Over the past quarter there has been little change in the outlook for most asset classes and it would be wrong to read too much into minor changes which have occurred in anticipated asset class returns and asset allocations.
Index-linked gilt yields have fallen dramatically in the past quarter and their expected returns are therefore correspondingly lower. However, the biggest change over the past quarter in the rest of the developed markets is in the expected returns on Japanese equities which are noticeably down in sterling terms.
In yen terms, expectations are actually up but rising inflation (or at least reduced deflation) expectations suggest that currency weakness will be more than enough to offset any raised returns.
These changes follow the dramatic government policy changes dubbed “Abenomics”, the name given to measures introduced by the Japanese prime minister Shinzo Abe and the economic rationale for them which he has provided. The aim of these measures is to revive Japan’s sluggish economy with a massive increase in fiscal stimulus through government spending, more aggressive monetary policies from the Bank of Japan and structural reforms to encourage private sector investment and boost Japan’s growth.
It remains to be seen whether these changes will improve things but they are certainly a significant change, the first on such a scale for some time in Japan’s apparently frozen economy.
The impact of the changes in the asset class risk and reward outlook between January 2013 and April 2013 has been as follows:
• The prospects for index-linked gilts and foreign sovereign bonds are lower and allocations have moved sharply away from them.
• Most of the reallocation from index-linked gilts has been to conventional gilts and corporate bonds.
• Cash allocations have increased as a result of the fall in prospects for index-linked bonds.
The general outlook for the global economies remains grim but little changed. As a result there is little change in equity expectations. The dramatic fall in index-linked gilt yields and rising inflation is impacting Japanese equity returns
Jack Evans is head of asset consulting for eValue FE.
