Pictet’s Luca Paolini sees reasons to be overweight Japan compared to US, Europe

Luca Paolini, chief strategist at Pictet Asset Management, comments that Japanese equity assets may be more attractive than those of other developed markets.

Riskier asset classes gained in the first month of 2013 and government bonds saw sharp declines as investors were confident that the ultra-easy monetary policies of major central banks were beginning to fuel a recovery in world growth.

A potential setback came in the shape of an unexpected decline in fourth quarter US GDP, but with the underlying figures showing a solid increase in business investment, investors took the news in their stride.

In our view, Japan continues to be the most attractive of the developed equity markets, and we have chosen to increase our overweight stance on the asset class as a result.

By contrast, the outlook for European equities is discouraging – stock valuations are high, earnings forecasts are overly-optimistic and the European Central Bank is beginning to reduce the size of its balance sheet. The euro is also strong, trading at around USD1.35, the currency’s resilience reduces the prospect of an export-led recovery. Against this backdrop, we have reduced our stance on European stocks to a full underweight. Emerging markets, where our leading indicators show positive momentum, are meanwhile on watch for upgrade.

We are more optimistic on emerging market bonds, especially local currency debt, which should benefit from currency appreciation. Easy monetary policy in the developed world increases the allure of higher-yielding currencies while the developing world’s better growth prospects should also serve as a magnet for foreign investors.

As far as currency positioning is concerned, we retain an underweight stance on both the euro and the Japanese yen. The euro has risen to values well above its intrinsic value and net speculative positions have turned positive, a sign that further appreciation is unlikely. The strength of the euro appears to reflect a widespread conviction that the euro zone debt crisis is now well under control – a view that we do not subscribe to given the risk attached to Italy’s general election, among other things.


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