ANNOUNCEMENT: Expert Investor is now PA Europe. Read more.

ANALYSIS: Sailing the macro winds in Japanese equities

Net inflows into Japanese equity funds by European investors have picked up recently, as the current macro environment looks conducive to Japanese equities. Asset managers are also becoming increasingly bullish on the asset class.

Between November and June, net inflows into Japanese equity funds totalled €5.34bn, according to Morningstar data. While that’s only a modest sum compared to the amounts of money that have gone into European and emerging market equities this year, Japanese stocks haven’t been this popular for at least two years.

As Unigestion analysts emphasised in a recent note, the rise of the Japanese stock market in recent years have been fully backed up by higher profits. There has been no multiple expansion in Japan, which sets the country apart from all other major equity markets.

Cheaper than Europe

“Japan is surely cheaper than Europe now,” says Thomas Romig, head of multi-asset at Assenagon in Frankfurt.

David Karni, head of portfolio investments at the Italian bank BCC Risparmio & Previdenza, is also warming to the asset class.

“We have a 10% allocation to Japanese equities in our equity fund-of-funds now. Four months ago, we reduced our allocation a little, but now we are looking to increase again,” he says.

Traditionally, the fortunes of Japanese equities are quite closely tied to global economic activity. When this picks up, Japanese stocks tend to outperform. Romig’s fund choice in Japan reflects this backdrop: the MAN GLG Japan Core Alpha fund (one of the largest Japanese equity funds with more than $4.2bn in assets under management) has a strong overweight to cyclical value stocks such as banks and steel producers.  

Dividend paradise

“A sustained global economic expansion is boosting overseas earnings, while wages are rising just enough to bolster domestic consumption without eroding profit margins,” says Richard Turnill, chief investment strategist at Blackrock. “Earnings, meanwhile, are rising faster than dividend payouts and buybacks, and this provides considerable scope to improve shareholder returns.”

Even though Japanese companies continue to sit on ever-growing cash piles, dividend payments have actually risen faster in Japanese equities than in any other mainstream asset class over the past three years, according to data from ETF provider Wisdom Tree.    

Monetary policy divergence is the final element that could turn Japanese equities into a relative outperformer. This year, Japanese equities have lagged other stock markets somewhat as expectations of Fed tightening eased, resulting in the yen strengthening against the dollar. But if US interest rates eventually continue their rise, this should be supportive of Japanese equities for two reasons.

The first is of course that rising US rates tend to coincide with periods of solid economic expansion. The second one is the Bank of Japan’s yield curve control policy.

Article continues on the next page

  • Can M&A and buybacks breathe life into UK market?

    Can M&A and buybacks breathe life into UK market?

    Both buybacks and M&A should help realise value in UK shares, boosting prices and giving investors another reason to consider the UK stockmarket Not only does M&A activity appear to be picking up, with a high-profile bid for UK electronics retailer Currys, but the scale of company buybacks continues to accelerate. If it goes well,…

  • Capital Group launches multi-thematic Article 8 funds

    Capital Group launches multi-thematic Article 8 funds

    Capital Group has launched a set of multi-thematic sustainable funds that are available for investors in Europe, writes Christian Mayes. The Capital Group Sustainable Global Opportunities fund (LUX) will invest in global equities, while the Capital Group Sustainable Global Corporate Bond fund (LUX) will target fixed income exposure. The launch also includes a multi-asset offering…

  • Bond funds pull in €29.7bn in January – LSEG

    Bond funds pull in €29.7bn in January – LSEG

    Bond products were the best-selling asset class in January, according to LSEG Lipper’s European Fund Flow report, writes Christian Mayes. The asset class pulled in a net €29.7bn in the month, while Money Market USD grouping was the best-selling Lipper Classification after receiving €11.2bn inflows. Providers of mutual funds pulled in €22.5bn, while passives saw net…

  • Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    A quarter of all Article 8 funds could be accused of greenwashing based on their sustainability framework and practices, according to MainStreet Partners, writes Christian Mayes The 24% of funds classified as a greenwashing risk by the 2024 ESG Barometer report marks a four percentage point increase from the 20% flagged at the end of…

  • EU green rules could stymie decarbonisation projects – ExxonMobil

    EU green rules could stymie decarbonisation projects – ExxonMobil

    The European Union’s climate regulations may lead to it halting its investments in Europe, ExxonMobil has warned. Speaking to the Financial Times, Karen McKee, president of the product solutions division, said the oil and gas giant had struggled to begin decarbonisation projects in Europe due to the regulatory burden. The result, she added, was that…

  • ICE flags need for Europe to double green investment

    ICE flags need for Europe to double green investment

    Investments to modernise energy and transport must double by the end of the decade to reach 2030 climate targets, the EU has been warned. According to the Institute for Climate Economics (ICE), which has released the European Climate Investment Deficit report, the bloc lacks what it calls a “consistent tool” to ensure monitoring of the…