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Japanese Stocks in 2016: Possibility for Attractive Upside Potential

Monday, January 11, 2016

The new year looks promising for Japanese equities, says Reiko Mito, Investment Manager at GAM. She sees upside potential for corporates even if the current accommodative monetary policy may eventually start being reversed.

What is your view of Japanese stocks in 2016?

I am bullish. Earnings of Japanese corporates are hitting record highs, and this upward trend is expected to continue for the next 2-3 years. 2016 earnings will be driven by sales increases and profitability improvements. A large number of corporates are increasingly using cash efficiently and improving their return on equity. However, the market is still undervalued compared with other developed markets. With earnings growth and a re-rating of valuations, Japanese stocks have the potential for attractive upside potential in 2016.

What are the investment themes to look out for in 2016?

We continue to look at factory automation (FA). With tight supply and demand conditions of labour within Japan and wage increases in emerging markets, demand for automation is strong. FA has been expanding into artificial intelligence (AI). One of our holdings invests in venture businesses active in AI. The electronisation of automobiles is also evolving. Self-driving cars should become a reality by 2020 in some areas, and the Tokyo Olympic Games that year should be a good occasion to for Japanese corporates to showcase their proprietary technologies.

We also look at global manufacturers. The pessimism towards China and other emerging countries has led to concerns over the earnings of Japanese corporates. However, these concerns seem to be priced in. Japanese manufacturers have strong potential to enhance their presence globally by leveraging not only product quality but also short lead times and extensive proposals to meet clients’ individual needs.

Have the “Three Arrows” of Abenomics attracted the attention of investors outside of Japan?

We highly appreciate the increase of female participation in the labour force, the increase of foreign tourists in Japan, and the introduction of the Corporate Governance Code last June. However, foreign investors’ expectations regarding the growth strategies of Prime Minister Abe have come down recently. From the beginning, we explained to investors that Abenomics’ growth strategies would take some time before yielding tangible results.

Have expectations regarding additional quantitative easing (QE) by the Bank of Japan (BOJ) remained high?

Similar to the US, where monetary policy has begun to move away from QE, investors seem to start to understand that any measures of QE will eventually end. Expectations of further QE by the BOJ have diminished versus some time ago. Yet even without any additional QE, we believe the positive story of Japanese stocks is intact.

What risks are you mindful of?

As particular risks, we would cite the numerous conflicts and terrorism globally, particularly in the Middle East. However, we believe that we may see a recovery of the global economy earlier than expected. Structural reform in China may lead to a recovery in production, which would be a positive factor for the global economy.

This interview was conducted by Nikkei and originally published on 25 December 2015. http://mw.nikkei.com/sp/#!/article/DGXLASFL25HEB_V21C15A2000000/

Source: GAM unless otherwise stated. Nothing contained herein constitutes investment, legal, tax or other advice, nor is it to be solely relied on in making an investment or other decision. It is not an invitation to subscribe and is by way of information only. The views expressed herein are those of the manager at the time and are subject to change. Past performance is not indicative of future performance.