Japan : local or global effect?

March was marked by the events that hit Japan. The worst seems to have been avoided even if it is too early to draw all the conclusions. The consequences for this already highly-indebted country are numerous: the paralysis of a part of Japanese production, a major medium-term reconstruction effort, the possible questioning of nuclear and the impact on conventional energies. All the effects of this catastrophe are, at present, difficult to quantify but do not necessarily compromise global growth.

Natixis Asset Management has nonetheless reduced the risk in its model portfolio by adopting a more prudent stance when faced with the proliferation of major social unrest in the Near and Middle East, soaring commodity prices that are liable to be driven to new highs by geopolitics, the EC B discourse on potential monetary tightening as of April and the difficulties of the Bank of England and a number of emerging regions in keeping the lid on inflation.

Fixed income

For the moment, within fixed income, the priority should be on holding significant reserves of cash and inflation-linked bonds. The exit from accommodative monetary policies (quantitative easing is expected to end this June in the United States) is approaching and imported inflation risks could see a rise in long-bond yields.

While credit represents a moderate risk, its absolute performance could be impacted by the possible rise in interest rates. Lastly, investing in emerging bonds seems risky since inflationary pressures are present in several of these regions. The monetary authorities are effectively going to have to make a choice to the detriment of short-term growth at a time when food supplies are expensive.

Equities

Natixis Asset Management has slightly reduced its exposure to equities by neutralizing an over-weight posted over the past few months and reinforced since the end of 2010. A return to the more defensive market segments (e.g. return to the UnitedStates, adding to positions in the cyclical sectors that have been laggards in Europe, lightening of positions in the financials that will be subject to new solvability tests by the summer, etc.) has also contributed to reducing overall risk.

We now have an underweight on emerging equities given the temporary uncertainties in these regions. Note: global economic growth, corporate earnings and liquidity all remain positively oriented.

Currencies

There are still concerns about Japan since it is very tempting to finance some of the reconstruction work by repatriating the capital currently invested in US bonds. This could lead to negative effects by driving the yen higher relative to the dollar. Some G20 central banks have thus mobilized to try to curb the rise in the yen. In the same vein, but for other reasons, the emerging currencies continue to be favored by the interest rate tightening inherent in combating imported inflation. The ideal policy mix remains to be found since this phenomenon is countered, in particular, by currency appreciation but remains detrimental, on the other hand, to a country’s external trade.

Commodities

Commodity prices have remained firm, stoking overall inflation in several world regions with risks of transmission to core inflation via production costs