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Nikko AM maintains overweight stance on global equities

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The G3 economies will continue to propel growth and gains in equities prices in the year ahead with valuations remaining steady despite rising US interest rates, according to Nikko Asset Management’s Global Investment Committee (GIC), which is retaining an overweight stance on global equities.

The Tokyo-based firm’s key investment committee has held an overweight position on global equities in the last 14 quarters out of 15 since September 2011.The G3 economies are set to exceed the current consensus for economic growth going forward, committee members said, adding the United States should rebound from the unusually brutal winter and the West Coast port strike, while the Eurozone and Japan should recover faster than expected.
 
“There certainly are some worrisome issues, as always, but we find none of them are convincing enough to prevent moderate increases in equity prices,” says John F Vail, chief global strategist and head of the GIC. “Rising US interest rates are consensus now, so although there may be volatility as such crystallises, it may be no more problematic than the tapering process.” He notes that US equities rose very strongly during the tapering process.
 
On the US Federal Reserve’s monetary policy, the committee is shifting its stance on the first rate hike to the fourth quarter from June/July. Nikko Asset Management’s analysts believe that a negative year-on-year CPI through September will steady the Fed’s hand despite firm economic growth.
 
“The FOMC roster includes more doves this year and the core Fed leadership is traditionally quite dovish, so we expect the Fed funds channel rate at only 0.50-0.75 percent at the year-end,” Vail says.
 
Surging equity valuations in the Eurozone has prompted the GIC to reverse its six-month overweight stance on the region to underweight. The committee thinks that Europe will underperform in the next six months, while the US, Japan and Asia-Pacific ex-Japan should perform the best and, thus, deserve an overweight stance.
 
“Eurozone equity valuations have surged to rather high levels, as equity prices increased with the lower euro and a rebound in economic confidence from very low levels,” Vail says. “We think the market needs to pause for earnings to catch up, Vail noted.
 
Regarding US equities, the S&P 500 is trading at 17 times next twelve month (NTM) earnings, which is high in a historical context, but the company’s analysts believe this is a fair valuation as interest rates remain structurally lower than any time since the 1950s. The US economy’s conditions are mixed, but consumer spending is the most important factor, which the analysts believe will continue to be very firm.
 
Elsewhere, the company’s analysts were optimistic about China and emerging markets economies. China, as the world’s second-largest economy, is expected to achieve a 6.9 per cent seasonally adjust annual growth rate in the April-September period.
 
“Given our view of stronger G3 and Chinese growth, coupled with dovish central banks and rising commodity prices, we are now more enthusiastic about emerging economies,” Vail says, reversing a long-held negative overall stance. He noted in particular that “we continue to believe that Asian emerging markets economies will remain firm as domestic demand is sturdy and external imbalances are quite small.” 

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