What Japan’s market fall means for investors

20th January 2016

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Fidelity’s investment team in Tokyo comment on Japan’s fall into a bear market…

Japanese stocks last entered a bear market in June 2013, when the Nikkei 225 slumped by more than 20% in one month (the TOPIX was down by 18% in the same period). The index subsequently rebounded by 30% through the end of the calendar year.

Takashi Maruyama, chief investment officer for Japan says:

“External macro instability is likely to persist for some time. However, conditions in Japan are not overly negative. As our portfolio managers have noted, the decline in energy prices is actually a huge boost for the domestic economy. The Shinzo Abe government will be keen to support the market ahead of Upper House elections in the summer and the Bank of Japan is more likely to implement additional easing measures now that the yen has strengthened.

“The valuations of Japanese stocks look attractive relative to those in other developed markets, and the corporate sector should be able to maintain positive earnings growth. Furthermore, ongoing improvements in corporate governance will help to increase capital efficiency and boost shareholder returns.

“The recent correction therefore offers a good opportunity to buy good companies at more attractive prices.”

Jun Tano portfolio manager at Fidelity International: “I believe the market is still in the correction phase of a bull market rather than at the beginning of a bear market.

“Obviously, the strong global growth led by emerging economies, especially China, is behind us and we have to bear the volatility that often comes during a transition phase. Additionally, geopolitical uncertainty is negatively affecting investor sentiment. “However, the US economy is steady and Europe seems to be finally recovering. The Japanese economy is also improving and deflationary fears are gradually abating.

“The weak oil price is negative news for oil producing countries but good news for the most developed countries, especially Japan. Corporate earnings in Japan remain healthy and I believe that the Japanese equity market will show a steady recovery not just as a result of further easing by the BoJ, but rather through steady earnings growth.”

Rie Shigekawa, portfolio manager at Fidelity International says:

“I remain cautiously optimistic on Japan as earnings should still be higher (in the absence of further significant currency moves) for the fiscal year through March 2017. The Abe government is keen to improve market sentiment ahead of the elections this summer.

“The Bank of Japan is increasingly concerned about the level of wage rises we are likely to see in the spring and are monitoring developments very carefully.

“With the current deterioration in sentiment, the Bank of Japan is increasingly likely to expand its QQE measures sooner rather than later. Furthermore, Japanese stocks continue to look attractive from a valuation standpoint.”

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