In its spring 2013 outlook report, Steve Cohen, head of investment and strategy and insights for EMEA, lays out four investment themes set to dominate a more uncertain second quarter. The firm also suggests investors should consider defensive equities and currency hedged Japanese equities as part of their investment strategy.

Defensive equities 

According to Cohen, while equity valuation remains attractive to cash and bonds, risk metrics which historically correlate with risk asset performance are pointing to a receding investor appetite. He suggests that investors should consider more defensive ways to maintain developed market equity exposure through dividend income and minimum volatility equity indices.

Emerging markets

Emerging market equities continue to struggle and have underperformed their developed market counterparts by 10 per cent year-to-date. Cohen points out that investors could look at alternative ways to play this theme such as dividend strategies, which may have better risk-reward characteristics. He says that certain developed market large cap companies and indices such as the DAX and the FTSE can also be attractive ways to access emerging markets indirectly.

Japanese equities

Cohen identifies how quantitative easing measures by the Bank of Japan have caused Japanese equities to rally more than 40 per cent since November last year and also resulted in the yen weakening aggressively against all major currencies. As a result of the significant easing coming into the system, he believes accessing the Japanese market through a currency hedged strategy provides the most opportune investment strategy for this theme.

Fixed income

The final theme that Cohen expects to dominate in the second quarter is that of fixed income. He says that bond portfolios carry more risks than in the past and suggests that the duration risk and the volatility of core rates markets will favour interest rate hedged corporates. Local emerging market debt also offers better value than US dollar emerging market debt.