Japan stock market: Opportunities and positive signs

In the last week, the Nikkei 225 has hit a record high in 15 years at 18,865 with year-on-year return of 25.97 per cent (source: Bloomberg, February 27, 2015). Even though the index has surged to a new high, the valuation is still cheap if you are looking for an opportunity to invest.

For the last year, Japan’s economic growth has been a bit sluggish, which was mainly due to the increase in sales tax, and the cold weather that slowed down consumption and economic activities. However, there are many positive signs and improving economic data that point to signs of an economic recovery:

nThe return of Shinzo Abe as the premier and his Liberal Democratic Party’s pursuit of ‘Abenomics’ policies, with the initiation of Abe’s third arrow of structural reforms, hoping to pull the Japanese economy out of the ongoing recession.

nThe quantitative easing policy (QE) that injects 80 trillion yen liquidity per year into the economy has put downward pressure on keeping the policy interest rates low, and boosting of both investment and domestic consumption.

nThe yen has depreciated 16 per cent against the US dollar in the past year and depreciated 50 per cent since the start of QE in early 2012. This serves as a supporting factor to stimulate growth of exports. The latest report of the Bank of Japan (BOJ) has revealed that there is an upward trend with increasing number of exports, private investment and better company profit margin. Exports in January 2015 saw a 17 per cent increase while Japan’s machinery orders saw an annual increase of 20 per cent.

nAbe has postponed the second sales-tax hike and plans to have a series of corporate tax reductions unlike the past when Japan had always been one of the countries with the highest corporate tax rates (35.6 per cent). This should help widen the profit margin of corporates and thus boost earnings of the stock market.

These factors can be seen as supporting factors for a turnaround and the beginning of economic recovery. However, questions still remain on how sustainable this recovery can be, and the answers rely on Abe’s third arrow of structural reform. There is still doubt on how long this reform will take and how much the impact can be. Many investors are still keeping a track on such economic reform and hoping that this could be the answer to their questions.

For this year, Asset Plus Fund Management has forecast the Nikkei 225 index should rise to 19,500-20,000 points, with the assumption that growth is driven by the positive signs listed above.

Moreover, the share purchase by Government Pension Investment Fund, which has increased its portion of equity assets, and the share buyback of most big-cap companies should limit the downside risk of the index.

Investment theme: Exporting automotive and machinery industry, tourism and transportation. Investments contain risk. Investors should study the prospectus before making a decision to invest.

Asset Plus Fund Management contributed this article