Investment case for Japanese equities

VIEWS FROM YUTAKA UDA - 24.01.2017

30 Jan 2017

VIEWS FROM YUTAKA UDA – 24.01.2017

Why should people invest in Japan today and in particular in large cap strategies?

Japan is now poised to exit from deflation and CPI should creep up towards 1.0-1.5% yoy by the end of 2017. GDP growth for the coming 3 years is likely to increase to the range of 2.0- 2.5% pa with corporate profits expanding 10-15% pa thanks to the aggressive fiscal policy and continuous monetary easing. President Trump’s policy is clearly targeted at substantially increasing US economic growth, which should lift world economic growth and help to reduce deflationary pressure globally. Japan has been suffering from persistent deflation for the long term, but prime minister Abe’s decisive economic policy, coupled with Trump’s new policy should change Japan’s economic landscape. The Japanese stock market, which was hurt the most by deflation among the major markets, should be one of the major beneficiaries of these policies. Valuations are very cheap with PBR 1.3x and PER 15x in relation to bond markets with 10 years JGB yield of 0.05 %. BOJ’s determination to buy 6 trillion yen pa of equity ETFs may lead investors to feel that downside risk is limited.

How will politics, government policy or BoJ decisions impact on Japan’s future?

Mr. Abe will utilize fiscal policy more efficiently and speed up structural reforms from now on with the BOJ maintaining monetary easing until 2 % CPI is foreseeable.

Are there any national or international trends which would concern you?

There is very little concern regarding domestic politics or the economic situation. Major concerns lie in uncertainty regarding Trump’s trade and defense policies, although we are relatively relaxed regarding these, they are expected to be more pragmatic and less fearful.

Do you currently favour any particular market sectors and if so why? Are there any sectors you would avoid in the short term?

We strongly believe that a paradigm shift from deflation to inflation is taking place, banking sectors and other economic sectors such as machinery, trading companies and cyclical stocks should lead the rally. On the other hand defensive sectors such as foods and pharmaceuticals with high valuations should be avoided.

 

The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 24/01/17 and are based on internal research and modelling.