November has been a tumultuous month for the Japanese prime minister, Shinzo Abe. With the world’s third largest economy falling into recession, he has dissolved
parliament and called a snap general election.
But the uncertainty has not panicked fund managers, who have generally welcomed Abe’s postponement of a sales tax and remain positive for equities.
The prime minister’s controversial economic policies, known as Abenomics, are also seen as being on track.
Patrick Moonen, equity strategist at ING Investment Management, expects Japanese corporate earnings to increase next year, benefiting form monetary policy easing and positive exchange rates.
“Generally speaking, corporates [in the US, Europe and Japan] do have money to spend, but at the same time we observe growing differences between the valuations of equities in the various regions. Japan is our favourite because of its very favourable valuation-growth trade-off,” says Moonen.
Fidelity Worldwide Investment has added to its overweight position in Japanese equities within its multi-asset funds, using currency-hedged exposure where possible. Trevor Greetham, director of asset allocation, sees the delay in a consumption tax as positive for the asset class.
“We have consistently argued this year’s sales tax hike was a mistake. We see its delay as good news for the economy and good news for the stock market over the medium term,” he says.
The first rise took the consumption tax from 5% to 8% in April, but a rise to 10% slated for next year has been delayed until 2017.
The tax has caused volatility, but other fund managers also see its postponement as support for equities.
Miyuki Kashima, head of Japanese equity investment at BNY Mellon, says: “The market has clearly disliked the volatility in the economic numbers caused by the consumption tax. If the consumption tax hike of April was partly to blame for the market weakness in the earlier part of the year, its postponement could prompt a positive market response.”
James Dowey, chief economist at Neptune Investment Management, says Abe’s snap election, which means voters will go to the polls two years ahead of schedule, and the tax delay, are “good economics, good politics”.
“In reality, Abe has called the snap election as a way to delay the tax hike while enabling those in the Ministry of Finance and the Bank of Japan, to whom he promised it as scheduled, to save face.”
BNY Mellon’s Kashima says the election is not a sign that Abe’s economic policies, or ‘Abenomics’, will end because there has been no accompanying rise in opposition support, while Fidelity’s Greetham says Abenomics has returned to its “compelling” original position.
Andrew Pease, global head of investment strategy at Russell Investments, says Japan’s equities market is showing parallels with the US market in 2012 and 2013, characterised by “extremely positive monetary policy, but only patchy evidence of real economic strength, in the early stages of recovery”.
Positive about Japanese shares, Pease recommends buying in the dips, and selling in the rallies when optimism moves too far ahead of economic reality.
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