ASSETCO MANAGEMENT AG
Advisors in Wealth Since 1996
Japanese equities: Outlook brighter, but no broad-based buy 10.01.2020 _ _________________________________________________________________________________________________________________________________________
Against the backdrop of signs of global recovery and signs of easing in the trading conflict between the USA and China, in our most recent securities strategy (early January 2020) we upgraded the stock exchanges of those countries that had been particularly badly affected by the trading disputes, namely Germany/Eurozone and Asian emerging markets.
We now have the Japanese stock market on our watch list, which could continue its price recovery, which began in September 2019, in the current year. The Japanese economy, which lives from its export strength, and consequently the Japanese stock exchange, in which export-oriented groups have a high weighting, has been particularly impeded by the international trade dispute.
Economic growth figures in Japan are still disappointing: The advance purchase effect expected for the 3rd quarter due to the VAT increase from 8 to 10%, which will came in force on October 1, 2019, was almost non-existent and a certain drop must nevertheless be expected in the final quarter, which will probably show a slight contraction. For 2020, at least, economic growth of just under 1% is forecast. This is to be driven by a large-scale economic stimulus package. The economic stimulus package of around EUR 110 billion agreed at the end of the year will be flanked by government loans and guarantees, bringing the total amount of stimulus aid for the economy to almost EUR 220 billion. The stimulus measures are aimed at compensating for both the VAT increase and the gradual phasing out of massive public investment spending in connection with the Olympic Games in Tokyo in the summer of 2020. However, this will further increase Japan's debt burden, which at 224% of GDP is already the highest of all industrialized countries.
Following months of poor stock market performance, the Japanese stock market turned around in September 2019, rising by a whopping 20% in recent months. And several banks, such as Citigroup, for example, are forecasting this trend will continue. A bundle of factors is listed. In addition to the easing of tensions in the trade conflict and the economic stimulus package, these include record dividends and share buybacks as well as a central bank that will continue to buy shares via listed funds, thus providing additional support for the market. The Bank of Japan already holds around 8% of all shares on the Japanese stock exchange. In addition, Japan attracts investors with comparatively low valuations: the price-earnings ratio is only 12 to 14 times. This seems reasonable, since after years of record profits, many companies are now very profitable and extremely rich. 4.5 trillion USD in liquid assets are on their balance sheets. Against this backdrop, dividends and share buybacks also rose to new record levels in 2019. The latter even rose by 50%. This stimulating effect on the stock market is likely to continue in the new year, as well as the increasing number of mergers and acquisitions. But careful: while share price advances are to be expected at a number of companies in the technology sector such as Sony or at highly competitive component manufacturers, this does not apply to companies in the index-weighted banking and automotive sectors. As a result of the upheaval in the automotive industry, investment in electric cars and automatic driving is very high, without the outcome being foreseeable. The low earning power of Japanese banks, which also suffer from the central bank's negative interest rate policy, do not make a case for investments in them.
Dr. oec. Susanne Toren
Chief Economist
Assetco Management