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How to play the next leg of the Japan rally
by Danielle Levy on Oct 07, 2013 at 10:59
Invesco Perpetual’s Paul Chesson is more measured in his two-year outlook, however.
‘Although we have seen this move in the market, we have not seen an upward rating of earnings valuations, notwithstanding the improvement in the outlook. It is, then, a great opportunity today from that point of view; how and when it plays out is always the more difficult question,’ he said.
If Japan follows its traditional course of clocking equity gains over relatively short periods of time, he says it is difficult to envisage a very strong market over the medium term.
‘Within a shorter period of time than two years, we could be looking at a market that is beginning to re-rate upwards and we need to start to become not necessarily cautious, but certainly more modest in our expectations of upward movement,’ added Chesson.
The potential beneficiaries
If the backdrop for Japanese equities is supportive, buoyed by earnings upgrades and further reratings, what is the best way to play the next stage of the recovery?
Many investors have benefited from yen weakness on the back of the expansion of QE by the new Bank of Japan governor, which has improved the competitiveness of Japanese exporters and boosted share prices in the sector.
But some now take the view that stock and sector selection in the Japanese market hinges on whether Abenomics succeeds in genuinely reflating Japan.
‘At the moment the key change in Japan has obviously been the weakening of the yen, and so exporters have seen the biggest change in their operating environment,’ said Andrew Wilson, head of investment at Towry.
‘Genuine reflation in Japan, if it comes, is likely to be more of a domestic story, given the benefits of operational leverage, and there are many sectors and stocks with incredible upside. Banks would presumably be a good place to be too.
‘However, Abe needs incomes, spending and investment to rise soon, as the negative impact of inflation is already being felt via high energy prices, for example, and the Bank of Japan is having to buy huge quantities of Japanese government securities to prevent yields getting out of control, which it can’t do forever, at least not without huge consequences.’
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