While the Nikkei may be trading at levels last seen 15 years ago, SocGen’s cross asset research team believe the current bull market – which has seen the index increase by over 135% since November 2012 – may last for some time yet.
Looking at the nation’s government pension investment fund (GPIF) and Bank of Japan (BOJ), they offer four factors that will help underpin Japanese equities in the year ahead.
GPIF and BOJ policies provide support to risky assets
"While the BoJ experiment is not without risk, QQE has improved the underlying fundamentals of Japanese stocks. The lower yen has restored the profit margins of international companies and boosted the tourism sector. Financial conditions have eased. As a result of both fiscal and monetary stimulus, business conditions improved significantly since 2010. The portfolio rebalancing effect is also positive for stocks: lower yields encourage investors to rebalance into domestic equities and foreign investment."
Purchases from GPIF and BOJ
"On 31 October 2014, Japan’s ¥127tn Government Pension Investment Fund (GPIF) reviewed its policy mix and raised its equity target allocation, doubling its share of domestic equities to 25% (from a 12% target and c.20% actual allocation at end-2014). To prevent moving the market, the reallocation of GPIF remaining funds to equity will be gradual and take time to be implemented, which should lead to further equity support in the future. The BoJ tripled its purchases of ETF equities since October 2014. Valuations remain attractive while ROE is likely to rise further."
Improving ROE
"Corporate behaviour has started to change as a result of the sharp focus of Abenomics on raising corporate value. And, with QQE pushing real interest rates into negative territory, firms have an incentive to make more efficient use of their cash. As a result, share buybacks have increased significantly, and acquisitions (in particular overseas) are on the rise also."
Compelling valuation
"While profit margins and ROE have recovered strongly, Japanese stocks remain reasonably priced with price-to-book ratio near 1.5x. Stock prices do not seem to fully reflect positive earnings momentum."
While Soc Gen remain overweight Japanese equities, they have placed caveats on their call.
They believe a slowdown in the global economy, something that would impact earnings at Japanese multinationals, along with a failure by the government to implement structural reforms, are the key risks that could unravel the bull market in equities in the year ahead.
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