Japanese equities have been in the spotlight since Japan’s new Prime Minister Shinzo Abe announced that the government would spend an additional JPY10.3trn (around USD106bn) to get the economy on a higher growth path.
Carlo Capaul, co-fund manager of the JB Japan Stock Fund at Swiss & Global Asset Management, says: “The performance of Japanese equities is to a large extent correlated to the global equity market. From mid-May to mid-June nearly all equity markets dropped as a result of Mr. Bernanke’s speech anticipating a tapering of Quantitative Easing (QE). Additionally, weak economic data from China impacted global equities, especially in emerging markets. However, we must take into consideration the substantial rally we have experienced since 2009 and recognise that at some point a correction was to be expected. The Yen has lost roughly 24 per cent of its value versus the Euro since June 2012, although we do not expect further falls in the short term.
“Interestingly, despite the correction, Japanese equities are still outperforming global equity indices. Valuations also look competitive, with the Price/Cash-Flow ratio of the MSCI Japan Index standing at 9.4, compared to 8.6 for the MSCI World Index. For the financial year 2013 earnings are expected to grow by approximately 40 per cent from a yen perspective. Based on relative valuations the case for Japanese equities remains reasonable.
“The outperformance of Japanese equities after the correction indicates that investors, particularly foreign investors, still have confidence in Japan. On 28 June 2013 the Ministry of Finance reported above average purchases of Japanese equities by foreign investors of JPY479.7bn. The polls indicate that Abe’s LDP party will achieve a majority in the upper house at the elections on 21 July, which should further boost confidence, maintaining an attractive exchange rate and low bond yields. The latter could be supported by successful implementation of higher consumption taxes next year.
“In terms of portfolio positioning, the sectors that have performed well in the last six months include security brokers, tyre manufactures, telecommunication services, maritime transport, real estate, retailers and utilities. We believe that capital goods, software and services, banks and household and personal products are in a position to profit going forward.”