{"id":64834,"date":"2017-07-27T01:57:53","date_gmt":"2017-07-26T23:57:53","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/the-case-for-japanese-equities\/"},"modified":"2019-12-31T02:04:40","modified_gmt":"2019-12-31T01:04:40","slug":"the-case-for-japanese-equities","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/the-case-for-japanese-equities\/","title":{"rendered":"The case for Japanese equities"},"content":{"rendered":"

We see further strength in Japanese equities after their recent rally, given an
\nencouraging earnings outlook, relatively low valuations and a stable yen under
\nJapan\u2019s ultra-easy monetary policy.<\/p>\n

\"japanese_equity_performance_and_valuation_1990-2017.jpg\"<\/a><\/p>\n

Japanese equities are approaching peaks they have struggled to climb over in past
\ndecades. Is this time different? We see reasons for optimism. Valuations (green line)
\nare lower than at previous high points in stock market performance (blue line).
\nMoreover, Japanese stocks appear inexpensive on the global stage \u2014 trading at a
\n20% discount to U.S. peers on a 12-month forward price-to-earnings basis. <\/p>\n

More than just valuations<\/strong><\/p>\n

Low valuations alone are not a reliable buy signal, yet we find an improving earnings outlook adds to the appeal of Japanese equities.
\nWe expect Japanese companies\u2019 earnings growth to hit a three-year high in 2017. A sustained global economic expansion is boosting
\noverseas earnings, while wages are rising just enough to bolster domestic consumption without eroding profit margins. The recovery in
\nearnings also reflects companies\u2019 greater focus on shareholder returns. Profitability among Japanese companies has been improving,
\nbut remains well below that of other developed markets. Return on assets, a gauge of corporate efficiency, has risen back toward precrisis
\npeaks, and Japanese companies have undertaken significant deleveraging. Earnings, meanwhile, are rising faster than dividend
\npayouts and buybacks, and this provides considerable scope to improve shareholder returns.<\/p>\n

The BoJ\u2019s equity purchases and domestic investors\u2019 increasing preference for stocks provide further support. Our analysis shows
\nJapanese equities remain far from a crowded trade, as foreign investor inflows have recently subsided. A further support is the BoJ\u2019s
\nultra-easy monetary policy, which contrasts with a normalizing Federal Reserve and a looming step change in the ECB\u2019s monetary
\nstimulus. We see this helping keep the yen in a stable trading range. Any sharp rise in the currency is a main risk to the Japanese
\nequity rally.<\/p>\n

Bottom line: We are overweight Japanese equities (currency-hedged in the case of non-Japanese investors), and prefer stocks with
\nforeign earnings growth.