Japan's Sumitomo Life Insurance said it plans to keep its exposure to foreign bonds fully hedged in the financial year to March 2012 as the US economy is not strong enough to keep the dollar in an constant uptrend.
Sumitomo Life, Japan's fourth-largest insurer, also said it plans to increase allocations in yen bonds by "several hundred billion yen," focusing on superlong Japanese government bonds and other yen bonds as the company seeks to lower its exposure to risk assets including equities.
The life insurer, which held about 24 trillion yen ($290 billion) in assets as of December, will seek the appropriate timing to increase its exposure to foreign bonds during the current 2011/12 financial year, after buying a net 300 billion yen the previous year, Haruhisa Hirata, deputy general manager of investment strategy at Sumitomo Life, told Reuters in an interview.
Sumitomo thinks the US Federal Reserve will not tighten its monetary policy during the current business year, making it difficult to keep the dollar in an upward trend, Hirata said.
"We plan to keep our foreign bond positions hedged. We'll keep that stance until we are sure that the dollar is in a constant uptrend," Hirata said. "We forecast the dollar to be slightly firmer but there is still a chance for the dollar to test around 80 yen." Hirata said to see the dollar advance at a constant pace, the market needs to confirm bigger global fund inflows into the US currency.
Sumitomo life expects the dollar to move in a range of 78 to 95 yen in the current year and the US currency to be at 86 at the end of March in 2012. On Thursday afternoon in Tokyo, it was trading around 82.20 yen. Japan's top nine insurers hold total assets of about $1.9 trillion - larger than the size of the world's eighth-largest economy, Brazil - and their investment decisions are closely watched by financial markets.
Sumitomo plans to increase its allocations in Japanese bonds by several hundred billion yen after increasing them by around 1 trillion yen in the previous financial year, Hirata said. "Our strategy remains pretty much similar to last year's. We'll concentrate our investments in the superlong sectors of domestic bonds, but the amount of our investments this year will depend on inflows into our new products that went on sale this month," Hirata said.
Sumitomo Life expects the 10-year JGB yield to move in a range of 0.8 percent to 1.6 percent during the current financial year. The JGB yield is likely to centre around 1.3 percent, which is near the current 1.230 percent. Sumitomo will continue to reduce risk positions by cutting its domestic equities holdings in 2011/12, after lowering them by about 100 billion yen the previous financial year, Hirata said.
"We'll continue to cut our equities positions. We have no plans to buy as we are trying to reduce risk," Hirata said. Sumitomo plans to reduce its exposure to fund of funds as well as real estate, he said. The insurer expects demand for loans will be weak, which should push down its loan exposure after it fell by 200 billion yen the previous year, Hirata said.
Sumitomo Life also holds bonds and shares of Tokyo Electric Power (TEPCO). TEPCO's shares plunged and its bond spreads widened sharply after last month's massive earthquake and tsunami crippled its Fukushima nuclear power plant, causing the world's worst nuclear accident since the Chernobyl disaster in 1986. But Sumitomo said the amount of TEPCO shares it holds is not enough to impact on its overall equities portfolio.
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