Rothschild Wealth Management is keeping a high allocation to cash, short-term bonds and gold, saying a "dangerous complacency" has taken hold of markets.
To the East, Wiedmann says Japan’s backdrop is “bleak” with problems of debt, demographics and deflation.
With gross government debt-to-GDP forecast to reach 238% of GDP this year, and a sharply rising old-age dependency ratio, Wiedmann said “a tipping point seems imminent”.
With domestic bond buyers making up 95% of total demand, Tokyo can afford to offer 1% interest on JGBs.
“However, the savings rate is falling sharply as a growing proportion of the population reach retirement age and draw on their savings. Some domestic financial institutions are already net sellers of JGBs, creating a major problem for the Japanese government.
“Any rise in bond yields would cripple the public finances, yet domestic demand for bonds is falling and international demand is unlikely to rise substantially.”
RWM expects to see further monetary stimulus and bond buying from the Bank of Japan as it seeks to prevent a “potentially catastrophic rise in bond yields”.
Such moves would help Japanese equities, but burden the yen – so RWM is hedging yen exposure for all investment strategies.
After being the strongest-performing currency against the US dollar from June last year, it relinquished most of its gains.
The wealth manager favours the US dollar, even though renewed optimism weighed on the currency in February, as investors sought higher-yielding currencies and the euro rallied. “We believe the dollar will outperform once again when the latest rally in risk assets comes to an end.”
RWM also points to stronger economic growth favouring the Greenback, and the market scrutinising the ECB’s balance sheet following LTRO I and II, “and that favours the US dollar”