A darkening global economic outlook, increasingly challenged policymaking, and fuller valuations have weakened the case for our long position in Japanese equities considerably; we are changing our view to neutral. Despite their positive corporate fundamentals, Japanese companies operationally are highly exposed to the weakening global economic cycle.
The adjustment comes after a spell of smart outperformance by Japanese equities against European stocks this year. We are now rotating our exposure tactically to US equities, in particular technology stocks. Valuations look increasingly attractive. Tech stocks are typically more defensive by nature and should benefit from central banks eventually turning away from policy tightening.
Our conviction in being long Chinese equities has weakened following the latest Communist Party Congress, while market technicals have added to the recent selloff.
We also feel that the disconnect between the valuations of Chinese stocks and equities in the rest of the world (RoW) has become more profound. We will cautiously exit the position.
We believe valuations of RoW equities do not yet fully reflect the macroeconomic weakness, nor do analysts’ cash flow projections. We note that adjustments have been seen mostly in emerging markets, with the US and Europe lagging. Attractive areas today are concentrated in Asia (where analysts’ earnings expectations have fallen notably). Here, we are already long (see table below).
On fixed income, we have added to our long position in European investment-grade (IG) credit.
We are steering clear of emerging market debt for now, taking the view that it is mainly higher-yielding names that look attractively valued at this point. Idiosyncratic risk and mounting global growth concerns are not sufficiently priced in this asset class, in our view.
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