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Japan – most realistically valued of all major equity markets

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Japan is a market that James Sullivan, manager of the CF Miton Arcturus Fund, continues to believe is the most realistically valued of all the major equity markets…

The level of the exchange rate is generally viewed as crucial to the prospects for the Japanese economy, therefore the domestic stock market in Japan tends to outperform when the domestic currency weakens against the dollar. This was clearly evident in Q1 when Japanese equities comfortably outperformed US equities, buoyed by a significant depreciation of the yen against the dollar. However, the outperformance has reversed in recent weeks as the yen has recouped some lost ground.

Nonetheless, we expect the yen to remain stable versus the dollar as risk aversion increases into the second half of 2012 (despite potential intervention by the Bank of Japan’s asset purchase programme). A strong or stable yen will go some way to softening any downside of Japanese equity exposure to a sterling based investor. We recently introduced the iShares MSCI Japan Fund to the portfolio, taking our long only equity weighting to 13.8%.

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