Outlook AWS
For professional investors and advisers only
December 2013
Schroders
Outlook 2014: Japanese Equities Shogo Maeda, Head of Japanese Equities Japanese equities have surged this year on the back of the much-lauded policy of Abenomics – named after newlyelected Prime Minister Shinzo Abe. We have witnessed Japanese growth pick up of late and the battle to fight deflation appears to be one which the government is winning.
– An exit from deflation, increased capex spending and growing exports should all provide support for earnings growth in 2014 – The first two arrows of Abenomics saw fast results but the third arrow of growth strategy disappointed the market, but there will be a chance of a positive surprise – Creation of a new index focused on corporate governance in Japan should help boost ROE and could be a catalyst for further market gains.
“As we head into 2014 Japanese companies’ earnings have already seen a pronounced bounce, partially due to the weaker yen but also on improving exports and higher consumption.”
Recent data point to rising prices. Although this can partly be contributed to higher energy costs following the 2011 tsunami along with the yen’s depreciation, the general trend towards inflation is an encouraging sign for the Japanese economy. Japanese consumer prices in October, excluding fresh foods and energy, rose 0.3% over a year – a 15-year high, and continued improvement in the labour market implies a likelihood of future wage growth, which will be required to see a continuous and stable inflation environment. Despite the fact that Abe has decided to introduce next year’s consumption tax hike, an economic stimulus package worth an estimated five to six trillion yen, expected to be introduced before the end of the year, should help to soften the impact of it. Earnings continue to grow As we head into 2014 Japanese companies’ earnings have already seen a pronounced bounce, partially due to the weaker yen but also on improving exports and higher consumption. All this is contributing to what we see as being a record high for corporate earnings in the 2014 financial year. Earnings and profitability, presented by return on equity, will likely continue on their upward trajectories as the macro environment is set to remain supportive. Companies’ capital expenditure continues to recover along with the much improved profits. Economic growth in the US, the most important market for Japan, remains intact. Recent fracases with China, another key market for many Japanese companies, can be seen as a risk in 2014 but we think the two countries’ governments would agree that bilateral economic relations are too important to be discarded. With the gradual exit from deflation, where a tightening labour market will be supportive, we have a macroeconomic environment that is conducive for companies to boost their earnings growth.
Outlook 2014: Japanese Equities
Potential upside for Abenomics Criticism has been aimed at Abe’s government in relation to the last of the ‘three arrows’ of Abenomics. The first two arrows, easing monetary policy along with a 2% inflation target by the Bank of Japan and a massive fiscal stimulus, have already contributed to the rally in share prices we have witnessed this year. However, the third arrow, concerning growth strategy, is the one that has raised the most debate, and to some extent has already disappointed the market. On this front, we believe the government is moving in the right direction and has already made some progress. As Abe’s administration is entering its second year, and having gained a majority in both houses of the Diet, it retains a political stability for at least the next three years. As a result, a positive upside surprise to market expectations could be delivered in 2014. Growth-enhancing strategies, such as negotiations over the Trans-Pacific Partnership trade agreement, will need more time to execute properly.
Shogo Maeda Head of Japanese Equities Shogo Maeda is Head of Japanese Equities, based in Tokyo, and joined Schroders in January 2006. He has previously worked at Goldman Sachs Asset Management, where he was Head of Japanese Equities, before becoming Managing Director & Chief Investment Officer for Asia Pacific equity fund management. Shogo is a CFA Charterholder and has a Masters in International Affairs from the School of International Affairs, Columbia University. He also has a BA in Economics from Wesleyan University.
Boosting corporate governance One recent market development that has piqued our interest is the creation of a new index in Japan: JPX-Nikkei Index 400. This new index is designed to consist of companies with minimum profitability and corporate governance requirements. Aimed at using capital more efficiently and effectively, we believe this will heighten the appeal of Japanese equities for domestic and foreign investors alike. The new index’s creation in itself bodes well for an improvement in corporate governance in Japan next year and adds yet another catalyst for a continued upmarket trend. Whether this index will be adopted by large Japanese pension funds is one of the keys in promoting corporate governance in Japan. This development should both boost confidence in Japanese corporate governance and pressure management to better align their interests with those of shareholders. Sticking to our principles Despite all the market hype, we continue to maintain our bottom-up stockpicking approach to the market. We will be focusing on the improving earnings growth profile which is likely to extend into next year, without compromising on our valuation discipline primarily based on P/E ratios. The yen will continue to act as a key driver for the market and is likely to weaken, albeit within a narrow range against the dollar. We continue to invest in companies that can deliver above-average growth and returns over medium term and prefer stocks with specific growth drivers which are yet to be fully appreciated in the market.
“One recent market development that has piqued our interest is the creation of a new index in Japan: JPX-Nikkei Index 400.”
Important information: The views and opinions contained herein are those of Shogo Maeda, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued in December 2013 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. w44698
December 2013
Schroders
Outlook 2014: Japanese Equities Shogo Maeda, Head of Japanese Equities Japanese equities have surged this year on the back of the much-lauded policy of Abenomics – named after newlyelected Prime Minister Shinzo Abe. We have witnessed Japanese growth pick up of late and the battle to fight deflation appears to be one which the government is winning.
– An exit from deflation, increased capex spending and growing exports should all provide support for earnings growth in 2014 – The first two arrows of Abenomics saw fast results but the third arrow of growth strategy disappointed the market, but there will be a chance of a positive surprise – Creation of a new index focused on corporate governance in Japan should help boost ROE and could be a catalyst for further market gains.
“As we head into 2014 Japanese companies’ earnings have already seen a pronounced bounce, partially due to the weaker yen but also on improving exports and higher consumption.”
Recent data point to rising prices. Although this can partly be contributed to higher energy costs following the 2011 tsunami along with the yen’s depreciation, the general trend towards inflation is an encouraging sign for the Japanese economy. Japanese consumer prices in October, excluding fresh foods and energy, rose 0.3% over a year – a 15-year high, and continued improvement in the labour market implies a likelihood of future wage growth, which will be required to see a continuous and stable inflation environment. Despite the fact that Abe has decided to introduce next year’s consumption tax hike, an economic stimulus package worth an estimated five to six trillion yen, expected to be introduced before the end of the year, should help to soften the impact of it. Earnings continue to grow As we head into 2014 Japanese companies’ earnings have already seen a pronounced bounce, partially due to the weaker yen but also on improving exports and higher consumption. All this is contributing to what we see as being a record high for corporate earnings in the 2014 financial year. Earnings and profitability, presented by return on equity, will likely continue on their upward trajectories as the macro environment is set to remain supportive. Companies’ capital expenditure continues to recover along with the much improved profits. Economic growth in the US, the most important market for Japan, remains intact. Recent fracases with China, another key market for many Japanese companies, can be seen as a risk in 2014 but we think the two countries’ governments would agree that bilateral economic relations are too important to be discarded. With the gradual exit from deflation, where a tightening labour market will be supportive, we have a macroeconomic environment that is conducive for companies to boost their earnings growth.
Outlook 2014: Japanese Equities
Potential upside for Abenomics Criticism has been aimed at Abe’s government in relation to the last of the ‘three arrows’ of Abenomics. The first two arrows, easing monetary policy along with a 2% inflation target by the Bank of Japan and a massive fiscal stimulus, have already contributed to the rally in share prices we have witnessed this year. However, the third arrow, concerning growth strategy, is the one that has raised the most debate, and to some extent has already disappointed the market. On this front, we believe the government is moving in the right direction and has already made some progress. As Abe’s administration is entering its second year, and having gained a majority in both houses of the Diet, it retains a political stability for at least the next three years. As a result, a positive upside surprise to market expectations could be delivered in 2014. Growth-enhancing strategies, such as negotiations over the Trans-Pacific Partnership trade agreement, will need more time to execute properly.
Shogo Maeda Head of Japanese Equities Shogo Maeda is Head of Japanese Equities, based in Tokyo, and joined Schroders in January 2006. He has previously worked at Goldman Sachs Asset Management, where he was Head of Japanese Equities, before becoming Managing Director & Chief Investment Officer for Asia Pacific equity fund management. Shogo is a CFA Charterholder and has a Masters in International Affairs from the School of International Affairs, Columbia University. He also has a BA in Economics from Wesleyan University.
Boosting corporate governance One recent market development that has piqued our interest is the creation of a new index in Japan: JPX-Nikkei Index 400. This new index is designed to consist of companies with minimum profitability and corporate governance requirements. Aimed at using capital more efficiently and effectively, we believe this will heighten the appeal of Japanese equities for domestic and foreign investors alike. The new index’s creation in itself bodes well for an improvement in corporate governance in Japan next year and adds yet another catalyst for a continued upmarket trend. Whether this index will be adopted by large Japanese pension funds is one of the keys in promoting corporate governance in Japan. This development should both boost confidence in Japanese corporate governance and pressure management to better align their interests with those of shareholders. Sticking to our principles Despite all the market hype, we continue to maintain our bottom-up stockpicking approach to the market. We will be focusing on the improving earnings growth profile which is likely to extend into next year, without compromising on our valuation discipline primarily based on P/E ratios. The yen will continue to act as a key driver for the market and is likely to weaken, albeit within a narrow range against the dollar. We continue to invest in companies that can deliver above-average growth and returns over medium term and prefer stocks with specific growth drivers which are yet to be fully appreciated in the market.
“One recent market development that has piqued our interest is the creation of a new index in Japan: JPX-Nikkei Index 400.”
Important information: The views and opinions contained herein are those of Shogo Maeda, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued in December 2013 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. w44698
