PA ANALYSIS: Sailing the macro winds in Japanese equities

Added 31st July 2017

Net inflows into Japanese equity funds by European investors have picked up recently, as the current macro environment looks conducive to Japanese equities. Asset managers are also jumping on board with the asset class, but why?

PA ANALYSIS: Sailing the macro winds in Japanese equities

Between November and June, net inflows into Japanese equity funds totalled €5.34bn (£4.78bn), according to Morningstar data. While that’s only a modest sum compared to the amounts of money that have gone into European and emerging market equities this year, Japanese stocks haven’t been this popular for at least two years.

As Unigestion analysts wrote in a recent note, the rise of the Japanese stock market in recent years has been fully backed up by higher profits. There has been no multiple expansion in Japan, which sets the country apart from all other major equity markets.

Cheaper than Europe

“Japan is surely cheaper than Europe now,” says Thomas Romig, head of multi-asset at Assenagon in Frankfurt.

David Karni, head of portfolio investments at the Italian bank BCC Risparmio & Previdenza, is also warming to the asset class.

“We have a 10% allocation to Japanese equities in our equity fund-of-funds now. Four months ago, we reduced our allocation a little, but now we are looking to increase again,” he says.

“The BoJ’s strategy of anchoring the 10-year government bond yield at zero implies that changes in foreign bond yields pass through almost completely to the yen”

Traditionally, the fortunes of Japanese equities are quite closely tied to global economic activity. When this picks up, Japanese stocks tend to outperform.

Romig’s fund choice in Japan reflects this backdrop: the MAN GLG Japan Core Alpha fund (one of the largest Japanese equity funds with more than $4.2bn in assets under management) has a strong overweight to cyclical value stocks such as banks and steel producers.  

Dividend paradise

“A sustained global economic expansion is boosting overseas earnings, while wages are rising just enough to bolster domestic consumption without eroding profit margins,” says Richard Turnill, chief investment strategist at BlackRock. “Earnings, meanwhile, are rising faster than dividend payouts and buybacks, and this provides considerable scope to improve shareholder returns.”

Even though Japanese companies continue to sit on ever-growing cash piles, dividends have actually grown faster in Japanese equities than in any other mainstream asset class over the past three years, according to data from ETF provider Wisdom Tree.    

Monetary policy divergence is the final element that could turn Japanese equities into a relative outperformer.

This year, Japanese equities have lagged other stock markets somewhat as expectations of Fed tightening eased, resulting in the yen strengthening against the dollar. But if US interest rates eventually continue their rise, this should be supportive of Japanese equities for two reasons.

The first is that rising US rates tend to coincide with periods of solid economic expansion. The second is the Bank of Japan’s yield curve control policy.

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Tjibbe Hoekstra

Senior Reporter

Tjibbe joined Expert Investor as a senior reporter in March 2014. Before moving to London he worked as a financial news reporter for various news outlets in Amsterdam, including Reuters and ANP, the main news agency in the Netherlands. He also worked for Fondsnieuws, a website and magazine for finance professionals in the Netherlands. Tjibbe holds a MSc in Public Administration and a post-graduate diploma in Journalism.

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