The largest listed asset management house in the hold sets out why it is bullish on Japanese equities.

BlackRock, the world’s largest listed asset management house ($5.7 trillion in AuM as at end-June), says it is bullish on Japanese equities, encouraged by prospects for the country’s earnings outlook, cheap valuations and ultra-easy monetary policy.

Richard Turnill, global chief investment strategist, said in a note that Japanese equities are “approaching peaks they have struggled to climb over in past decades”, and asks whether the market could finally break out of constraints this time around. 

There are reasons for being optimistic, he said: Equity market values are lower than at previoius high points in stock market performance and Japanese equities are cheaper on international measures, trading at a 20 per cent discount to comparable US stocks on a 12-month forward price/earnings multiple.

“Low valuations alone are not a reliable buy signal, yet we find an improving earnings outlook adds to the appeal of Japanese equities. We expect Japanese companies’ earnings growth to hit a three-year high in 2017,” Turnill said.

The comments come at a time when taken as a whole, equities are seen on average to be over-valued, as shown by a recent Bank of America Merrill Lynch survey of fund managers around the world. (See story here.) Overall, managers were overweight Japan equites, although the scale of their bullish stance was cut from where it was in May. 

As far as BlackRock is concerned, however, Japan remains highly attractive.

“A sustained global economic expansion is boosting overseas earnings, while wages are rising just enough to bolster domestic consumption without eroding profit margins. The recovery in earnings also reflects companies’ greater focus on shareholder returns. Profitability among Japanese companies has been improving, but remains well below that of other developed markets. Return on assets, a gauge of corporate efficiency, has risen back toward pre-crisis peaks, and Japanese companies have undertaken significant deleveraging,” he continued.

“Earnings, meanwhile, are rising faster than dividend payouts and buybacks, and this provides considerable scope to improve shareholder returns. The BoJ’s equity purchases and domestic investors’ increasing preference for stocks provide further support. Our analysis shows Japanese equities remain far from a crowded trade, as foreign investor inflows have recently subsided,” Turnill said.