IN FOCUS6-8 min read

The opportunity in Japan

Economic developments may start to favour an increased exposure to other equity markets over the medium term.

Japan leads global markets higher


Caspar Rock
Chief Investment Officer

There have been times over the past 18 months when a cautious stance on equities has helped performance. This was not the case in the second quarter of 2023. While there has been a divergence in the performance of individual markets, global equities have been on the rise. We benefited from the rally, given that we maintain broad exposure to equities across our core strategies. However, this exposure is generally at the lower end of our typical long-term range.

We think this positioning remains appropriate for now. The US economy has proved more resilient than economists anticipated, but it is not immune to the five percentage point rise in interest rates that we have seen over the past 15 months. There are already signs that activity is slowing, with a rise in unemployment claims and weaker manufacturing data. The result may be a slowdown rather than an outright recession. Either way, it is very possible that the US faces a bumpier landing than markets are currently anticipating. This could present an opportunity to increase our equity exposure.

A more active stance in Japan

The end of China’s zero-Covid restrictions led to some excitement about the country’s prospects in 2023. However, neither its economy nor its stock market has been performing particularly strongly. It is in fact Japan that has been leading Asian stocks higher this year. It is also the best-performing major developed market.

For the past two years, we have had exposure to Japan through an index-tracking fund, which has tracked the recent strong performance. To take advantage of the more dynamic outlook for Japanese equities, we have been switching this exposure to actively-managed funds. We may also further increase the absolute level of Japanese exposure over the coming months.

There are two key shifts that mean the strong performance could have further to run. Firstly, the economy. For many years, Japan has suffered from falling prices. That is now changing and many Japanese workers have recently had their biggest pay rise in nearly 40 years. The second shift is a newfound focus on corporate reform. Japanese companies have been more willing to restructure their businesses and are returning more capital to shareholders than ever before. Despite the rally seen so far this year, Japanese markets still remain attractively valued, especially compared to the US.

Japan leads global markets higher

Performance of major stock markets (rebased to 100)

Performance of major stock markets (rebased to 100)

Source: Cazenove Capital, Refinitiv Datastream

Rebuilding fixed income exposure

Following last year’s sell-off in fixed income, we have been increasing our allocation to the asset class and now have an “overweight” exposure. There are two recent developments to highlight. We have initiated a new position in emerging market debt, which offers attractive yields – even after adjusting for inflation – and should stand to benefit as the end of the US rate hiking cycle comes into view. We have also continued to gradually increase the average maturity of our core government bond holdings. This should help protect portfolios if the global economy slows significantly and central banks cut interest rates to support growth.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


Caspar Rock
Chief Investment Officer


Market reviews
Global economy

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