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CIO Insight – Disappointed by China’s re-opening? Try Japan’s instead

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While the equity market has been disappointing for many this year with China’s grand post-COVID reopening proving underwhelming, Japanese equities may be a bright spot in the market, according to Pictet.

“Japan’s reopening story is like China, but without geopolitical overhang and with better macro numbers. So the Japan equity market is doing really well this year,” said Hugues Rialan, Asia CIO of Pictet Wealth Management.

Japan’s benchmark indexes, TOPIX and NIKKEI 225, are up significantly this year hitting 30-year highs this week. This year, TOPIX was up close to 15% and NIKKEI gained 20% making the Japan equity market the best-performing stock market in Asia this year.

“[The Japan equity market] is moving and is attracting momentum players as well as fundamental investors. So there is a very positive dynamic at the moment. We do not know how long it can keep going in this space, but it is attracting attention and investors’ money,” Rialan told Asian Private Banker.

In addition, Rialan underlined that Japan does not have any geopolitical tension weighing on market performance.

“The positioning to begin with in Japan was unlike China, where everybody was overweight at the end of January. Japan is really showing you that it’s possible to get investors’ interest and risk their money into something,” said Rialan.

The China question

While China’s reopening still shows promising numbers, investors are still wary of geopolitical risk.

“[China] is a complicated question, because a lot of it depends on the geopolitical tensions and I think the geopolitical premium to everything Chinese at the moment seen from an international investor is very significant,” Rialan explained, adding that the investor community is really concerned about the US-China relationship and how it evolves.

In October, the Chinese stock market was the second most-shorted market. But just three months later in January, China was the market with the most long positions again. “So the reopening happened very quickly and expectations were high, too high for investors’ own good,” he said.

Rialan explained that when talking to investors, there “has been a very depressed level of expectations, not a lot of hope, and that is reflected in valuations as well.” Both the Hang Seng Index and China CSI 300 have tumbled over the past week and are seeing flat performance across the year as the recovery is still patchy.

Political premium

Rialan believes that the US-China geopolitical premium is not going away. “We do not know when it is going to happen, but there are going to be fluctuations, and this is unpredictable. So for the foreseeable future there will be a discount to Chinese equities from the international investor community.”

But Rialan also believes there is a case for Chinese equities to perform better in the second half of the year: “Investors want to see first and then make a decision. So I think we need to see an improvement at the macro level. The numbers need to improve and the geopolitical tensions between the US and China need to ease. And only then we will see the investor community moving back to China.”

Fixed income and active investing

Like other private banks, Pictet’s top conviction call this year is also on fixed income, although actual inflows are still low.

“The move in fixed income markets last year created a real opportunity for investors to get back into the asset class, which was an uninteresting and unexciting asset class for the last 10 or 15 years. But we think at today’s level, it is really attractive and should be a significant part of any portfolio.”

Rialan also said that this year is important for active investing. He explained that while major indexes are up this year, the FAANG stocks have already gained more than 50%, and if investors take the S&P 500 equal weight index as the return, it is next to zero.

“So that tells you that out of the 500 stocks constituting the S&P 500, you have 490 names that are delivering next to nothing and 10 names that are delivering everything. This is an illustration of our call for active investing.”

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