Writing in the commentary to its final results for the year ended March 2014, managers, Shoichi Mizusawa, Nicholas Weindling and Naohiro Ozawa said: “An increasing number of investors and commentators are starting to doubt Abe's commitment to reform."
"It has been over a year since Prime Minister Abe took office and he has to start to deliver soon, not only for investor sentiment but more fundamentally in order to address the structural issues, such as the declining population and unsustainable level of public debt that pose threats to the long term health of the Japanese economy,” they added.
Despite this concern, the managers expect growth in Japan to return in the third quarter as, it says: “Company fundamentals are strong and valuations are compelling. We expect that the impact of the consumption tax rise will prove to be relatively small.”
Looking ahead, the trust spells out four reasons to remain bullish on the outlook for Japanese equities.
First, they say, the consensus earnings forecast for the 2014 financial year currently stands at a 10% growth compared to the previous year, with a similar growth expected in 2015.
“We have never before seen a Japan versus US P/E valuation gap at a three point discount. Smaller companies offer equally attractive valuations, with the trailing price/earnings ratio of sub 15x and price to book value of 1x.,” they said.
The second reason is that the Bank of Japan remains committed to fighting deflation.
“We believe that the BoJ will be willing to use the tools at its disposal, including an increase in its quantitative easing programme, as and when required.”
The third reason are the signs of improvement visible in the domestic Japanese economy.
“In February of this year, consumer price index inflation (excluding fresh food and energy) rose to 0.8%, the highest reading since 1998. This is a key change. We are also encouraged by announcements from large companies that they are going to increase base wages this year. Wages remain one of the key drivers of sustained growth and inflation and it is important that this trend spreads, not only among large companies but also among small and medium enterprises ('SMEs') which account for 70% of the Japanese workforce.”
The final reason outlined is the expectation that global demand will continue to be led by US economic growth momentum.
“The fortunes for the Japanese economy have historically depended on global economic growth and we believe that this will continue to hold true. This is positive for corporate earnings and, ultimately, the Japanese equity market.”
