Japanese equities have further upside potential after their recent rally, according to market commentary by BlackRock. Easy monetary policy, low valuations and an improving earnings outlook should all help to sustain upwards momentum seen since the middle of 2016. Such tailwinds will likely benefit broad market Japan equity ETFs such as the popular $2.8 billion iShares Core MSCI Japan IMI UCITS ETF (LON: SJPA).
Richard Turnill, BlackRock Global Chief Investment Strategist.
Equity valuations for Japanese equities have been remarkably stable since 2010. The average valuations of Japanese equities are lower now than at previous high points in the stock market performance. Moreover, Japanese stocks appear inexpensive on the global stage – trading at a 20% discount to US peers on a 12-month forward price-to-earnings basis.
Richard Turnill, global chief investment strategist at BlackRock commented: “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 to hit a three-year high in 2017.”
Source: BlackRock (Japanese stock market has wind at its back)
According to Turnill, a sustained global economic expansion is boosting overseas earnings, while wages are rising just fast enough to boost domestic consumption without eroding profit margins. The recovery in earnings also reflects companies’ greater focus on shareholder returns while profitability among Japanese companies has been improving but remains well below that of other developed markets.
Turnill added, “Return on assets, a gauge of corporate efficiency, has risen back toward pre-crisis peaks, and Japanese companies have undertaken significant deleveraging. Earnings, meanwhile, are rising faster than dividend payouts and buybacks, and this provides considerable scope to improve shareholder returns.”
Equity purchases by the Bank of Japan (BoJ) and domestic investors’ increasing preference for stocks provide further support. Turnill commented: “Our analysis shows Japanese equities remain far from a crowded trade, as foreign investor inflows have recently subsided. A further support is the BoJ’s ultra-easy monetary policy, which contrasts with a normalizing Federal Reserve and a looming step change in the ECB’s monetary stimulus. We see this helping keep the yen in a stable trading range. Any sharp rise in the currency is a main risk to the Japanese equity rally.”
BlackRock offers a number of ETFs to European investors with exposure to Japanese equity. The previously mentioned SJPA, which has $2.8 billion in assets under management (AUM), tracks Japan’s large-, mid-, and small-cap segments. Its total expense ratio (TER) is 0.20%. The slightly narrower iShares MSCI Japan ETF (LON: IJPN) currently tracks 312 Japanese large- and mid-cap stocks compared to 1218 for SJPA. It has AUM of $1.9bn and a TER of 0.59% and also comes in euro, US dollar and British pound currency hedged versions.
Alternatively, investors may wish to consider the iShares Nikkei 225 UCITS ETF (LON: CNKY) which tracks the widely followed Nikkei 225 Index, has AUM of ¥39bn (approximately $350 million) and a TER of 0.48%.
BlackRock also offers European investors a socially responsible play on Japanese equities. The iShares MSCI Japan SRI UCITS ETF (LON: SUJP) invests in companies with strong environmental, social and governance (ESG) practices. The fund has $8m in AUM and a TER of 0.30%.