Investors turn positive on Japan in marked change

Commentators look favourably on domestic stocks due to economic revival and the end of deflation, combined with a drive to enhance corporate value, hears an AsianInvestor forum.
Investors turn positive on Japan in marked change

Investors and commentators have turned positive on the outlook for Japanese equities due to economic resurgence and the end of deflation, combined with a domestic drive to enhance corporate value, an AsianInvestor forum heard.

Tomonari Kadoumi, general manager of ¥2 trillion ($16.8 billion) in the separate accounts department at Sumitomo Life Insurance, said he looked favourably on valuations.

Speaking on a panel about the investment environment from a domestic perspective at AsianInvestor’s fourth institutional forum in Tokyo this month, Kadoumi noted that while Sumitomo Life had been overweight Japanese equities last year, it had no choice amid the low-rate environment.

But this year was different, he argued, saying he expected a lag effect from yen weakness to filter through to corporate earnings. “The market expects the effect to be immediate, but actually there is some time before impact is felt,” he said.

He expressed the view that earnings per share would rise to ¥100 this year and that the Tokyo All Price Share Index (Topix) would continue its climb (it had risen 35% since mid-October to close in on 1,600 points by press time).

Kadoumi added that Sumitomo Life had adopted the stewardship code last year to promote the sustainable growth of companies through investment and dialogue (184 institutions in Japan have committed to the code so far).

“Going forward we hope to contribute to supporting the economy and society overall,” he said, in a marked change in sentiment from AsianInvestor’s last two institutional investment forums in Japan.

“I think companies will take [governance] seriously and institutional investors will be more proactive in their role. There are various ways to enhance corporate value – raise return on equity, do share buybacks and be more proactive in M&A.

“I think this type of activity will increase, so for Japanese equity on a relative scale there is positive material we can focus on.”

He conceded there were also potential headwinds, pointing to US and Japanese monetary divergence and the likelihood that the US would raise interest rates this year. He forecast there would be vacillation in the market.

Yuji Kage, senior adviser at Blackstone Group Japan, was similarly upbeat, noting that some influential commentators in Japan were suggesting wage growth in 2016/17 could well bring about inflation.

He highlighted industry research showing the long-term average return for equities was 7-9%, but stressed this factored in recovery from the bottom and that 90% of the time returns would be flat to almost negative.

But he noted how Japanese equity had returned 10% annually for the past three years or so, adding: “Will that hold in future? Yes, I think so, in the sense that the majority of equity return is recovery from the bottom and that is what [Japanese investors] suffered.”

Takuji Okubo, chief economist at Japan Macro Advisors, voiced his view that Japan’s deflationary period was already at an end and said a moderate inflationary period was now likely.

He said he agreed with market consensus for economic growth of 2% for the next two fiscal years, notwithstanding geopolitical risks from the likes of Russia and China.

He noted that the competitiveness of Japanese companies was good on the tailwind of yen devaluation, combined with a ¥5-6 trillion boost to the economy from depressed commodity prices.

He added that there were two job openings now for every person looking for work. “In the labour market it is only a matter of time before we are going to see an increase in wages,” Okubo said.

While he cautioned that crude oil prices had fallen so low that it could lead to renewed expectations of deflation, he said that was not his view and that the Bank of Japan would be more worried about inflation than deflation and would be targeting a little below ¥120 to the dollar (exactly where it was at press time).

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