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magazineMoment of truth for Japanese stocks
The International Monetary Fund (IMF) is increasingly gloomy on the prospects for the UK and US (see page 7) but there is at least one major economy where it is becoming more positive – namely Japan.
In its latest World Economic Outlook it projects 1.3% growth in 2017 up 0.1% from its previous forecast in April.
And according to BlackRock’s global chief investment strategist Richard Turnill, Japanese equities are closing on highs they have struggled to scale in the last 25 years.
VALUATIONS ARE UNDEMANDING
He sees several reasons why they could buck the trend this time. First, valuations are lower than at previous high points in stock market performance (see chart) and are inexpensive relative to other major markets, at a 20% discount to the US based on forward price-to-earnings ratios for example.
Turnill says: ‘Low valuations alone are not a reliable buy signal, yet we find an improving earnings outlook adds to the appeal of Japanese equities. We expect Japanese companies’ earnings growth to hit a three-year high in 2017.
‘A sustained global economic expansion is boosting overseas earnings, while wages are rising just enough to bolster domestic consumption without eroding profit margins. The recovery in earnings also reflects companies’ greater focus on shareholder returns.’
He notes that earnings are growing faster than dividends and share buybacks providing ‘considerable scope to improve shareholder returns’.
BlackRock are ‘overweight’ on Japan and prefer stocks with foreign earnings growth. UK investors looking for exposure to Japanese stocks have a number of options.
WAYS TO PLAY
The investment trust space includes JPMorgan Japanese (JFJ), Aberdeen Japan (JPIT) and Schroder Japan Growth (SJG), all of which trade at a discount to net asset value (NAV). We took a detailed look at investment trusts focused on Japan here.
In terms of open-ended funds AJ Bell’s head of fund selection Ryan Hughes has previously highlighted Legg Mason Japan Equity (GB00B8JYLC77) as a good option, noting manager Hideo Shiozumi ‘has proved time and again that when Japanese equities are in favour he has the ability to significantly outperform’.
There are also low-cost exchange-traded funds (ETFs) available. Deutsche Bank’s db X-trackers MSCI Japan (GBP hedged) (XMJG) offers currency-hedged exposure for an all-in fee of 0.4%.
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