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21 May 2013
Flash: Japan, The big asset allocation debate - Nomura
FXstreet.com (Barcelona) - Nomura Strategist Jens Nordvig notes that since Mr Kuroda‟s big announcement, the focus has been on where Mr Kuroda‟s money would go.
Nordvig begins by noting that one could indeed argue that a large part of the volatility in global fixed income markets since April has been driven by the expectation of money flows from Japan (initially, excitement pushing yields lower; and later giving way to disappointment, and a reversal in yields). Broadly speaking, he feels that asset allocation shifts in the institutional space in Japan seem relatively moderate and happening over fairly long time horizons, commenting, “This is the feedback we are getting from life insurance companies and from asset managers.” Further, he feels that part of this picture is related to the regulatory environment, which has very different capital charges on unhedged foreign assets relative to JGBs.
he also believes that the volatility of the JGB market also matters and it is difficult to make strategic asset allocation decisions if you don‟t have good sense of where the benchmark curve is sitting. He writes, “There is little doubt, however, that investors are embracing the equity market revival with passion. Volume on the Tokyo Stock Exchange has risen by 300-400% over the past six months, and momentum seems to be pointing still higher. The revival seems to be mainly retail driven, although foreign investors are playing a role too.” He sees that retail flow into domestic equity investment trusts reached JPY23bn in April, up from an average of JPY4bn in 2012 per months. Interestingly, he finishes by noting that a sizeable part of flows into the domestic equity market may be translating into currency outflows, as some investment trusts are structured to be delivered in foreign currencies. Inflow into foreign currency denominated Japanese equity investment trusts reached JPY269bn in April.
Nordvig begins by noting that one could indeed argue that a large part of the volatility in global fixed income markets since April has been driven by the expectation of money flows from Japan (initially, excitement pushing yields lower; and later giving way to disappointment, and a reversal in yields). Broadly speaking, he feels that asset allocation shifts in the institutional space in Japan seem relatively moderate and happening over fairly long time horizons, commenting, “This is the feedback we are getting from life insurance companies and from asset managers.” Further, he feels that part of this picture is related to the regulatory environment, which has very different capital charges on unhedged foreign assets relative to JGBs.
he also believes that the volatility of the JGB market also matters and it is difficult to make strategic asset allocation decisions if you don‟t have good sense of where the benchmark curve is sitting. He writes, “There is little doubt, however, that investors are embracing the equity market revival with passion. Volume on the Tokyo Stock Exchange has risen by 300-400% over the past six months, and momentum seems to be pointing still higher. The revival seems to be mainly retail driven, although foreign investors are playing a role too.” He sees that retail flow into domestic equity investment trusts reached JPY23bn in April, up from an average of JPY4bn in 2012 per months. Interestingly, he finishes by noting that a sizeable part of flows into the domestic equity market may be translating into currency outflows, as some investment trusts are structured to be delivered in foreign currencies. Inflow into foreign currency denominated Japanese equity investment trusts reached JPY269bn in April.