
Emerging markets have been the best performing region so far this year, and if we continue to see earnings surprise in China, we think that could continue going into the second half,” he said. In equities, UBP also sees opportunities in European banks, though not in the broader European equity markets. Villamin said European banks would benefit from the European Central Bank’s quantitative easing programme.
“If you look at the undervaluations of Europe versus the US sector by sector, where the big undervaluation is in European banks, and so, we’re neutral Europe, but we’re overweight European banks because we think that’s where the value is,” he said.
Gold and bonds
From a broader portfolio perspective, UBP is currently overweight on equities, gold, and alternative investments. It is underweight on bonds.
Villamin said UBP is underweight on bonds as it expects to see higher volatility in the bond market going forward, especially as the US Federal Reserve continues to raise interest rates. The European bond market is also expected to see volatility supported by the ECB’s tapering process.
Despite that, the CIO said investors should not exit bonds completely, but instead change their bond strategies. He said investors should take a non-directional approach to bonds instead of a directional approach, and find bonds with value that can trade volatility going forward.
In the gold market, Villamin said, “We think gold has gone up a lot. The long positions of gold have grown through the course of 2017. At $1,300, we start to get worried. I’ll be honest with you; if the second round of the French elections plays as we expect, meaning Macron wins, now is a good time to look for opportunity to take profits on gold.”
CIO Private Banking