Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/wealth-manager/article/a707588
How to play the next leg of the Japan rally
by Danielle Levy on Oct 07, 2013 at 10:59
The advent of Japanese prime minister Shinzo Abe’s economic policies, dubbed ‘Abenomics’, has sparked a meteoric rise in the Japanese market.
It is a journey that has hit some bumps along the way, perhaps best demonstrated by a 20% market fall in late May after the Federal Reserve announced its intention to taper quantitative easing (QE). Nonetheless, since the sell-off bottomed on 13 June, the Nikkei 225 index has recovered by 11% and is still up by 63% over the past year.
Investors who have participated in the market rise now face the question of whether the easy money has been made.
‘The first leg of the rally is done,’ said GAM Japan manager Ben Williams.
‘The rapid depreciation of the yen and the upward revision to corporate earnings associated with that moved the market quickly. In the past few months, the yen has found a range between 95 and 100 [to the dollar] and analyst earnings revisions have slowed.’
Despite this view, he remains bullish on the Japanese economy and market, arguing that Abe winning the upper house election has provided a stable platform to pursue his agenda, increasing the probability of the success of his policies. Given where Japanese equities are currently trading, Williams also anticipates further upside.
‘Valuations based on price-to-earnings ratios are reasonable versus other global markets and on enterprise value measures remain extremely attractive against other markets and versus its own history,’ he said.
‘On valuations alone I feel the market offers good value versus alternative yen assets. If companies were to offer greater returns to shareholders then we could see big upside.’
Martin Currie’s John-Paul Temperley is also positive, expecting earnings to return to 2007 levels, which he says is not reflected in current valuations. ‘We think this year earnings will surpass the record earnings from 2007, yet the market is trading at 30% lower than it did then. Therefore, we believe it is possible that the market could reach or exceed levels of 2007,’ he said.
Citywire AAA-rated Hideo Shiozumi’s optimism goes even further. The manager of the Legg Mason Japan Equity fund believes with the end of the ‘lost two decades’ the Nikkei has the potential to more than double over the next few years.
News sponsored by: