MUMBAI: The current dynamics in the Japanese financial landscape suggest a significant shift in capital flows, driven primarily by rising long-term yields and an attractive carry in Japan. As Japanese life insurers and other institutional investors reassess their hedge ratios and investment strategies, we anticipate a notable repatriation of capital back into Japan. This trend may lead to increased demand for domestic securities, potentially causing the global bond term premia to rise, as per experts.
For India, while it has been enjoying a premium over other emerging market equities, the potential for a broader market correction remains. Given the cyclical positioning of the Indian economy, it is prudent for investors to adopt a defensive stance in the near term.
“We note while the Japanese yield curve is one of the few globally, that still offers an attractive carry, Japan also remains the largest holder of USTs. Japan’s Life insurers are one of the biggest holders of non-Japanese govt bonds and their estimated hedge ratio sits close to 50%. *A combination of higher long-term yields in Japan, an unattractive hedge ratio for Japanese corporates on overseas investments and a stronger yen, driven by other factors more than a hawkish BoJ will cause a repatriation of capital into Japan. This may cause the global bond term premia to rise,” said Madhavi Arora, Lead Economist at Emkay Global Financial Services.
“India has been enjoying premium over emerging market (EM) asia equities, but it could still fall in tandem with the rest. On India’s Cyclical Positioning, it is advisable to play Defensives in the near-term and reduce Midcaps positioning,” Arora said.
“On positioning, we continue to hold our positive stance on staples like FMCG* (we cut our UW weight on the sector post elections poll) as we see early signs of cyclical rural demand recovery. We are also constructive on Healthcare. We would keep a watch on IT sector under the global macro backdrop,” she further stated.
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