Investment Strategies

BNY Mellon Sees Long-Term Potential For Japan

Sandra Kilhof Reporter 17 February 2014

BNY Mellon Sees Long-Term Potential For Japan

While still relatively unloved and under-owned, Japan is looking to pick up in the coming years and catch up on the global earnings recovery. As such, now is the time for investors to buy Japan, as the potential for earnings per share growth is looking greater than ever, said BNY Mellon’s Japanese equity investment team at a recent roundtable in London.

Miyuki Kashima, head of Japanese equity investment at BNY Mellon Asset Management Japan, announced the launch of two Japanese equity funds, the Japan All Cap Equity fund and the Japan Small Cap Equity Focus fund, which are both domiciled in Dublin, with share classes available at an annual management charge of 1 per cent. Read more on the launch, here.

Giving a broad overview of the Japanese economy, Kashima explained that the launch follows her having “never felt this positive for the long term” during her near-30-year career running Japanese equities. She argued that even given last year’s equity rally, which saw the Topix index gain more than 50 per cent in local currency terms, the market was a long way off its peak.

“The market hasn’t caught up to the earnings recovery since the financial crisis,” Kashima said, adding that she expects a 10 per cent growth in earnings in the coming financial year.  

Smiling on Japanese equities
With the TOPIX trailing behind the MSCI World rebound, the significant gap in earnings signals great potential for the Japanese economy, Kashima said.

“The potential upside, including this year’s and next year’s earnings growth, is 40 per cent. We will start to see the market discount next year’s earnings growth as well as catch up with previous growth.”

The positive sentiments on Japan are also shared by other industry players such as Swiss & Global Asset Management, which is part of Switzerland-listed GAM Holding AG. The firm said in a recent outlook on Japanese equities that it expects double-digit annual profit growth for the asset class in 2014 and 2015.

“Sustained currency weakness will continue to benefit most Japanese companies; a weaker yen will allow businesses to achieve an even higher level of profitability and will boost investment spending and wages. This will herald an end to deflation and boost the country's economic growth,” the firm said. 

Kashima’s faith in the rebound of the Japanese economy comes down to two particular points she explained during the roundtable. Firstly, and most importantly, the country is experiencing a rare period of political stability, as so-called Abenomics (named for Japan’s popular prime minister Shinzō Abe), looks to end deflation quickly.

Secondly, public opinion on the Japanese economy is shifting, as Japanese investors who had previously lost all faith in their own products, are slowly returning to the domestic market. As such, Japanese funds enjoyed $150 billion in inflows during 2013, primarily boosted by foreign investors, yet with another $200 billion needed for Japanese allocations to reach a neutral standpoint, there’s room for growth fuelled by domestic investors, explained Kashima.

Long-term gains
When asked whether Japan will contract now that emerging markets, particularly those in Asia including China and India, Kashima insisted that money will not be pulling out of Japan,"because Japan never enjoyed money inflows post-crisis like China did. If anything, money should flow in", she explained.

Similarly, Swiss and Global said that it expects profits in industrialised countries like Japan to approach pre-crisis levels.

“We also expect comparable price gains in equity markets in the long term, with Japan rising in line with other developed markets,” the firm explained, adding that investors should focus on internet firms and market leaders, where there are pay-offs to be found, even in the short-term.

That said, the potential for the Japanese economy to truly pick up, is not going to happen overnight, Kashima said.

“This is a long-term recovery. At the current loan to deposit ratio of just 60 per cent, Japanese banks have ample room to extend loans, but it will take time for companies to start borrowing again. So this so-called multiply effect that we’re expecting to see, has 5-10 years potential”.

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