Despite the broader Japanese stockmarket indices continuing to lag other developed markets, we continue to believe investor patience will be rewarded. The combination of aggressive monetary easing and fiscal stimulus looks to be getting Japan out of decades of deflation. Wage increases reported this summer were the highest in 20 years and restructuring at companies is paying off.
The market is attractively valued. Despite nearly doubling earnings per share, the forward price-to-earnings ratio of Japanese equities is about 13 times and trading cheaper than most developed regions for almost the first time since before the 1989 market peak.
The momentum for shareholder value creation continues – dividends and share repurchases are forecasted to double over the next few years. The introduction of the JPX Nikkei Index 400, which includes shareholder value as a factor in its selection criteria, has increased the attention on value creation.
Finally, Prime Minister Abe announced a reshuffling of the cabinet at the beginning of September. The appointment of Yasuhisa Shiozaki as health minister is significant since he has the most aggressive stance on corporate governance reforms and is in favour of rebalancing Japan’s pension fund, the GPIF, towards more domestic equities. Given the size of the GPIF, a change in asset allocation would mean flows of around 4 trillion yen.
The periphery of Europe (Spain and Italy) has risen almost 10 per cent in local currency terms since the beginning of the year. Germany (as measured by the Dax) is up just 1 per cent. While we are encouraged by the improvement in leading indicators such as the Purchasing Managers Index in Spain, we believe the time is right to be booking some profits and reinvesting these back into the core of Europe – Germany. Mario Draghi’s most recent comments have resulted in notable weakness in the Euro that had previously been strong. If this weakness is sustained it would prove very supportive to the exporting companies of Europe, many of which you will find in Germany. Europe is not historically the driver of global growth, but it is a beneficiary of it. As the US economic recovery continues to gather momentum and emerging market economy PMIs begin to expand, greater exposure to core Europe seems more than justified.
The recent actions by the ECB have confirmed the diverging paths of monetary policy between Europe and the US. While Europe is just beginning to loosen the taps, the Fed may be forced to tighten policy quicker than a very dovishly positioned market expects. This is an important trend which has far reaching implications across several asset classes, not least in currency and fixed income. Lower European rates may keep a lid on longer dated US bonds, but we still see short rates as vulnerable to a further upward shift. This supports our continued bullish view on the dollar and exposure to absolute return fixed income funds with shorts at the front end of the US curve.
Tony Lanning is lead manager on the JP Morgan Asset Management Fusion funds range