UBS Wealth Management is retaining a modestly bullish stance on Japanese equities as it monitors how well the reflationary impact of “Abenomics” works out, while the Zurich-listed firm is taking its most upbeat position on the US equity market.

Japanese equities have rallied, according to some yardsticks, by more than 50 per cent over the past six months – a period coinciding with the election of the pre-reflation administration of Shinzo Abe. (However, Japanese stocks have suffered a sharp correction in recent days.)

“It may be years before we can fully judge any long-term success of Abenomics, but over our tactical investment horizon we believe the combined actions of the government and BOJ [Bank of Japan] can continue to drive earnings growth for Japanese companies,” Alexander Friedman, global chief investment officer at UBS Wealth Management, said in a regular note to clients.

“And with inflation likely to remain close to zero, we do not expect a stampede out of the bond market: any short-term sell-off would likely be met by temporary BOJ stabilisation measures. We therefore are keeping a small overweight position in Japanese equities over our tactical six-month horizon as we monitor the potential changes in long-term dynamics closely,” he said.

His note is one of many that have sought to understand whether the policies of Japan’s administration - a mix of monetary, fiscal and supply-side measures – can pull the Asian country out of around two decades of sluggish growth. Japan, beset by the demographic pressures of an ageing population and an eye-watering debt/GDP ratio of around 226 per cent, has been seen as the exception to the general recent trend of fast economic growth in the Pacific Rim.

Staying in the region, Friedman noted that China’s economy is slowing, albeit from recent red-hot speeds. A sharp rise in credit expansion has yet to cause higher investment in the economy, apart from property. In the case of real estate, accelerating growth is “far from an ideal source of growth”, given that prices have surged as a side-effect of China’s financially repressive policies, he said.

China’s economy is unlikely to speed up in the next few months, he added.

US

Friedman said UBS continues to place its greatest confidence in the US equities market, and has added to the already overweight stance it has on that stock market.

“This is funded by reducing our US high-yield [debt] position and by adopting an underweight position in Australian equities, which could suffer from any further slowdown in China,” he said. Friedman explained that UBS has decided to lock in some profits made on US high-yield debt.

“We expect the US economy to help deliver solid revenue growth for US companies, while the improving housing market should prop up domestic demand and the outlook for financials. In terms of valuation, despite a 16 per cent run this year, we believe there is approximately 6 per cent upside in the coming six months, and just under 20 per cent upside to fair value on a cyclically adjusted earnings yield basis, given current trends in inflation and real interest rates,” he said.

Among other positions, UBS Wealth Management is overweight the US dollar, while the Australian dollar – once a darling of currency investors – is the least preferred currency of the Swiss bank. A month ago, UBS took an overweight stance on the US dollar against the Swiss franc and continues to be bearish on the euro.