No upgrade to Japan despite improving equity drivers

Global growth surprises, improved earnings and relative valuations acted as tailwinds for Japanese equities in recent weeks – but insufficiently so for NN Investment Partners to upgrade its outlook for them.

First, Japan is a key beneficiary of the strengthening of global growth through its sensitivity to the export sector, especially capital goods, IT hardware and durable consumer goods. Second, earnings momentum has remained strong and is above the levels being seen in Europe and the US. Third, the additional equity risk premium Japan offers relative to global equities is (at least) at a 27-year high.

However, Patrick Moonen, Principal Strategist Multi Asset, NN IP, commented: “Just as is the case in the rest of the developed world, wage growth is not picking up in Japan and inflation expectations are too low. The weakness of the USD is a headwind even if the strength of the Euro partially compensates the impact.

“The absolute medium-term earnings growth levels are also deteriorating. For the current year, Japanese profits are expected to outgrow global profits, 15% versus 12.6%, but for next year this reverses to 5.5% versus 9%. This may keep a lid on relative Japanese valuations.

“All in all, an improvement in drivers, but not yet convincingly enough for us to upgrade the region just yet.”