Japanese institutional investors are shaking up their investment strategies overseas to accommodate for an increasingly unpredictable global and regional economic environment.
A combination of the poor market reception to last year’s rate hikes in the US and the ongoing repercussions of the ongoing trade war between the US and China has caused the Federal Reserve to scrap plans for further hikes for now. Amid this uncertain outlook and given lingering low interest rates in Europe, some asset owners in Japan have begun to look for investment opportunities in emerging markets fixed income and government-backed infrastructure .
Kewpie Pension Fund, the namesake corporate retirement fund for a Japanese food manufacturer is one fund looking to diversify. It has gradually increased its exposure to alternatives, and intends to move some of its $600 million assets under management (AUM) into less developed countries in Asia.
“We want to access to the Asia emerging market growth, but we are not entirely sure about the risks of emerging market government bonds. We have to mitigate the issues of FX volatility and the lack of transparency of the China market, especially with the trade war threat,” Kosuke Okimori, executive investment director at Kewpie Pension Fund, told AsianInvestor.
Okimori elaborated that Kewpie has half of its AUM in overseas markets, but 70% of this is invested in the US. Furthermore, 90% of overseas investments in US dollars. This heavy US exposure is a key reason to diversify into other markets.
Japanese institutional investors also have concerns about investing in Europe. Hisashi Hatta, adviser at Aisin Employees’ Pension Fund, note that the fallout from Brexit is still uncertain and historically low interest rates are also making fixed income investments in this region less attractive, even with relatively low return targets for Japanese pension funds.
“The US is expensive right now, but what is going on with the EU and Brexit also raise concerns about the right investment strategy,” Hatta told AsianInvestor. “On top of that, we must weigh in the unpredictability of US President Trump, especially with regards to the trade war with China.”
One way Hatta has sought to react to this at his ¥205 billion ($1.9 billion) fund has been to look further into infrastructure. He believes the alternatives asset type offers a good risk-adjusted return after currency hedging costs. The fund is targeting a return in the “high single digits”.
Hatta said government-backed infrastructure offers a relatively stable investment at a time of historically low interest rates in developed countries and geopolitical concerns. He pointed out that the attractiveness of the domestic Japanese market has also been affected by these low rates.
“We Japanese investors basically have to look at foreign assets due to the current domestic market situation,” Hatta said. “However, the current global investment environment is very tough to navigate, not only because of fundamental factors but also political issues.”
One of Japan's largest investors is also carefully following events, although they have yet to make major investment shifts. Tatsuo Ichikawa, head of the quants team in the investment division of Japan Post Bank, explained that the long-term investment focused bank tries “not to be affected by the headlines” by issues such as the US-China friction and on ongoing affairs in the Middle East tensions.
However, if any of these issues are persist, then the bank with total assets of ¥209 trillion as of March 31 2019 "need to look into what we are missing in our portfolio for those risk scenarios".
“In general, Japanese investors might have a weakness against stagflation, so we need to look at what kind of products there are and how we can diversify and hedge,” Ichikawa said. “The possible risk scenarios have to be looked at.”