Felix Zulauf: Buy Japan

Felix Zulauf of Zulauf Asset Management has a good record in getting the big calls right.He was rightly bearish on the macro picture in early 2008, but bullish on markets in early 2009. When he attended the latest mid-year Roundtable at Barron's, he was in a gloomy mood.

Never has so much money been hurled into the world economy, yet "this has been the weakest economic recovery by far" for the West.

That's due to high debts, broken banks, ageing populations and globalisation, which have "dampened the income of the middle class and moved some of it to the emerging world". The US is set for growth of around 2% this year; Europe will expand by less than 1%.

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However, the world "is too optimistic about growth", and markets have raced ahead of the fundamentals."The world is yield-hungry, but there is less and less yield, so people are going after riskier investments."

Stocks are also overcooked. Zulauf believes thata correction of over 10% is a possibility and could happen in late summer.

China is a medium-term worry. It is "in a growth slump that could worsen next year", dampening the overall performance of the emerging world. History shows that the excesses seen in the Chinese economy tend to leadto setbacks that can last years and wipe 5%-15% off GDP.

The strengthening currency and rising wages for low-cost labour up 20% in five years are undermining competitiveness.

On a more positive note, look for Japan's Nikkei to rally later in 2014 or early 2015. Zulauf correctly predicted in January that the yen would strengthen and the Japanese stock markets weaken.

But he thinks the Bank of Japan will print more money later this year, cheapening the currency and propelling equities upwards.