News

The Nikkei 225, Japan’s most followed equity market index, has fallen 11.5% year-to-date* in local currency terms. Part of this will be profit taking after last year’s strong performance, when the Nikkei 225 index was amongst the world’s best performing major markets. Another part of this poor performance can be attributed to the worries that emerged at the beginning of the year over the possibility that global growth would stall.

So far 70% of companies have released their earnings for the year ended March 2014, and the results have been strong as expected. Sales have risen 12%, operating profits almost 40% and after tax profits have nearly doubled. However, these results have already been factored into the market, and it is next year’s forecasts that are disappointing market expectations, as sales and after tax profits are expected to rise by just 4%.**

We are however maintaining our overweight position as we believe that as US growth accelerates revenues will rise and the yen will weaken, further boosting earnings and in turn the market. We believe our positive stance is supported by valuations, which are cheap compared to other markets, with a forecast price earnings ratio of 13x compared to the global average of 14.5x and 15.7x in the US*. Additionally the Bank of Japan may also ease further if the consumption tax hike looks like it may derail their objective of achieving sustainable inflation of 2%.

*Source Bloomberg 13/05/2014

** Source SMBC Nikko Securities