Despite the technical recession during the second half of last year, the outlook is for faster econo...
Despite the technical recession during the second half of last year, the outlook is for faster economic expansion this year, with the consensus GDP growth forecast currently at 1.6%. We expect growth to be ahead of the consensus, fuelled by the continued expansion of industrial production, which in turn should feed through to rising employee compensation and should lend support to the stabilising consumer trend.
Our expectation of continued industrial recovery is based on a number of factors: the low level of inventories; the likelihood that export growth will feed through to production; the benefit that many industries will derive from faster Asian economic growth; continued strong levels of demand in the electronics sector (which accounts for over a third of production); and a strong cyclical recovery in machinery orders.
Additionally, further government spending packages are expected and may take place as early as June. This year sees the maturation of post office savings worth ¥106 trillion and while the destiny of this money is uncertain, it seems likely that some of it will find its way into the equity market.
The economy should also benefit from positive developments at the corporate level. Sales are picking up and companies are embarking on aggressive cost cutting measures. There is also continued M&A activity and corporate restructuring.
Our positive economic standpoint has led us to increase our equity market forecast. Given the expected strong recovery in corporate earnings, the yield ratio appears supportive, as well as being low by global standards.
While the yen has been stronger than anticipated, companies have offset the effects of this by reducing costs and increasing prices. The levels of individuals' equity weightings as a proportion of personal assets currently stands at 7-8%, (compared with over 40% in the US). We believe that there is significant scope for this to expand and individual investors will be a key driver at the margin.
We are overweight the machinery sector and have recently raised our exposure to pharmaceuticals.
We are adding to our weighting in consumer-related areas, as we believe the retail sector will be a key beneficiary of faster economic growth. We continue to be overweight in the services sector, including areas such as internet security and have used the recent spell of Nasdaq-related weakness to add to positions.
We are also overweight basic materials on a selective basis and favour the paper sector, which has benefited from M&A activity and sector consolidation.
We are underweight in banks as we believe that the majority of deals in the sector have now been announced and that companies now have to deliver the goods in order to prove the credibility of their plans.
Anne-Marie Main is head of Japanese equities at Hill Samuel Asset Management
Janus Henderson Global Dividend Index
More than 10 million shares allocated
Long-term strategic holding
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To promote 'long-term investment'