Bank J. Safra Sarasin Ltd. is adding Japanese stocks for the first time in at least five years, speculating they will rise as the world’s biggest pension fund buys shares and the global economy expands.
Purchases by Japan’s 126.6 trillion yen ($1.2 trillion) Government Pension Investment Fund will trigger investment by individuals, said Philipp Baertschi, Zurich-based chief investment officer for private clients. The bank’s parent, Safra Group, manages about $200 billion. A global recovery will boost Japan’s exporters, making the nation a better choice than emerging markets that will see reduced inflows as the Federal Reserve raises interest rates, he said.
Japanese shares rebounded in the second quarter on speculation GPIF would increase holdings of domestic stocks. The government has been urging the pension to speed up a portfolio review and buy riskier assets as the Bank of Japan spurs inflation that will erode the value of bonds.
Buying of more equities by GPIF will be “a signal not only for the pension-fund market but also investors generally,” and probably individuals who have been keeping money in bank deposits, Baertschi said in an interview in Hong Kong on July 10. “This could change the mindset of domestic investors.”
The bank has been purchasing Japanese shares for the last three months and will consider adding more if the market drops, Baertschi said. He said he still needs evidence of structural improvements including wage increases and accommodative immigration policies before switching to more active management.
Japan’s Topix index climbed 5 percent in the three months through June, outperforming a 4.7 percent gain by the Standard & Poor’s 500 Index and a 4.3 percent advance for the MSCI All-Country World Index. Shares rose even as the yen gained 1.9 percent against the dollar. The Topix gained 0.7 percent today at the close in Tokyo, while the Nikkei 225 Stock Average climbed 0.6 percent.
GPIF may increase its target for domestic equities to 20 percent from the current 12 percent, while cutting local bonds to 40 percent from 60 percent, according to a Bloomberg News survey of 10 fund managers, strategists and economists in May. The fund may complete its portfolio review as early as September, the Nikkei newspaper reported July 12.
“If you have that kind of support or endorsement from a big pension fund, it could lead to a trend reversal in terms of fund flows,” said Baertschi. “That gives me confidence in terms of long-term support for the market.”
Recent data have added to signs global economic growth is picking up, with an official gauge of China manufacturing expanding at its fastest pace this year in June. U.S. unemployment falling to the lowest since September 2008 has also fueled speculation the Fed may raise rates sooner than expected. Goldman Sachs Group Inc. pushed forward its forecast for a hike to the third quarter of next year rather than in the first the months of 2016.
Rising interest rates will limit capital inflows to emerging markets, while Japan’s exporters will benefit from global expansion as well as a weaker currency, according to Baertschi, who expects the yen to depreciate to as low as 110 per dollar in the next 12 months. A weaker yen boosts overseas income at Japanese companies when repatriated.
“The currency has not moved a lot and has been rather stable, but Japan was able to outperform the rest of the world in the second quarter, and this has encouraged us in terms of making the call to be overweight Japan,” said Baertschi. “We see the risk of some dips in the next couple of months, which we may use to increase Japan equities.”