Japan cited as decent equities play as year-end approaches

Tokyo cityJapan equities are cited as an attractive investment amid a mixed outlook for the rest of the year, which will see market volatility persist.

The eurozone is struggling to show signs of growth, while disappointing jobs data and manufacturing confidence mar an otherwise positive outlook for the US.

In separate reports issued this week iShares, an exchange-traded fund provider, and Russell Investments, a fund manager, both cite Japan as a stock market leader in the run up to year-end.

Stephen Cohen, chief investment strategist at iShares in Europe, Middle East and Africa, says Japanese equities seem to offer the most value in the developed world, but he recommends currency hedging.

"Japan's largest pension fund, the Government Pension Investment Fund, which has $1.2 trillion (€0.9 trillion) in assets, is looking to allocate more to domestic equities which should help support the market," he says, adding that a weaker yen versus the dollar compared to earlier this year is also boosting the earnings of Japan's exporters.

Cohen says current worries for investors include poor growth for regions such as the eurozone and disappointing data on jobs, manufacturing and business confidence in countries such as the US.

Andrew Pease, global head of investment strategy at Russell, says: "Strictly from a value perspective, Japan is the most attractive of the developed markets and currently holds a neutral valuation score."

He views emerging market equities as undervalued, US equities as expensive on a book-to-value basis, and says UK equity valuations are in negative territory due to poor earnings.

Pease says the outlook for the US and UK is generally positive. Economic growth trends are strong, particularly when compared to the loss of growth momentum in the eurozone, though further easing of fiscal austerity and plans to expand the European Central Bank balance sheet may counter these trends.

He adds that the aging equity bull market is starting to display signs of unpredictability and increased volatility is expected.

At iShares, Cohen says low inflation could also benefit European credit.

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