Japanese equities could be set for a renaissance as mounting inflation hits bond returns in the Far East, according to Resolution Asset Management and Old Mutual.
The fund houses believe as inflation continues to climb, investors will not tolerate declining fixed interest returns and will seek to shift into the country’s recently ignored equity market.
ResolutionAsset Japan fund manager Natasha Chetwynd argues the current Japanese equity market is cheap, with many stocks trading on eight to 12 times earnings.
“The return of inflation in Japan is very good news after such a long period of deflation,” she says.
“It might put pressure on margins but the declining returns from bonds might prompt investors to sell out of fixed interest and into equities, which would be very positive shift.
“There are potential challenges ahead – we would like to see a change of Government sooner rather than later, for instance – but we are more positive than most on Japan.”
Mutual Japanese Select fund manager Les Jones agrees, labelling Japan as a “stable haven” from the more volatile emerging markets.
“Only a few months ago, the broader (Japanese) equity market was yielding about 40 basis points more than bonds,” he says.
“Past performance is no guide to the future but on the four occasions that this has happened in the past equities significantly outperformed bonds in the following year.”
Jones is keen on Japanese banking stocks, believing they are in “much better shape” than US and European peers.
“With higher inflation prompting bond yields to rise and short term rates staying low in the expectation of a softer economic environment, banks should reap rewards from the steepening yield curve,” he says.
“Leading bank shares are already off their lows but I believe that their long term prospects are still undervalued and any subsequent consolidation or near term correction should be seen as a favourable buying opportunity.”IFAonline
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