Brexit & the Markets: Japan, Asia & Emerging Markets

July 7, 2016

Japan

Japanese equities have traded sideways over the quarter, although it has been a bumpy ride. Changing global sentiment and debate over the conviction of the BOJ to continue to loosen monetary policy has led to relatively volatile markets. Furthermore, the Japanese government appears to have provided a more supportive fiscal outlook, notably the expected rise in the sales tax has been pushed back. There has been less concern over the government debt issue as the BOJ owns a significant and ever increasing proportion of the debt. Some have speculated that this debt could easily be “written off” allowing the government to spend more, providing a strong stimulus to the real economy. This is broadly considered as “helicopter money” and would be a significant step for the BOJ to take and is unlikely to be in the immediate horizon.

The country is still struggling with deflation. The low oil price has not helped in the shorter term which makes it difficult to determine if the mind-set of the Japanese consumer has truly changed. The government is still struggling somewhat to change corporate attitudes to regular pay rises. However, some steps have been made and the corporate governance standard has begun to improve. These structural changes are likely to take a generation to fully take effect, although if investors see that progress is being made then this may be enough to increase the attractiveness of the county as an investment destination, re-rating share valuations.

Given the incentives for the BOJ to further weaken the yen, either directly or indirectly, there is possibility to hedge exposure to Japan. However, there has been some pressure from the US, who have described Japan as a currency manipulator, the potential effects of this are difficult to call.

Japan Yen

Asian & Emerging Markets Equities

After a strong rally into the last rebalance Asian and Emerging Market equities have not significantly progressed. Valuations continue to be very supportive in many areas and a change in sentiment may result in a substantial re-rating. However, the asset class continues have high risks to the downside, predominately originating from China. There would be significant contagion across the world if there was a sharp slowdown/ recession in China. This would likely have the heaviest impact on EM and Asian economies, potentially causing currency crises.

While there is clearly a good opportunity to find value here, when many other regions look expensive, the potential downside risk indicates that investors should continue to be wary and limit exposure if looking to maintain low risk in their portfolios.

You should always remember that the value of your investments and any income from them can go down as well as up and you may get back less than the amount you originally invested. All investments carry an element of risk which may vary significantly. If you are unsure as to the suitability of a particular investment or product, you should seek professional independent financial advice.