Smart politics vs fast money
One of the biggest stories post-GFC has been unfolding over the past six months: the re-awakening of Japan’s moribund markets under Shinzo Abe and Haruhiko Kuroda (see page 24). Their
monetary-easing template is driving down the yen (by 19% against the dollar in six months). Then at the start of April came the howitzer: a pledge from Bank of Japan (BoJ) to increase its
purchase of Japanese government bonds by ¥50 trillion a year for two years – equivalent to 10%
of GDP and 70% of JGBs. They have set a 2% inflation target to turn around years of deflation.
These actions intend to stimulate the real economy and encourage Japanese companies sitting on cash to start investing again. The authorities want to spark buying in risk assets, to drive up asset prices. They also want international firms to return to Otemachi. One (admittedly early) question is: how are investors reacting to these dynamics? And the answer is: contrary to expectations.
The move by the BoJ to increase government bond purchases, combined with ultra-low yields (10-year JGB yields hit record lows in April), is expected to drive domestic investors offshore to seek returns. In fact, they have been net sellers of foreign bonds and foreign equities. They have been taking profits on overseas assets, presumably seeing opportunity in a weakening yen to look at domestic real estate and equities. That implies flow back into yen.
Meanwhile, international investors turned net sellers of domestic bonds but big buyers of Japanese equities. That also implies flows into yen. There are no signs the long money has been moving. Rather it is the fast money – hedge funds and what’s left of prop desks at banks – that has driven the Nikkei rally. So the worry is this can leave as quickly as it arrived. The foundation of this
recovery is being built on quicksand.
The hope, of course, is that institutional investors will catch up: a 60% rise in the Nikkei since November will hurt those global investors who have underweighted Japan for years. But it’s a risk.
Further, if the government instils a mindset that the yen is on a multi-year downward trend to hit 2% inflation (making real returns on JGBs even less appealing), that should drive an exodus out of JGBs, potentially sparking a fiscal crisis to rival what is happening in Europe.
But Japan bulls see it differently. Yen depreciation should have a powerful impact on company earnings (exporters), underpinning the equity rally, while eurozone fears and a global reallocation from fixed income to equities provide support. On the bond side they point to ultra-low yields in the US and core eurozone. Plus yields on five-year JGBs rallied in April, which will reduce the incentive to invest abroad. Abe and Kuroda are smart, but that does not mean they will succeed. Yen stability, not relentless depreciation, holds the key.
04 On the move
BlackRock hires capital markets heads and Singapore retail chief; JP Morgan AM adds multi-asset head; Jupiter appoints Swarbreck
08 Regulatory Roundup: Fund houses should be wary of AML rules
10 Data Centre: Asia’s mutual fund market rebounds
12 Reserves management revolution
Where there are surpluses, central banks are considering previously unthinkable asset classes such as equities and even alternatives, creating outsourcing opportunities.
14 Q&A: Choo Heung-Sik, Bank of Korea
18 CIC lets rip at Boao media, talks allocation; Taiwan state funds issuing mandates
20 Private banking under one roof
Commercial banks are busy setting up private bank divisions and sharing resources to cater to Taiwan’s wealthy.
22 Mirae Asset Securites cuts back in Hong Kong; Cazenove to start HK wealth business
24 Market gives Abe benefit of the doubt
Fund managers have abandoned their underweight on Japan. But amid the euphoria, risks abound.
30 Asian bond juggernaut forging ahead
34 China private fund managers returning to public firms
36 Middle East still waiting for foreign flows
40 Chinese fund firms set sights on Europe; Asiya Investments opens in Hong Kong
42 Credit funds on the comeback trail
Low interest rates and rising debt issuance have driven a resurgence in Asian fixed income hedge funds.
44 Q&A: Ivan Vatchkov, Algebris Investments
46 LGT adds China office; Asian PE firms raise $6.6bn in Q1; LaSalle IM wins Korea licence
48 China revs up for securities lending
Beijing is moving to allow firms to borrow and lend stocks, but there are issues to be ironed out.
50 The changing face of securities lending
52 Operations manager: Sharon Davis, COO of AMP Capital
54 Northern Trust launches fund admin in Hong Kong; Complyport enters Asia
55 Trader talk: Luca Dotti, Valeur Investments
56 Bookend: Makers: The new industrial revolution by Chris Anderson