Fiducia Wealth Management
Posted in Investing, Tax Planning on 12.03.12

Justification and 2012 Outlook

Although Japanese equities are not universally favoured amongst the investor community, at Fiducia they have commanded an allocation within our global equity space since 2009. The major facet underpinning this conviction, aside from valuation, is the lower correlation that the Japanese market – as measured by the TSE Topix Index – possesses in relation to traditional Western markets, a quality we deem to be very important and somewhat scarce in a world where global stock indices tend to look to each other for direction. Add in strong corporate governance, the importance placed upon preserving and improving shareholder wealth and the mere fact that Japan is home to some of the largest market leading companies in the world, and this makes the country a worthwhile investment over the long term in our view.

Correlation coefficient between major global indices (Lower figure indicates less correlation)

Japanese Equity Correlations to other markets

Over the past twelve months, Japan has rebounded in typically determined fashion from the devastating earthquake that struck in March 2011. Against the backdrop of an apparent lack of urgency by the government to implement aid measures, as well as public perception of coordination deficiencies in the execution of such measures, supply chains have been restored far faster than expectations, while consumer and corporate confidence have also strengthened from their perilously fragile state in the immediate aftermath of the crisis. Initial investor pessimism that corporate Japan would have to endure lasting earnings depression has failed to materialise, indicating the inherent strength and robustness of the Japanese private sector.

Looking ahead to the remainder of 2012, we are positive on the outlook for Japanese equities. On a macroeconomic level, ever-strengthening signs of life in the US economic recovery, as well as widespread acceptance that China will almost certainly avoid a ‘hard landing’ – two key export markets – provides comfort, as does the fact that although the Eurozone bloc continues to be plagued by political paralysis, with destabilising economic symptoms a result, Japanese companies should be minimally affected as the average company only accrues around one tenth of its revenue from European sources. The strength of the Yen may continue, although persistent Bank of Japan attempts to weaken it via an increase in the money supply are likely to place downward pressure from here on, easing export pressure. A recent pledge by the Bank of Japan to set an inflation target of 1% is a welcome development for equities, as an inflationary economic environment, as opposed to a deflationary one which has blighted Japan in recent years, should enable firms to widen profit margins, and may even trigger cash flows from government bonds.

Through a microeconomic lens Japan is also looking attractive, with the corporate sector in good health. Stringent cost cutting since 2009, a process accelerated in response to the earthquake, has helped to consolidate balance sheets and preserve margins, while an upturn in the US and China, as mentioned earlier, should help to further fortify corporate finances. Earnings are expected to bounce back from 2011 lows, with data projecting impressive Earnings per Share growth for 2012 as a whole, far outstripping that of other established markets. Such corporate strength is not displayed in current market valuations in our view, which continue to be displaced from underlying fundamentals as markets are pricing in unnecessarily pessimistic scenarios that we believe are very unlikely to materialise. When coupled with a retreat from risk aversion, such divergence from intrinsic value generates the potential for considerable upside, with cyclical names in particular set to benefit.

To summarise, we believe the prospects for Japan are promising going forward, with 2012 set to be a rewarding year. The macro- and micro-economic landscapes appear fruitful, with two key export markets, namely the US and China, reverting back to more positive economic territory to aid the macro story, while cheap valuations, in conjunction with inherent corporate strength, underpin the micro view. With regard to how we play the Japan theme within our model portfolio range, we employ dedicated large and small cap positions to capture gains in different market segments. Large caps attract capital when Japan is in favour, a scenario we think will gather greater traction in the coming months for the reasons mentioned, and the smaller cap stocks, although tending to slightly lag their larger counterparts, should also benefit from increased investor focus on Japan. Both of our chosen funds have the preponderance of their net assets in cyclical names, with industrials, technology and financials well represented, an area of the market we feel is likely to deliver the largest returns.



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The information contained in our website is for guidance only and does not constitute advice which should be sought before taking any action. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Fiducia Wealth Management Limited, or any associated companies or persons, its officers or its employees, for any loss occurred in connection with the content hereof and any such action. Professional financial advice is recommended for every case.

Fiducia is a multi award-winning firm of Financial Advisers based in Dedham near Colchester situated in the heart of Constable Country on the Essex Suffolk border.

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Fiducia Wealth Management
Posted in Investing, Tax Planning on 12.03.12