Investors not so big on Japan

The future doesn’t look so bright for Japanese equities, according to leading European and US fund managers. Natexis Asset Square’s latest World Multimanagement Indicator confirms a downturn in optimism on Japan, with only 56 per cent of interviewees positive about its economic outlook, down from 68 per cent in June and an 85 per cent high in December 2005. Only 42 per cent of the 180 fund managers surveyed described themselves as buyers of Japanese equity, down from March’s 63 per cent high. Nor are things likely to improve, with these findings marking a return to long term trends, according to Philippe Waechter, director of economic studies at Natexis. “In 2005 and at the start of 2006 expectation was very high,” he says. “But what we have seen is that economic growth in Japan is converging to its long-term growth rate, which is less than 2 per cent. We do not expect acceleration.” Managers are most buoyant (61 per cent) about Asia ex-Japan and Europe. But when it comes to voting with their feet, they are keenest on Europe, where 58 per cent describe themselves as buyers, up from 43 per cent in June. This compares to 46 per cent for Asia ex-Japan, and only 36 per cent for the US and 32 per cent for emerging countries, up from 36 per cent, 25 per cent and 29 per cent, respectively. The global feeling, says Mr Waechter, is one of decreased tension on economic activity, with lower expectations confirmed for US business. He adds that emerging markets can thank “relative calm in the US” for the stabilisation of perspective following the spring’s crisis of confidence. Overall, respondents’ ideal portfolio breakdowns (charts 1 and 2) confirm that there has been no lasting fallout from the spring’s stock market fall, with equities back at 61 per cent of the high risk portfolio (approaching March’s 65 per cent high, and up from 57 per cent in June), and 46 per cent of the medium risk portfolio (compared to 50 per cent in March and 43 per cent in June). Healthcare has gone up a place to become the popular sector, corresponding straightforwardly to a shift towards the defensive, according to Mr Waechter. Energy, in first place in June, has slumped (from 64 to 42 per cent of respondents), while telecoms is down from fourth to ninth place, a dramatic contrast to its third place a year ago. In the wake of the Federal Reserve’s decision to hold US interest rates stable last month, fund managers have become increasingly bearish on long term rates for both the US and Europe. Less than a third (31 per cent) expect US rates to rise long term, down from 44 per cent in June, and the dominant view (43 per cent) is that they will stay stable. For Europe, although bullish views still predominate, the proportion of respondents predicting a long term rise has dropped from 63 to 52 per cent. Mr Waechter says European monetary policy and economic growth, the determining factor behind European interest rates for the first half of the year, has lost its influence, as European rates increasingly follow the lead of those across the Atlantic.