close

I confirm that I am a UK financial adviser (Professional Client) and that I agree to and will comply with the Terms and Conditions of this site

close

I confirm that I am resident in the UK and I agree to and will comply with the Terms and Conditions of this site

close

I confirm that I am a UK institutional investor (Professional Client) and that I agree to and will comply with the Terms and Conditions of this site

What has changed in Japanese Equities?

Article | 04 November 2016

How has a shift in Japanese equity market drivers affected investors?

Paul Chesson

Paul Chesson

Head of Japanese Equities

In recent times, we have seen a significant change in the sectors driving the Japanese equity market. The higher quality sectors with stable earnings, which were among the better performers this year, have suffered recently from widespread profit taking. At the same time, some of the more economic and currency sensitive areas of the market have rallied.

The reasons behind this shift in focus included more optimism that the government’s expenditure policy and Bank of Japan’s (BoJ’s) ongoing low interest rate policy could have a positive impact on the Japanese economy. Prime Minister Abe unveiled a substantial expenditure programme aimed at stimulating the economy, while the BoJ announced it would continue to keep interest rates low until the inflation rate moves above 2%. Furthermore, the bank also decided not to push interest rates further into negative territory, at least at the current time, which should alleviate some downward pressure on earnings at financial institutions. These companies have seen their profits suffer as lower rates caused spreads, the differential between loan and deposit rates, to decline. At the same time, lower interest rates have increased the size of pension fund liabilities, and this has negatively impacted corporate earnings.

A further reason behind the shift in the sectors driving the market was the increasing likelihood that the next move in US interest rates will be upwards. This is expected to cause the US dollar to strengthen against the yen, particularly as, in our view, low interest rates are likely to remain in place in Japan for some time to come. This resulted in those sectors that benefit from a weaker yen to outperform, and the defensive sectors which generally do not, to decline. Also, in several cases the differences in sector performance have been due to an increase in the valuation differentials between the defensive and cyclical stocks, given the lengthy period of outperformance by the former.

How is the Invesco Perpetual Japan Fund positioned? Although we retain a cautious view on the Japanese equity market, in recent months the fund’s tilt towards defensive stocks, such as Japan’s real estate investment trusts (J-REITS), has been reduced. We have selectively added to areas such as banks, insurers and auto-manufacturers where we see greater upside potential. Importantly, many of these stocks possess valuation levels which we believe already reflect the challenging economic backdrop. Although we still retain positions in some defensive sectors where we see reasonable valuations and visible earnings, such as rail companies and tobacco, the fund’s exposure is now more evenly balanced.

Looking forward, valuation multiples for the Topix index are undemanding relative to history and to other developed equity markets, but we believe that earnings growth for Japanese corporates is likely to remain subdued and sensitive to the exchange rate. In addition, any sustainable improvement in domestic economic growth will depend as much on global conditions as on domestic policy. Despite our current cautious view on the overall equity market, we are able to find companies with attractive medium-term earnings growth which we feel is not adequately reflected in their share prices. Finally, total shareholder returns are rising as many companies are paying out more of their earnings in the form of dividends to shareholders and undertaking share buybacks. This adds support to the investment case for the market as a whole.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

The Invesco Perpetual Japan Fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.

Important information

Where Paul Chesson has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual investment professionals.

For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Short Reports and the Prospectus, which are available from the Literature section.

Tags: Equity, Japan

More from this author

A fresh path in Japanese equities

The Japanese equity market made gains over the last two years. We are now more cautious about the near term outlook.

Read about the companies we favour among Japanese equities

Article

27 October 2015

Paul Chesson, Head of Japanese Equities, Invesco Perpetual

Volatility borne of uncertainty

While I believe that in the short-term there are reasons to be cautious on the Japanese equity market, the longer term outlook is brighter.

Get our insight on the major issues

Article

14 March 2016

Paul Chesson, Head of Japanese Equities, Invesco Perpetual

Finding opportunities at home in Japan

Paul Chesson explores his investment strategy and the opportunities and challenges in the Japanese market given the currently uncertain global economic outlook.

Read Paul’s views on the Japanese market

Article

04 May 2016

Paul Chesson, Head of Japanese Equities, Invesco Perpetual

What could destabilise the Japanese economic recovery?

While there are signs of stability in Japan’s economy, should we be mindful of an unusually unclear outlook?

Read more

Article

05 May 2017

Paul Chesson, Head of Japanese Equities, Invesco Perpetual