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Following is the full transcript of CNBC's interview with Takumi Shibata, President & CEO of Nikko Asset Management, at the 2017 Singapore Summit. This interview broadcasted in Asia on Tuesday, 19 September.
All references must be sourced to a "CNBC Interview".
Interviewed by Amanda Drury, Contributor, CNBC.
Amanda Drury (AD): So Mr. Shibata, you think that markets around the world are reacting appropriately to the North Korean crisis?
Shibata: Actually there is a sense of disconnect between geopolitical tensions around the world and the market. And North Korea poses no exception. In the past if take a look at VIX Index you would have expected the VIX indexes shoot up when North Korea shoots a missile up. None of that is happening.
AD: So do you think that the markets are underpricing the risk? 16:06:48
Shibata: Actually, I think the market is now sort of used to facing all those geopolitical risks without affecting real productivity of the market or economy. So that's where we are. Of course we should not exclude the possibility, although remote, of a military conflict. Well then market would start reacting.
AD: How difficult is it right now as an asset manager, when you look around the world and you see these markets which can so easily just move on just a comment from the ECB, a verbal intervention on the euro, or a hawkish comment from the BOE which certainly makes the pound spike. Do you feel that because the so many markets are almost priced to perfection, that the swings - we're more vulnerable to bigger swings?
Shibata: Actually when you take a look at the swings, it's very small in scale. And actually there is a big degree of control by the central banks around the world when it comes to fixed income and also currencies. So despite the impression that you get from headlines on newspapers, it's really minor movement that we're observing in relation to the comments from central bankers.
AD: You know Nikko Asset Management is not the only company that has greatly benefited from Abenomics with the BOJ essentially pumping vast sums of money into Japanese stocks under this program. But then what happens when that program is wound down?
Shibata: I think one case that Japan should study very carefully is the case of Hong Kong getting out of the positions and I think in a very orderly fashion. And what you know is that it's not supply and demand only, but it is essentially value of underlying stocks that matters when it comes to the timing of the price. So as long as the economy is OK, as long as the company is doing fine, it will be very easy for the central banks to come back orderly liquidation.
AD: Do you agree with the current BOJ program?
Shibata: I think they are sort of very very smart in doing what they're doing. It's not an easy operation. For instance, when it comes to the Japanese government bonds it could well be that they might be reaching the limit as to the amount of JGB that they can buy. So they are absorbing inventories of JGB of the various financial institutions and doing operations impeccably well.
AD: It has created quite a headache hasn't it for institutional investors who are desperately seeking yield if you get absolutely nothing for JGBs? So at Nikko AM what can you offer institutional investors?
Shibata: Actually we do not pretend to give solutions to all the problems that institutions are facing but we can also provide part of the solution. And we are not really interested in replacing the major operational part of you know the Treasury operations. But on the side, there are small pockets of investment opportunities that they need to have exposure to and that's a place where we are very happy to be of help.
AD: So what are the best investment opportunities at the moment that you see?
Shibata: Actually the wall street journal in the past, media in the past, reported that the Danish mortgage securities has swept in the Japanese yen with the promise of positive yield. And that's a good deal against a negative interest rate. But our recommendations to institutions these days is that you don't want a concentration of risks and they would benefit most by diversifying exposures to various underlying assets that should include multi-assets with the risk budget, that should include smart beta in the Japanese equity with 100 per cent hedge. And actually we are in the process of making a recommendation that the best risk management is to diversify risk exposures.
AD: Diversify geographically where at the moment? I know you've been looking in places like Australia, New Zealand ahead of the election, Chinese banks - where do you see the most value at the moment?
Shibata: I think when it comes to fixed income, Australia and also mortgage securities within Australia poses very good opportunities as a diversifier. And also New Zealand securities are also very attractive too. When it comes to stocks, we need to basically think of different types of institutions and also different type of investors such as pension funds, or individuals on the street. And to them we are now recommending they you try to find fast lanes within the slow moving traffic. So for instance we've raised about six billion dollars in the global robotics, idea being that what you see in the portfolio of global robotics now could be just interpreted as an industrial portfolio of 10 years later.
AD: So how are you achieving your goal of becoming more relevant to overseas international investors as well?
Shibata: I think we want to be something new, because there's no use in copying someone else's game. So we are trying to be very creative. So for instance on the front of ESG, visibly Japanese stocks together with the engagement, we have now built a track record of covering them in the number of 500 corporations for over three years and that's a very good database from which we can build the portfolio that has two institutions very concerned about ESG and that we do seem to have answer. But let's see you know. Also support smart beta, of course some of the challenges of Japanese equity index is that the replacement of component is not aggressive as Dow Jones. So in a metaphorical way there are many - 85 years old trees in Nikkei 225 and not all 85 years old trees would grow. So there is a sort of a room full smart data and that's another route that we are taking. And the other thing is that because the coverage of corporations by sell-side research analysts is going down and it's also going down because of MiFID II. So essentially real money of stock pickers would be great differentiators. So we are investing a lot of our own resources as well as our human resources, talent training to strengthen the existing bench and also deepen the existing bench.
AD: I have to ask you about the FSA blasting the "toushin" the Japanese investment trusts for not serving the customers appropriately so for example the high fees but low returns. Has that affected you at Nikko?
Shibata: I think you know the asset manager are given the opportunities of perfecting the job of guardian of fiduciary responsibility. So everything goes back to fiduciary responsibilities and we try to produce a portfolio that best serve investors interest. The positive intervention by the regulators would actually change the ways in which products are sold. And the old product might disappear, the new product might come in to make better products. So actually I think we would welcome intervention by the regulators and we want to run ahead of them.
AD: Do you feel though that as a member of the industry you need to rebuild trust with the customer?
Shibata: Actually in the past 10 years we've trained about 18,000 account executives of distributors. And we are very often voted number one as best servicer to the distributers. And also we invest a lot of time and money into educating retail investors. So the growing demand for better citizens is actually good for us.
AD: Finally we've had a pretty good run this year. 2017 growth-wise and also stock market wise. Are we due for a global market correction?
Shibata: I think the market correction can happen any time. And of course you know if something massive happens in North Korea that can sort of affect us short term but we don't really expect the long term conflict. Apart from those we find that geopolitical concerns are acting as a lid on the valuations of Japanese equities. So while technical questions are possible, long term it is a very good buy.
AD: It certainly benefited the Japanese yen as a safe haven. Does the strong yen give you a headache?
Shibata: No I think you know the corporations actually use exchange rate targets and when they make an exchange rate the target they always build a cushion. So to the extent that we don't we see the value of US Dollar going below 100, I think most of the companies will be OK
AD: And the reason I asked that is because quite often when we see the strong yen we see the stock market go down as a result. But that was the reference to that question.
Shibata: There's always a sort of negative correlation between value of Japanese yen and value of a Japanese stocks. At the same time good deal of that is technical. Those who are funding themselves in the Japanese yen when they want to reduce their position, all they have to do is buy the Japanese yen. So it's not a long term trade.
AD: So you don't see it going below 100?
AD: What's your forecast in 12 months?
Shibata: I don't pretend to know anything about the exchange rates except to say that below 105 I'd be a very big buyer personally of US dollars.
AD: That's a good answer. Thank you very much for joining us today.