Risk Factors Prompting Nikko Asset Management to Cut Equity Exposure Worsening

Press Release

7 May 2014
  • Ukraine and China remain most worrisome issues

The volatile geopolitical situation in Eastern Ukraine and the prospect for prolonged negative news out of China continue to weigh on Nikko Asset Management's stance on global equities, which the Tokyo-based asset manager cut to neutral from overweight last month. In its latest research report, Evolving Markets, the firm's analysts provide detailed analysis of these risk factors as well as an overview of the most (and least) attractive emerging markets.

The situation in Eastern Ukraine may be more perilous than many realize because vital production facilities for military equipment, including missile, aircraft and naval engines are located in the region and which Russia is not likely to permit coming under the control of a hostile government.

"While we did not previously believe that Russia would invade Eastern Ukraine, we did expect ethnic violence to occur there," said John F. Vail, Chief Global Strategist and Chairman of the Global Investment Committee. "However, now we have to admit that some form of Russian presence, perhaps 'peacekeepers' requested by the separatists, is likely. Whether opponents of strong Russian control in Eastern Ukraine decide to fight these peacekeepers is a key question, but it clearly could become more unstable than the Crimean example."

Meanwhile, in China, Nikko Asset Management continues to believe the country will be able to avoid a hard landing even though negative news is accelerating on several fronts. Property price declines are spreadingwith secondary prices starting to fall in many second- and third-tier citieswhile the government is pushing even harder to rein in the shadow banking system, which provides funding to many struggling sectors of the economy

"Falling property prices put a damper on investor sentiment, and also lead to less activity in the crucial housing construction industry," Vail said. "Rising defaults among the shadow banks will lead to a rise in banks' non-performing loans, but in the long run the government is doing the right thing in instilling some discipline in lending activity."

In the emerging markets, Nikko Asset Management's top investment professionals covering equities, fixed income and forex have updated their views on the relative attractiveness of several countries, based on a ranking of average scores across six categories: 1) the direction of the one-year interest rate, 2) the direction of the forex rate, 3) equity earnings growth, 4) equity valuations (based upon several measures), 5) political risk and 6) vulnerability to credit or property market downturns.

The most attractive emerging markets are India, Korea and Mexico, while the most unattractive markets are Chile, Egypt, Russia, South Africa, Thailand and Turkey. In the middle, average-scoring countries include China, Indonesia, Malaysia, Peru, the Philippines and Vietnam. Brazil scores slightly below average.

Overall, Nikko Asset Management is cautious on emerging markets equities as a whole, even though certain countries offer excellent prospects; nevertheless, investors should be cautious about the political risks associated with this asset class.

– ENDS –

For inquiries, please contact:

Jeanie Cheah
Tel: +65-6500-5793
Email: jeanie.cheah@nikkoam.com

About Nikko Asset Management

With USD203.9 billion* under management, Nikko Asset Management is one of Asia’s largest asset managers, providing high-conviction, active fund management across a range of equity, fixed income, multi-asset and alternative strategies. In addition, its complementary range of passive strategies covers more than 20 indices and includes some of Asia’s leading exchange-traded funds (ETFs).

Headquartered in Asia since 1959, Nikko Asset Management and its subsidiaries employ personnel representing around 30 nationalities, including approximately 200 investment professionals**. The firm has a presence through subsidiaries or affiliates in a total of 11 countries and regions. More than 400 banks, brokers, financial advisors and life insurance companies around the world distribute the firm’s products.

The investment teams benefit from a unique global perspective complemented by the firm's historic Asian DNA, striving to deliver consistent excellence in performance. The firm also prides itself on its progressive, solution-driven approach, which has led to many innovative funds launched for its clients.

For more information about Nikko Asset Management and to access its investment insights, please visit the firm’s homepage.

* Consolidated assets under management and sub-advisory of Nikko Asset Management and its subsidiaries as of .
** Including employees of Nikko Asset Management and its subsidiaries as of .

Important Information

Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets which are targeted by the fund is not necessarily indicative of the future or likely performance of the fund. Nikko AM Asia reserves the right to make changes and corrections to the information, including any opinions or forecasts expressed herein at any time, without notice. Nikko AM Asia accepts no liability for any loss whatsoever arising from any use of or reliance on any of the opinions expressed. Whilst Nikko AM Asia believes that the information is correct at the date of production, no warranty or representation, whether express or implied, is given to this effect and Nikko AM Asia expressly disclaims liability for any errors or omissions. The information contained in this document is given on a general basis without obligation and on the understanding that any person acting upon or in reliance on it, does so entirely at his or her own risk.
Nikko Asset Management Asia Limited, Registration Number 198202562H

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