SuMi TRUST’s Masashi Oda calls the Japanese election outcome
Masashi Oda, CIO of the SuMi TRUST, is predicting regime change in Japan when the country goes to the ballot in mid-December, with significant implications for investors stung by more than two decades of deflationary periods.
The prime minister, Yoshihiko Noda, dissolved parliament and called a general election for 16th December. The Liberal Democratic Party (LDP), which is likely to win the election, promises aggressive monetary easing and expanding public expenditure in order to beat long lasting deflation. The LDP aims to achieve the goal by setting an inflation target of 2% and easing monetary condition further. The regime change is expected to end the age of long lasting deflation and yen’s appreciation which Japanese companies suffered for years.
Changes to Earnings Forecasts and SuMi TRUST’s View
Our earnings estimates were revised downwards in October, due largely to downgrading in overseas demand driven sectors such as electric appliances and manufacturing. Despite seeing a single digit earnings growth for FY2012, for FY2013 we have upgraded our general forecast by around 1% and anticipate double digit growth.
The Japanese market still offers investors attractive value with the estimated PER gap between TOPIX and S&P 500 still in negative territory and the expected PER of TOPIX still around the bottom of its 2010 to 2012 range. Additionally, share prices for many companies do not reflect the sound fundamentals that they enjoy and therefore we see a number of attractive investment opportunities in the Japanese equity market.
The high conviction stock picks of our portfolio managers include companies which are likely to achieve strong growth in China, despite an escalation in the Japan-China dispute. Such stocks include Calbee Inc., Japan’s leading manufacturer of snacks with about 50% share of the market and Ryohin Keikaku, who plan, produce and retail a wide range of self-branded goods from foods to apparel to household goods under the brand name “MUJI”.
The Japanese equity market hovered below September’s high, with the TOPIX posting a return of +0.7% JPY and -1.8% in USD for the month. This followed a mix of negative and positive newsflow in China, whose economic prospects have been the focus of attention, as well as in the U.S. and Japan.
The Japanese equity market experienced a price reversal in October; sectors linked to domestic demand such as food, information & communication and pharmaceuticals, whose earnings have been stable, underperformed the market while those sectors exposed to the global economy, such as marine transportation, iron & steel and electric appliances sectors, whose earnings have been downgraded, outperformed.
With regards to the corporate picture Japan has seen a number of companies cutting their earning guidance as a result of the territorial dispute with China.
Reflecting growing uncertainty in the global economy, the volatility indices in major equity markets rose over the month. There will be a number of hurdles to clear if markets are to regain the positive momentum seen in recent months.
On the other hand, we believe there is significant upside potential in the Japanese equity market.