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Outlook 2024: Lukas Knüppel (Japan Equities)

Japanese equities – Unique investment opportunities are emerging in Japan in quality companies at reasonable prices

December 2023

Challenges and opportunities: Click here to read GAM's investment managers' Outlooks for 2024

As we approach the beginning of 2024, we find ourselves at a pivotal juncture in various aspects of the investment landscape. On one hand, key industry indicators, such as machinery and robotic orders or the US Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), which strongly correlates with the industrial sectors in Japan, are bottoming out and showing signs of recovery. Global semiconductor sales are already rebounding. In addition, many industrial companies are successfully reducing the excess inventories that accumulated when consumer demand worldwide shifted abruptly from goods to services after the pandemic. These positive developments collectively suggest that the industrial sector in Japan is poised for a stronger performance in 2024.

On the other hand, companies that focus on domestic consumption and the service sector are poised for a return to more normal growth rates. This projection is based on a comparison of the expected performance in 2024 with the exceptional recovery witnessed in Japan after the post-Covid consumption boom and the resurgence of tourism that boosted domestic spending.

Earnings growth: Modest but with potential for upward revisions

Our 2024 outlook for listed Japanese companies is a mid-single-digit earnings growth in yen terms, followed by a further acceleration of 10% in 2025. While this may seem modest compared to the 10-year average growth rate of 8%, there is potential for upward revisions if our bullish scenario of a more pronounced recovery in manufacturing materialises in 2024.

Interest rates: Diverging from other central banks

There is a growing expectation that the Bank of Japan (BoJ) may end its long-standing negative interest rate policy in 2024, but any such move is expected to be relatively modest. Consequently, Japanese bank stocks have experienced a substantial rerating in 2023, reaching their 10-year average valuations.

If the BoJ raises interest rates in 2024, it will be diverging from other central banks. The global economic landscape is characterised by a noticeable slowdown in inflation and a gradual easing of labour markets, which may contribute to the stabilisation of interest rates and the possibility of rate cuts, in the US and other countries.

Investment opportunities

Considering these factors, we believe unique investment opportunities are emerging for Japan equities, enabling us to invest in quality companies that have long been on our radar at reasonable prices. Despite the significant outperformance of value stocks, especially in the banking sector, in 2023, our commitment remains unwavering in adhering to our strategic, long-term perspective. We remain focused on participating in the value creation of growing companies in attractive sectors and leveraging structural trends. Our core objective continues to be investing in quality companies with robust margins and sound fundamentals.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.

This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Lukas Knüppel

Co-Manager and Investment Director
My Insights

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