Japanese equities: Headwinds in 2016

Economists have pointed out that progress on structural reforms will remain slow while a major pick-up in wages remain an unlikely scenario.

However, industry sources believe that the introduction of the Nikkei 400, a governance code that asks companies to be more responsible about shareholder value, is promoting better return on equity.

Others noted that Japan’s large-scale quantitative easing would boost the profitability of exporting companies as goods become more competitively priced.

Against this backdrop, Fund Selector Asia presents views from the 2016 outlooks of various asset management firms:

Andrew Milligan, head of global strategy for Standard Life Investments:

“Our house view on Japanese equities is neutral. The asset class is supported by earnings upgrades from a weaker yen, improving corporate governance, lower corporate taxes and the [Bank of Japan’s] quantitative easting measures. However, we have yet to see the full implementation of the Abenomics’ structural reform components.”

Sean Taylor, CIO of Asia Pacific, Deutsche Asset & Wealth Management:

“We remain overweight on Japanese equities. We expect the Bank of Japan to initiate more quantitative easing next year, which is positive to the equities market. But on growth prospects, we are projecting that Japan’s GDP will expand at 1.2% next year, down 0.6% from 1.8% this year. Structurally, [Prime Minister Shinzo] Abe’s three-arrow initiatives are taking longer to realise.”

Mark Burgess, CIO of EMEA and global head of equities for Columbia Threadneedle:

“At a regional level, we continue to see good opportunities in Japanese equities and we have also reflected this in our asset allocation portfolios. Japan has delivered good levels of earnings growth and this has meant that equity valuations remain attractive.”

Dean Cashman, portfolio manager for Japan equities at Eastspring Investments:

“We have found, on a stock-by-stock basis, high conviction names with strong valuation signals across much of the market. There are names in major banks, insurance companies, consumer electronics and information technology, specialist materials and industrials, auto–related as well as domestic names.

“We avoid expensively valued names that are loved by the market. In aggregate, we are finding either insufficient conviction or unattractive valuations in the more defensive stocks including consumer staples, pharmaceuticals, railways and utilities.”