Risk

Nikko AM decreases risk, reduces overweight on global equities

A long-running overweight stance on global equities is being trimmed by Nikko Asset Management’s Global Investment Committee (GIC).

The GIC has been able to shoulder all the various global risks since September 2011 and still maintain an overweight stance on global equities, but earlier this week it voted to recommend slightly decreasing risk to a neutral stance.
 
A major reason was the Ukraine tensions, but other factors also played a role in the GIC’s concern. It has long maintained a cautious stance on China, and there are increasing signs of shadow banking defaults and declining residential property prices. Many other reforms are accelerating there, and while positive in the long-run, such will likely cause overall uncertainty and difficulties in the short term. On the other hand, certain segments of the economy will benefit strongly from the reforms even in the short term, and the GIC is by no means calling for a hard landing; rather, that economic growth will moderately disappoint consensus expectations.
 
As for other factors, fairly elevated US equity valuations and the strong rise in US equity prices over the last year also contributed to the GIC’s concern, especially as earnings growth will likely be hampered by the recent weather calamities.
 
With regards to the Ukraine, the GIC agreed that Putin is not likely to invade other parts of Ukraine, but that, quietly, the West likely assumed that Russia would not give up Crimea. Thus, most of the complaints from the West are mostly rhetoric and perhaps intended to make Putin look “tough”. Going forward, a stalemate and long negotiations are the most likely outcome, with the West essentially controlling 95 per cent of Ukraine, but also needing to keep decent relations with Russia (for energy, primarily). Thus, a “Finlandization” of the Ukraine (without becoming a full EU or NATO member), with an autonomous Crimea, is the most likely outcome in the years ahead. There is always the chance, however, that the local populations begin to fight with each other, which would escalate geo-political tensions greatly. 

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