However, there are signs the Japanese economy can take up some of the slack given the unprecedented new wave of quantitative easing (central bank asset purchases) announced.
We are left thinking the markets will probably witness lower returns from higher-risk securities in the second quarter.
More upside to come from Japan
It’s simple advice – continue to buy Japanese equities.
This is advice Mark Harris, fund manager at City Financial completly disagrees with – look out for more on this on the PA website later.
The Bank of Japan’s (BoJ’s) actions last week were more substantial than the market had expected. There are now many drivers to the upside. We expect significant upgrades to both economic growth and corporate earnings forecasts. And the policymakers are not yet even done. In June, we expect the Japanese government to announce a large package of reforms and fiscal spending measures.
The BoJ’s announcement that it would double its balance sheet by 2014 may increase Japan’s contribution to global growth in 2013. At the very least, it should lead to the afore-mentioned gross domestic product (GDP) forecast upgrades. To date, consensus GDP forecasts for 2013 have virtually doubled and are now around the 1.2% level. The latest measures should lead to further improvement in the coming weeks.
At the same time, we expect the market to start looking at nominal GDP much more closely, given that, unlike real GDP, it includes inflation, and is now expected to rise sharply on the BoJ’s moves. Goldman Sachs, for example, estimates that nominal GDP growth in 2014 will hit 2.6% relative to 1.1% in 2012.
true
Japanese equities can rise further
We believe that the Japanese equity market can rise further. Although the market is up some 46% from its low point of last year, earnings forecasts are only slowly responding to the stimulus measures.
The most positive estimates of earnings growth for the next two years have been forecasting a 45% increase per annum while the lowest ones see a more modest 30% increase. The estimated 2013 price/earnings ratio of 13.8x for the Japanese equity market is still below the US, which is at 14.7x. The actual dividend yield is 1.8%, which is significantly above the 0.5% yield for 10-year Japanese government bonds (JGBs).
We expect domestic buyers to join foreign buyers in propelling the market higher. To date, foreign buyers have been largely responsible for the rise in the market and they were net buyers again last week. Since the last general election, they have bought ¥58trn ($587bn) of Japanese shares. In contrast, local retail investors last week sold for the first time in weeks. Trust banks have also remained net sellers.
We expect foreign investors to remain buyers in our belief that institutional investors are still underweight Japanese equities in global portfolios.
Consumer and cyclical stocks to outperform
Sector-wise, the performance of Japanese equities has been driven by a sharp rise in real estate (+122%) and financial stocks (+60%) over the past year. The next phase of performance will have to come from consumer and cyclical stocks. Retail stocks, for example, are up just 30% in the last year and chemical and machinery stocks 20%.
Hear Abermarle Street Partners’ Dan Kemp talk on the scars experienced from Japan in past years.
