The launch of a fresh round of quantitative easing in Japan has created a shock effect. The emerging markets will remain under pressure, while the Japanese market is making great strides. In short, Japan is finally worthy of its place in a diversified portfolio
Too late to invest?
Equity investors are, in any case, expecting the BoJ measures to have a major impact on the region’s economic momentum. The Merril Lynch Fund Managers Survey indicates that, over the past five years, Japan has been regularly underweighted in most of the balanced portfolios. This trend is now being reversed. Many investors have recently begun to reduce their underweight on Japan in their regional equity allocation, at the expense of their general overweighting of the emerging markets. Here at Dexia Asset Management, we are, for the first time in almost ten years, again overweight on Japan.
This is a trend that should be confirmed by a further improvement in the economic figures. However, not only is the reversal of economic momentum a good reason for investing in Japanese equities: earnings momentum could also offer a considerable boost. The depreciation of the Japanese yen (an export-friendly measure) and a better economic environment are also bound to strongly impact companies’ bottom line. The earnings revision ratio turned positive recently (more upwards revisions than downward revisions) and, in view of the expected improvement in corporate returns (cf., diagram showing Japanese rate/book value and profitability), the region could well be re-rated on the basis of current valuation parameters.
In the medium term, there is clearly further potential on the Japanese market. Following the substantial mid-November rally, the Nikkei 225 now needs to get its breath back; there could, therefore, be a minor correction in the short term. This could prove to be a window of opportunity for investors with diversified portfolios currently not exposed to the region.