This interview was featured on Asian Private Banker on 9 July 2024.

Anticipating currency volatility, Lombard Odier believes market pullbacks in Japan could provide compelling opportunities for investors. Meanwhile, the Chinese yuan looks to further depreciate against the dollar as authorities play a difficult game of balancing stimulus and leverage.

John Woods, the Swiss bank’s CIO and head of investment solutions for Asia, told Asian Private Banker in a recent interview that the bank sees upside potential in equity semiconductor trades in Asia as well as in the fixed-income space.

“We’ve had a very strong rally in high yield, particularly from the sovereign side,” said Woods, the multiple APB award-winning CIO who joined Lombard Odier from Credit Suisse earlier this year. “We would be looking at the risk-adjusted value offered by investment grade as being a lot more attractive than high yield right now.”

Improving macro outlook

Woods explained that while some banks foresee a sharp recession, Lombard Odier is not among them, as forward-looking indicators such as manufacturing and global services PMI are both improving.

“Central to our improving macro outlook is the US labour market, which has remained in a healthy shape with layoffs, job cuts, and unemployment claims all keeping reasonably low,” he said, adding these factors signal a limited recession risk.

Lombard Odier has a reasonably constructive outlook for disinflation, which could lead to interest rate cuts.

“The decline in inflation remains on track as reflected on those monthly numbers recently published,” he said. “We’re calling for two cuts over the course of this year. We think the neutral rate for the Fed will stabilise around 3.5% over the next year or so, 1.5% in the case of the ECB.”

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Japan’s bipolar economy

Woods believes the Bank of Japan (BOJ) will likely tighten further amid significant wage strength, particularly as the yen continues to remain weak. Lombard Odier forecasts two more BOJ rate hikes in 2024 to 0.3%.

The bank does not expect much of a rebound in the yen in the near term as large outflows from domestic investors add to weakness. Currency market interventions and the lead-up to the end-July BOJ meeting should keep volatility high.

Over a 12-month horizon, Lombard Odier expects the yen to reach 148 USD-JPY. According to Woods, this is driven by the fact that the Fed will start cutting late this year.

“I will not be surprised that the market would eventually become more volatile, driven by currency movements,” he said.

Export-driven Japan is benefiting from trade policies that target China’s EV sector and is taking market share in precision manufacturing. However, Woods noted that while Japan is still benefiting from a positive macro backdrop and external environment, there are still concerns due to a slowdown among consumers and limited wage growth.

“This leaves us with a bipolar economy from external versus internal perspectives,” he said.

“We have a strategic weight for Japan and would be looking for pullbacks to re-look at the market more positively. It’s more of a pullback and correction, which I think would give investors the opportunity to participate.

“Our clients, even domestic Japanese clients, are interested in increasing exposure in Japan equities, but they are doing so via the most familiar and the biggest names like Tokyo 30,” Woods told APB, referring to the 30 most capitalised stocks in Japan.

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Room for RMB to depreciate

Lombard Odier remains neutral on China, with some exposure through proxies, such as Korea or Taiwan, from a tech perspective or European luxuries from a consumption perspective.

“China has to play a careful strategic [game] of stimulus and support without triggering another round of leverage, particularly amongst households. It’s a difficult game. We suspect China’s growth trajectory is likely to be a shallow decline in the years ahead given the maturing nature of the economy,” Woods said.

Amid these ongoing challenges in Asia’s largest economy, Lombard Odier anticipates ongoing RMB weakness versus the dollar. The bank’s 12-month forecast for USD-RMB is 7.35.

For Woods, the RMB’s depreciation could partly be justified because most of the currencies of China’s major trading partners, which are included in the CFETS RMB Index, have depreciated. If China wants to remain in a strong and stable trading relationship, it should be tracking the index.

“If we look at the index, RMB is now within the historical range but slightly on the expensive side. So it’s got some room to gradually depreciate,” he added.

Meanwhile, a US election is on the horizon, and both Republicans and Democrats have a negative view of China. As such, in either election outcome, headline news about China will not be supportive from a foreign investor’s standpoint, Woods noted.