Investment Strategies
Equities Set To Rise As Japan Opens Credit Floodgates - Lombard Odier Darier Hentsch

Equity markets, which have already started 2012 in stronger fashion, will benefit as the Bank of Japan joins the “activism party” of other central banks’ rapid expansion of the money supply, according to Lombard Odier Darier Hentsch.
The central bank of the world’s third largest economy has recently signalled that it intends to openly move towards inflation targeting, and has indicated it intends to “massively” increase purchases of Japanese government bonds (JGBs). In the case of bond purchases, the BoJ is operating in the same way as the US Federal Reserve and European Central Bank, argues Lombard Odier.
The commentary shows how wealth managers are trying to make sense of central bank policy at a time when a number of jurisdictions, notably the US, eurozone and UK, have embarked on policies of quantitative easing – credit creation – to reignite flagging economies. The moves are controversial: fears that money printing will eventually stoke inflation are driving purchases of assets such as gold, diamonds, real estate and equities. The QE policy, when combined with low single-digit inflation rates in some nations, means interest rates for many investors are now negative.
The LODH commentary argues that in recent years, the BoJ has been a relatively cautious practitioner of quantitative easing. Its balance sheet has expanded by only 11 per cent over the past five years, while the Bank of England, Fed and ECB have increased their balance sheets by 249 per cent, 239 per cent and 147 per cent, respectively.
“The equity market, from very attractive valuation levels, should be a prime beneficiary from this liquidity wave, with exporters receiving an additional boost from yen depreciation,” the Swiss firm said. But it added: “So, like for Europe, our recommendation to investors is to 'enjoy the liquidity-fuelled rally in equities but stay sober', recognising the huge structural issues.”