Healthy economic growth prospects in the United States, which is expected to drive corporate earnings, has led Nikko Asset Management’s Global Investment Committee (GIC) to lift its stance on global equities to moderately overweight from neutral, according to the Tokyo-based asset manager’s latest house view.
The company’s key investment committee maintained an underweight stance on global bonds against US dollar cash for US dollar-based clients due to a forecasted moderate rise in global bond yields. Meanwhile, the US dollar is expected to continue appreciating, the committee noted.
“Our new macro-backdrop scenario had moderately more positive ramifications for global equities, with the US rising mildly but the other regions posting substantial gains,” says John F Vail (pictured), chief global strategist and head of the GIC. “We forecast that global equities will continue to rise, especially developed markets outside of the United States, but we do not wish to be aggressively overweight.”
In October, the committee changed its overweight stance on global equities that was largely in place since September 2011. Committee members were less optimistic about the outlook of corporate earnings and share prices in the United States.
The GIC members, who consist of senior investment professionals from the company’s global offices, expect equities in Europe, Japan and Asia Pacific excluding Japan to outperform over the next six months. Conversely the United States should underperform on a relative basis, leading the committee to adopt an underweight stance on US equities.
Eurozone equity prices in US dollar terms should rebound after three quarters of weakness due to the euro’s fall, with corporate earnings and continued regional economic expansion driving growth, the committee said.
Any delay in progress of the Trans-Pacific Partnership (TPP) will be a temporary headwind for Japanese equities, but improving corporate earnings should be positive, it added.
“We believe Abenomics is working well, especially for corporations, with third quarter pretax profit margins soaring to historical highs for both manufacturing and non-manufacturing sectors,” Vail said. “It is, thus, working very well for equity investors too, and should continue to do so, in our view.”
In currencies, the US dollar is expected to be strong next year as central bank divergence continues. The US Federal Reserve is expected to raise its interest rates in December followed by further 25 basis point hikes at alternating meetings through 2016.
Meanwhile, there is some chance for the Bank of Japan to ease if the yen strengthens to 110-115 against the US dollar. For the European Central Bank, the GIC members expect mild easing moving forward as the ECB does not wish to cause a rupture while the Fed is hiking rates.
As for oil prices, the committee expects Brent crude oil to stand around $43 per barrel at the end of June. Oil prices should stabilise after recent declines, as global economic growth remains firm. Investors are starting to be concerned about a possible supply disruption as geopolitical risks are growing in the Middle East and North Africa (MENA) region, the committee noted.
Nikko Asset Management’s GIC met on December 8 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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