Central stimulus and earnings growth mean Japan deserves reconsideration, says Pictet

Central bank stimulus and expectations of 28% earnings growth are not concepts traditionally linked to Japan, but they each are now, and signal better times ahead for investors, according to Swiss asset manager Pictet Asset Management.

Japan has been an almost perennially disappointing market, plagued by lacklustre returns and a deflationary environment, but Pictet’s head of Japanese equities Adrian Hickey argues this could change.

“After having dragged their heels for many years, policymakers and Japanese companies in particular are at last doing what is required of them to place the economy – and the stock market – on a path to a strong recovery,” he said.

The Bank of Japan adopting an explicit inflationary target this year, flushing the system with cash to lower the yen and help exporters and free credit for householders last year, all brighten the corporate and market outlook.

The gap between inflation-linked and nominal government bonds already suggest steady rises in inflationary pressures over the next five years, Hickey said.

Headline inflation recently turned positive while core inflation is falling less sharply.

Hickey also pointed to the distribution of public funds – including a governmental 19 trillion yen reconstruction programme following the natural disasters in March 2001 – that could boost economic output by 1.7% this year, and create about 600,000 jobs.

Sam Perry, a senior Japanese equity investment manager at PAM, added corporate earnings are predicted to rise by 28% a year over two years.
He added that data shows earnings of companies with more than 30 employees are rising annually by 1.5%.

Although EPS of Japanese companies is predicted to rise, the combined market cap of Japanese equities has fallen, leaving Japanese companies trading at a price to book ratio of 1, and with the dividend yield of 2.2%, which is above many Western governments’ sovereigns and 2% for S&P 500 index of America’s largest listed companies.

 

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