Schroders’ chief investment officer, Johanna Kyrklund, finds equities outside the US, especially in Japan and Europe, particularly intriguing.
“Japan is on fire, China is particularly cheap and while there are some reasons for that, ultimately some of those risks are priced. Europe also is very much a value market,” she said at the Morningstar Investment Conference.
“We’ve been positive on international equities and I feel now the rate expectations are reasonable, even for the US.”
Expounding on Japan and her enthusiasm, Kyrklund explained how Schroders is thinking about the yen and its impact on equities.
“We always separate the equity market exposure from the currency because, particularly with Japan, it does tend to do well when the yen is weak. So, I am not a big fan of buying Japan unhedged,” the CIO said.
“Although there are structural reasons for liking Japan, which our stock pickers are really picking up this idea that there has been a shift in corporate culture, but cyclically, what’s really benefitting Japan is the weakness of the yen, the fact that the bank of Japan has kept policy very stimulative. So, we would own it hedged, that’s how we like to own Japan.”
She noted that the yen’s position is largely influenced by the US, so without Fed rate cuts, the yen is expected to remain low.
Moving on to Europe, Kyrklund highlighted Germany as the country to watch.
“Germany got affected by a number of things. It was a bit of a perfect storm, weakness in global manufacturing, but also weakness in China which Germany is really geared into, and then of course, an energy crisis.
“So a lot of that is priced in at the moment, and also there are structural changes happening in Germany. The potential for them to, for example, reconsider nuclear … And of course, the euro has been cheapening up as well.”
Looking beyond Germany, she also highlighted the “periphery” as doing “quite well”.
“Who would have thought it, but countries like Italy are actually doing really well now,” the CIO said.
“I’ve never been structurally positive on Europe, I think it’s got some major issues, it’s always a technical play, but again … a cheap currency, cheap valuations, I think there are opportunities in Europe.”
Last month, Lazard Asset Management said its European equity team believes investors should look forward to the coming months with mild optimism given current market conditions.
“Supportive valuations, the potential for incremental improvements in the macroeconomic picture, helped in part by lower energy costs feeding through to lower manufacturing input prices, and the near-term prospect of a start to the rate-cutting cycle suggest European equities could extend their first-quarter strength,” the manager said in a note to investors.
In the first quarter of this year, the STOXX Europe 50 Index charged 12.9 per cent higher, in euro terms, outpacing the S&P 500 Index, which ended up 10.6 per cent higher in dollar terms.
Regarding Japan, it has garnered significant attention in recent months, with its equities surging to all-time highs driven by corporate reforms and increased foreign inflows.
Asset managers have been tilting their portfolios towards Japan, particularly as the yen has remained low. In fact, Russell Investments recently said: “We believe Japanese equities still have room to climb further due to a positive cyclical backdrop and improvements in corporate governance.”
But managers have also alerted to the possibility of a strengthening Japanese yen which could prove to be a headwind to earnings and equities later in the year.
Ultimately, while sentiment has not become euphoric, it will serve as a key watchpoint over the coming months, Russell Investments said.
