Citywire printed articles sponsored by:
View this article online at http://citywire.co.uk/wealth-manager/article/a696386
MRB's Insight of the Week: the triple leverage charm of Japanese banks
News sponsored by:
by Salvatore Ruscitti on Aug 09, 2013 at 00:01
We are overweight Japanese equities within a global portfolio for three main reasons:
Shinzo Abe’s election victory: While widely anticipated, prime minister Abe’s win increases the odds that his reform legislation will be passed. Abe’s political standing rests on reform efforts and, thus, we foresee little risk of significant backsliding (although there will be bumps along with the way, given some dissent within his party).
Growth outlook: Aside from the US, Japan is one of the few economies showing decent forward momentum. Consumer spending is up, rising business confidence heralds a rebound in capital spending, and better export growth looms (partly because of the substantial depreciation in the yen this year).
Monetary policy: The Bank of Japan is committed to reflating the economy and meeting its goal of lifting inflation expectations. It faces a challenging task, but at least it has changed its deflationary mindset of the past two decades.
In view of these positive changes, there are a number of domestic sectors within the Japanese stock market that should particularly benefit, with banks at the top of our list.
Credit growth and quality will both improve as prices rise throughout the economy, and overall economic risk-taking comes out of hibernation.
The process will be slow, but at least the landscape is finally changing in a favorable direction.
Fewer corporate failures will lift the return on equity and boost relative earnings for banks. Valuations for bank stocks are inexpensive relative to the overall Japanese market, selling near record lows on a price/book basis.
Thus, banks shares have the potential to rerate significantly if reflation continues and is successful in spurring better economic growth and corporate earnings.
Investors are wary of embracing the bullish story on Japan after more than 20 years of disappointment. This pessimism, though, is why the Japanese bourse and many of its sectors sell at cheap valuations, especially banks and cyclicals.