Mikio Kumada, global strategist LGT Capital Partners, comments on the improvement of corporate earnings in Japan.
We have been overweighting Japan’s equity market since early 2013, believing that Tokyo’s decision to finally pursue uninhibited monetary policy easing and market-friendly reforms would trigger a strong and sustained corporate earnings rebound.
The latest quarterly earnings season confirms our assessment: corporate profits in Japan continue to grow significantly faster than in any other major market, driven by a broad-based expansion of profit margins. The global corporate earnings season for the second quarter of 2015 has produced a clear winner: Japan.
The country’s corporations reported by far the fastest growth in earnings and sales, and surpassed consensus estimates by the widest margin. In fact, Japan was the only major market in which all ten sectors reported higher-than-expected growth. This development is perfectly in line with our regional positioning in equities, which favors Japan over all other markets. It gives us little reason to review that assessment at present.
Stronger growth, more positive surprises Let us look at the numbers first. Based on the results of 296 out of 310 members represented in the MSCI Japan, earnings per share surged 35% in Q2/2015 year-on-year, surpassing the consensus projection by 15.4%.
That’s clearly above the average for both developed and emerging markets. For example, EPS for the MSCI World, with 90% of the results published, rose by only 1%, although that was strong enough to beat the consensus forecast by 5%. The EM managed to report a gain of 2.4%, but that remained 1.2% short of the expected number. Only the Eurozone came anywhere close to producing similarly respectable growth rates and surprise margins (19% EPS gain vs. Q2/2014, 9.9% above consensus, see table 2, page 2).
All in all, Japan enjoyed the strongest profit growth across all sectors, while analysts continue to err on the side of caution. This is the perfect combination of reasons to own equities: robust, underestimated and – in our view – sustainable growth in earnings. Japanese earnings momentum should hold up.