Investment Strategies

Another Wealth Manager Lauds Abe Victory As Positive For Japan Equities - Up To A Point

Tom Burroughes Group Editor 19 December 2012

Another Wealth Manager Lauds Abe Victory As Positive For Japan Equities - Up To A Point

Yet another investment manager has lent his voice to the chorus of firms saying the recent emphatic victory for Japan’s Liberal Democrats spells more weakness for the yen and a chance of gains to the embattled economy’s stock market.

At the weekend, Shinzo Abe’s party clinched a clear majority by a margin greater than some had expected. He has frequently called on the Bank of Japan to loosen monetary policy as a way to revive the country’s economy.

Wealth managers have been broadly favourable in their reaction to Abe’s victory, arguing that his reflationary views is positive for the Japanese stock market; the market is still about 75 per cent below its 1989 peak and the country’s growth has faltered. One of the major worries about Japan is that this country, with an ageing population, has a debt-to-GDP ratio of around 200 per cent, one of the worst ratios of any major developed economy.

“While the change in political leadership may not be an enduring reason for market strength, we believe that it has highlighted the opportunities that exist within Japanese equities,” Paul Chesson, head of Japanese equities at Invesco Perpetual, said in a note about the results.

“Lowly valued cyclical companies have been the major drivers of the market’s short-term strength and our portfolios have been biased towards these sectors over the last two years on the belief that their valuation discounts to other areas of the market has been excessive, even amid a difficult economic environment,” Chesson continued.

“We do not believe that in themselves the recent political developments suggest a cyclical bias is justified. We hold these companies because we believe that they are cheap based on fundamentals and that while tough, the economic outlook is not as poor as valuations suggest. As long term investors, we recognise that these are very short term moves, but it is possible that the political changes provide the catalyst for the correction of what we believe are valuation anomalies, where a cheap market offers even cheaper company specific opportunities,” he said.

As far as the yen was concerned, Chesson noted that weakness in the forex rate was key, given Japan’s historically important export sector.

“While the current catalyst for the falls in the Yen has been the expectation of a more expansionary central bank, we believe that fundamental factors will determine the currency’s direction in the longer term. Here, our view is that the Yen remains moderately overvalued and that it is likely to weaken based on increased market confidence in sustainable global economic recovery and, in the medium term, a gradual normalisation of interest rates in the US ahead of Japan,” Chesson said.

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