Japan is one of the equity markets that our Global Investment Solutions team finds most attractive for a combination of both top-down and bottom-up reasons, including:
- an accommodative central bank
- currency weakness boosting exporters
- oil price weakness leaving consumers with more disposable income
- a positive outlook for corporate earnings growth
From a macro perspective we have seen strong monetary stimulus and some good evidence of the end of the deflationary spiral, even seeing signs of positive wage growth coming through. Japan's equity rally has been based on structural changes and cyclical forces (e.g. corporate tax cut, improved shareholder focus, greater dividend payouts, end of deflation, weak yen, oil price decline) and public money flows. Buybacks are also at their highest levels since 2004 and there has been an increase in M&A activity.
The BoJ's ultra-accommodative monetary policy—and its potential expansion —remains a bullish signal.
From a bottom-up basis, Japanese companies are benefitting from the weak yen, improved efficiencies and cost cutting. Valuations seem attractive versus history, earnings forecasts for Japanese companies continue to show positive momentum.
Drivers behind Japanese corporate earnings are strong and unlikely to be reversed easily. With sales expected to recover as the effects of the consumption tax hike wear off, profits can rise even if margins remain unchanged. Demographics should help corporate Japan avoid increases in labour costs in future.
On the Real exchange rate levels signal that JPY is the most undervalued G10 currency and a natural beneficiary of increased uncertainty. Cheapness of the currency has been driven by BoJ policy.
Investors can gain simple low cost exposure to the Japanese equity markets via the UBS IQ MSCI Japan Ethical ETF (ASX Code: UBJ).
This document is intended to provide general information only. To purchase a UBS IQ MSCI Japan Ethical ETF please contact your broker or financial advisor.