Veteran Jupiter JGF Strategic Total Return manager Miles Geldard believes Japanese equities will 'run hard again' after the recent pullback and warns that many emerging market debt markets could endure further capital losses in the next two years.
This represents around 10% of the latter fund's long exposure and it is currently the only global equities market where he has a relatively bullish view.
'If this risk on/risk off phase evolves and markets fall we will increase our Japan equities exposure as we believe we are in a slow, normalisation process for markets after QE distorted natural pricing mechanisms.'
Near term volatility
But Geldard expects further near term volatility in Japan as much of the momentum upwards, and more recently downwards, has been dictated by hedge fund activity.
He believes the market looks rosy over the next 18 months to two years as Abe's structural and labour reforms and further monetary easing continue to take effect.
'I get the feeling that if they don't get it right this time the clock is really ticking on the domestic economy but once the Japanese make a collective decision, they really do try to see it through.'
But he adds: 'The short term negative for Japan is that people got so excited when [the market] rocketed 60%. It got so far above its long term average that it does not take much disappointment to bring it down. Many of the hedge funds have stop losses in place so it can fall quite savagely.'
While there has been a momentary pause in the amount of liquidity being pumped in after by the central bank after it got slightly ahead of the trajectory set out by bank governor Kuroda, Geldard expects the rate of money printing to soon pick up again.
He is also confident that the country will eventually enter into the Trans-Pacific Partnership with its Pacific Rim partners as opposition from the agriculture sector gradually wanes.
'Institutions are still very sceptical and there remains a large community of investors who have not bought into the equity story yet. We may see short term problems due to rising oil prices [aid the Syria crisis] which will hurt the domestic economy but we expect to make money over the next 18 months because there is still a lot of value around.'
Overall, Geldard describes himself as 'pro-growth' and has a raft of short positions against 10-year government bonds in France and Italy, as well as other developed markets, as a consequence.
'If Europe does come tumbling down France will be very vulnerable because the risk premium would have to go up so we have shorts here and in Italy but not on Germany.'
Geldard's current major concern is in the emerging markets, as he believes asset prices in the sector have been distorted by huge inflows over the past two years.
Geldard is particularly concerned about Indonesia which has significant debt and expects that at some point the investor stampede from EMD will be akin to 'a herd of elephants crashing through a very narrow door.'
'There will be fantastic opportunities in EM debt but we are bearish at present.'
As the yields on the main US dollar bond market ease up making it more attractive, Geldard thinks EM currencies will come under sustained pressure. He has a significant short bet on the South African rand as a consequence although he also thinks the country faces huge internal pressures through social and political unrest.
'It is possible that all the central banks' efforts will not be enough. Markets have been nervous but our view is that rates will go up but not at the level to destroy the turn in the US housing market.If the world does goes wobbly we would reduce any US [soverign bond] shorts because it remains the ultimate safe haven.'