Can Japanese equities maintain their momentum after surprise election move?

Investors in Japanese equities must prepare for further volatility in the coming month amid the unexpected election, but with valuations less stretched than other developed markets the asset class remains poised to outperform, RWC Partners’ Japan Active Engagement team has said.
Japan’s broad indices have surged this year, with the TOPIX up 10%^[1] year-to-date despite a pullback in April.
The decision by Prime Minister Abe to host an election this month – much earlier than expected – has yet to impact the momentum behind equities, but Corinna Arnold, Head of the RWC Japanese Focus strategy, said investors should expect more bouts of volatility in the near term.
Nonetheless, she added there remains a valuation opportunity in Japan versus other developed markets.
“Macroeconomic and geopolitical risk factors abound and we expect the absolute and relative performance of our portfolio to be volatile in coming months,” she said.
“However, Japan remains an interesting equity market for active managers as restructuring and an ongoing focus on shareholder value underpin a corporate earnings expansion against a backdrop of global economic growth.”
Arnold said supportive growth figures from the economy, coupled with a recovery in exports and record figures from both manufacturing and non-manufacturing activity surveys, mean the dynamics are in place for companies to continue to deliver for shareholders, with profits still lagging the US and Europe.
“Net profit margins in Japan are still lower than they are in the US and Europe, leaving plenty of room for improvement,” she said.
“Valuations in Japan remain less stretched than in either the US or Europe, especially when one considers that there are no signs of any shift in the Bank of Japan’s position on quantitative easing. While the United States tightens and the EU begins to debate what it will do next with rates, Japan’s equities tailwind continues.”
The RWC Nissay Japan Focus Fund, which launched in 2015, focuses on delivering returns via a process of engagement with a small number of rigorously selected companies.
Amid a change in approach across many Japanese corporates to focus on delivering value for shareholders, the strategy has outperformed the wider market, returning 20.2% year-to-date, ahead of the TOPIX’s return of 13.1%[2].
[1] According to Bloomberg, the Tokyo Stock Exchange Tokyo Price Index TOPIX has risen 10.28% year-to-date (to 29/09/17).
[2] Performance shown relates to the RWC Japan Stewardship Fund, as at 04 October 2017