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Is the sun rising once again in the Land of the Rising Sun? The answer: an emphatic yes! In our Key Investment Themes and 2018 Outlook, we highlighted Japan as our dark horse market for the year. We provide three reasons why we did so in this “Idea of the Week” segment.
(I) Combination Of Monetary & Fiscal Stimulus
What does that mean? To put it simply, both fiscal and monetary policies are tools used by policy-makers to stimulate the economy. Monetary policy is conducted by a central bank, which regulates the price and supply of money. On the other hand, fiscal policy is conducted by the government, where by the amount of taxes collected from the people or the amount of government spending is used to influence the economy.
If monetary policy is being eased (i.e. interest rates are lowered), the price of money is lowered and this makes it cheaper for businesses and individuals to borrow money. Consequently, businesses and individuals are encouraged to spend more via taking on cheaper debt. When there is more spending, the demand for goods and services increase, supporting the overall economy.
On the other hand, when a government wants to stimulate the economy, and does so by reducing taxes, businesses and individuals will have more cash savings. These extra cash could then be used for investing or spending, and this supports economic growth as a whole as demand is boosted.
Conversely, if a central bank raises interest rates, it is effectively tightening monetary policy as the supply of money is reined in and the cost of borrowing is raised. When a government raises taxes or cuts spending on infrastructure projects, fiscal policy is considered tighter. Both of these measures are usually used if policy-makers want to cool down an economy which is overheating.
Now, if both monetary and fiscal policies are eased, there is a powerful tailwind for the economy as a whole. As of this juncture, Japanese policy-makers are hoping to stimulate the economy with both levers. Prime Minister Shinzō Abe’s administration has conducted aggressive monetary easing since 2013 (when he was elected), and has rolled out various forms of fiscal stimulus since then as well. While America’s tax bill gets all the attention, not many are aware that the Japanese government is planning to lower corporate tax rates as well.
Unlike other developed and emerging markets, Japan is in that unique situation of having both levers of fiscal and monetary policies in an easing stance. This is showing up in a slew of economic data, and polls show that businesses have never been so confident of their prospects since 2005! This is shown in Chart 1 below, whereby large and smaller companies are increasingly optimistic, and this trend is consistent across manufacturing and non-manufacturing segments of Japan’s economy.
Chart 1: BOJ's Tankan Survey Readings Since 1987
This development bodes well for investment, spending and many other good things for growth!
(II) Corporate Earnings Growth Supports The Stock Market!
With a synchronised economic acceleration across the world as well as both fiscal and monetary stimulus in Japan happening all at the same time, earnings growth of Japanese corporations have been strong over the past few years, and upgrades have far surpassed downgrades, indicating strong positive momentum!
Chart 2: Corporate Earnings Trend Of Nikkei 225 Index Since 2013
We expect the industrials sector and consumer-related companies to perform well in this cycle. At present, earnings of Japanese companies (gauged by the Nikkei 225 Index) are expected to grow by 12.4% and 12.2% in FY 2018 and FY 2019 respectively. These numbers are very reasonable given the current backdrop, and we wouldn’t be surprised if continued upgrades come in! This will support overall valuations going forward, which at this juncture, are undemanding.
(III) Valuations Are Undemanding!
As a long term investor, valuations are important as you want to make sure that assets you are buying are priced reasonably to give you more bang for your buck. While we are most positive on emerging markets, in particular the Asia ex Japan region, we still advocate maintaining allocations to developed markets. As of present; relative to the other developed markets like America and Europe, Japan is definitely more attractive from a valuation perspective!
Japan’s equity market is trading at PE ratios of 17.4X and 15.6X based on its FY 2018’s and FY 2019’s estimated earnings respectively, comparing favourably to its fair PE ratio of 18.5X (as of 18 January 2018). Contrastingly, valuations in the US and European markets are above their fair levels, and thus possess lesser potential upside.
Table 1 and Table 2 below display some fund choices and exchange-traded funds (ETFs) respectively for you to consider. If you can afford the risks of investing in small-caps, you may want to opt for a small-cap fund as they are more leveraged on the domestic recovery trend currently happening in the country.
This is Japan’s time in the sun – do not miss your chance!
Table 1: Some Options For Japanese Equity Funds
Name |
Sector |
||||
| Aberdeen Japan Equity | General | ||||
| Nikko AM Japan Dividend Equity SGD | General | ||||
| LionGlobal Japan Growth Fund | General (tilt towards mid & small-cap) | ||||
| BNY Mellon Japan Sm Cap Eq Focus Acc SGD-H | Small & Mid-Cap Focus | ||||
| Parvest Eq Jap Small Cap Classic H USD | Small & Mid-Cap Focus | ||||
| United Japan Small and Mid Cap SGD | Small & Mid-Cap Focus | ||||
| Source: iFAST compilations. |
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Table 2: Japanese Equity ETFs On FSMOne
Name |
Underlying Index |
Trading Currency |
Annual Management Fee |
Exchange |
Type |
||||
| BMO MSCI Japan Hedged to USD ETF (3160) | MSCI Japan 100% Hedged to USD Index | HKD | 0.50% | HKEX | Physical | ||||
| db x-trackers MSCI Japan Index UCITS ETF (DR) 1C (LF2) | MSCI Japan TRN Index | USD | 0.30% | SGX | Physical | ||||
| Value Japan ETF (3084) | FTSE Value-Stocks Japan Index | HKD | 0.70% | HKEX | Physical | ||||
| Vanguard FTSE Japan Index ETF (3126) | FTSE Japan Index | HKD | 0.18% | HKEX | Physical | ||||
| iShares MSCI Japan ETF (EWJ) | MSCI Japan NR USD | USD | 0.48% | NYSE | Physical | ||||
| iShares JPX-Nikkei 400 ETF (JPXN) | JPX-Nikkei 400 NR USD | USD | 0.48% | NYSE | Physical | ||||
| WisdomTree Japan Hedged Equity Fund (DXJ) | WisdomTree Japan Equity TR Hdg USD | USD | 0.48% | NYSE | Physical | ||||
| Source: iFAST compilations. |
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More details about the products that give you exposure to the market can be found here!
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