Japan market: rise in corporate earnings means market actually as cheap as November 2012 argues Psigma’s Becket

11th February 2014

Japanese equities are effectively as cheap as they were in November 2012 as corporate profits have kept pace with the rise in the market says Psigma’s chief investment officer Tom Becket.

Despite the setbacks seen in 2014, Becket believes Japan will finish the year higher. He hopes the recent sell-off has blown away some of the froth from the market and knocked out some of the ‘hot money’ investors.

Noting the yen’s strength, he says it has really been attributable to two factors; the EM ‘crisis’ and patchy economic data from the US. “In the first instance the yen has been a beneficiary of safe haven flows and in the latter it has followed its usual path of falling in tandem with US Treasury yields. A strong US is traditionally good news for Japan”.

He says that Japan managers he has spoken to remain upbeat about the reform agency with big change in energy, trade and tax and more reforms to follow including Japan getting its own version of the UK’s Isa.

The note adds: “Where we have been pleasantly surprised is with corporate profits. The ongoing results season has been strong, justifying the move higher that stocks made last year. Indeed, Japan was the only market to really “deserve” its leap higher last year, as the rise in profits from late 2012 to the end of 2013 was c.70%, matching the rise in the market. This means that (in simple terms) Japanese stocks are as cheap now as they were in November 2012, with arguably less tail risks, than they were before the rally commenced.

“Therefore we expect Japanese equities to finish the year higher, which equates to a decent rally from here. Japanese stocks should again track corporate profits higher, with our expectations of 15% year over year profits growth. Abe-san and Kuroda-san will do all they can to spur the economy higher and (regardless of international opinion) the yen lower. At the same time, institutions with Japanese funds tell us of record levels of interest from long term institutional investors, which can help to elongate the Japanese market recovery”.

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