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Japan Equities – Lukas Knueppel

In this latest video on his investment views, Lukas Knueppel discusses the significance of the Tokyo Stock Exchange’s initiative for Japanese listed companies to work on their capital allocation and points to the improved sentiment in manufacturing as a guide to potential corporate profit growth.

What were the major recent events and what were the impacts on your asset class?

The Japanese stock market achieved a 33-year high in the second quarter. One of the main drivers was a better than expected earnings season with net profits growing by 13% versus last year excluding SoftBank. We also saw a record number of share buybacks announcements, which leads us to another important supporting factor: the corporate governance reforms requested by the Tokyo Stock Exchange for listed firms in Japan to improve their capital efficiency. At the same time interest rates in the US weakened significantly which led the yen to weaken due to the growing gap between the Bank of Japan’s (BoJ) easy monetary policy and the hawkish stance of peers such as the Federal Reserve and the European Central Bank (ECB). Throughout the quarter index performance was primarily influenced by the largest index weights while the Topix Core 30 index outperformed the Topix Small index by nearly twice the margin. And finally, in terms of investment styles, there was a clear preference for value stocks over growth stocks.

What can your asset class offer in the current environment?

The initiative by the Tokyo Stock Exchange that was announced in April for Japanese listed companies to work on their capital allocation is significant and unique at the same time. While the Tokyo Stock Exchange has been pushing for corporate governance reforms for a long time, its most recent efforts addressed the poor capital allocation decisions at numerous firms which have led to low price to book valuations in Japan. We saw first evidence that some listed firms in Japan started to critically examine their capital allocation strategies and we expect more firms to increasingly return excess cash to shareholders through dividends and share buybacks, which should result in an increase in return on equity and likely raise corporate valuations. We believe this represents a unique opportunity that does not exist as such in other regions and which could be a solid supportive driver for positive returns in Japan in the next years to come.

What’s your outlook in the near and medium term?

The most recent Tankan Manufacturing Survey showed that sentiment among large Japanese manufacturers has improved for the first time since 2021 on the back of falling raw material prices and strong capex investment plans for Japanese corporates. For the second half of 2023 we expect the recovery in order momentum in the manufacturing sector, led by the semiconductor industry, after inventories will have adjusted in many sectors following the stabilisation in global supply chains in the aftermath of the pandemic. Consumption is supported by the strongest pay rises in decades in Japan and a boom in tourism with more visitors arriving to Japan from increasingly wealthy Asian neighbouring countries. All in all we expect corporate profit growth in Japan to re-accelerate towards the end of the year and grow well again in 2024 supported also by lower input prices and lower freight costs.

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 not an 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. 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 or represent any recommendations by the portfolio managers.

No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Past results are not necessarily indicative of future results. Investors could lose some or all of their investments.

TOPIX is a market benchmark with functionality as an investable index, covering an extensive proportion of the Japanese stock market. TOPIX is a free-float adjusted market capitalization-weighted index. TOPIX shows the measure of current market capitalization assuming that market capitalization as of the base date (January 4 ,1968) is 100 points. This is a measure of the overall trend in the stock market, and is used as a benchmark for investment in Japan stocks. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.

This presentation 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

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