PERSPECTIVES FOR PROFESSIONAL INVESTORS ONLY Japanese equities: taking stock post-election November 217 The result of the 48th general election of Japan s House of Representatives was unsurprising, especially given the disarray of the major opposition party. Shinzo Abe s well received leadership on the North Korean crisis and improved sentiment, reflecting the resurgent economy, helped solidify the lead for Abe s Liberal Democrat Party (LDP) and helped ease his re-election as prime minister. This outcome provides greater certainty in relation to monetary policy, with the reappointment of Kuroda as Bank of Japan governor seen as likely, as well as further momentum for Abenomics and the necessary reforms. Japanese economy on solid footing Gaël Combes Fundamental Analyst, Equities Markets absorbed news of the snap election positively and the strong momentum continued following the result, with the Nikkei posting a solid 6% return since the announcement of the election and a 2% return from the day of the election until the end of October. Tokyo Stock Exchange Tokyo Price Index (TOPIX) 18 175 17 Maria Musiela Investment Specialist, Equities 165 Price 16 155 15 145 14 In our view, the election outcome provides continuity for both monetary and fiscal policy. Fiscal stimulus, with a greater emphasis on social expenditure in education and training, should boost consumer services and education stocks in particular. With a helping hand from Abenomics, the Japanese economy has seen gradual improvements in unemployment, the labour market and GDP growth for some time now. A tighter job market should in time translate to growth in wages and inflation, as well as increased consumption and a further strengthening of the domestic economy. Summary 1. The outcome of Japan s recent general election provides greater certainty in relation to monetary policy as well as Abenomics and the necessary reforms. 2. Despite a relative positive story for Japan s economy postelection, risks still lurk and could potentially disturb the bullish trend for equities. 3. Our risk-managed approach is designed to let investors benefit from rises in the market while limiting losses. Read more of our latest investment thinking online: www.unigestion.com/publications/ Unigestion (UK) Ltd I 1/5
Japan Consumer Price Index (CPI) Nationwide Percentage 1 8 6 4 2-2 -4-6 -8-1 4 3 2 1-1 -2-3 22 23 24 Percentage 25 26 27 28 29 21 211 212 213 214 215 216 217 Japan PPI (R1) Japan Core CPI (R2) Japan CPI (R2) The government has been putting pressure on local companies to raise wages, however, for now wage growth has mainly fed through to part-time workers. With commodity prices stablising and a tighter labour market pushing wage pressures through to other parts of the working population, there should ultimately be some momentum in inflation, providing a further boost to domestic consumption and the economy at large. MSCI Japan Small Cap versus MSCI Japan Total Return 18 Cumulative relative returns 16 14 12 1 98 96 94 Abenomics focus on the domestic economy and consumption should help maintain the momentum in the Uni-Global Equities Japan Fund, which has a bias towards domestic, midcap, lower risk and higher quality companies. The fund has outperformed the MSCI Japan index by 3.6% gross of fees, so far this year (to end October) and by 4.9% p.a. since its inception in 26. Abenomics focus on the domestic economy and consumption should help maintain the momentum in Uni-Global Equities Japan Fund which has a bias towards domestic, mid-cap, lower risk and higher quality companies. Read more of our latest investment thinking online: www.unigestion.com/publications/ Unigestion (UK) Ltd I 2/5
Strong performance from the Uni-Global Equities Japan Fund since launch 125 12 Gross returns 115 11 15 1 95 UG Japan SA-JPY (gross of fees) MSCI Japan TR Net Source: Unigestion, as at 31 st October 217. Inception date: 13.3.26 Is it still a good time to invest in Japanese equities? Despite recent strong momentum for the Japanese equity market, we believe that valuations are still relatively attractive when compared to other markets, such as the US, and are in line with history. Price-Earnings (PE) ratios across regions PE ratios 35 3 25 2 15 1 5 a rising US interest rate environment has historically been supportive for Japanese equities. EM - PE NTM US - PE NTM EU - PE NTM JP - PE NTM Source: MSCI, as at 31 st October 217. NTM = next twelve months. When considering the performance of the Japan market relative to the global market in USD, Japanese equities have stopped underperforming global markets in USD terms since 214. Read more of our latest investment thinking online: www.unigestion.com/publications/ Unigestion (UK) Ltd I 3/5
Japan market vs global market in USD 7 8 9 1 11 12 13 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1..9 JPY Curncy (USD) - Last Price (R1) MS Japan TR USD / MS Wld TR USD (R2) In addition, a rising US interest rate environment has historically been supportive for Japanese equities and rates in the US are currently on an upward trajectory - a message recently reinforced by Federal Reserve Chairman Janet Yellen. Rate increases tend to be associated with periods of solid economic growth and should the US economy continue its growth momentum, especially in light of the Trump administration s planned stimulus, Japanese equities should benefit. Donald Trump s recent visit to Asia could also lead to further developments on policy and political negotiations. Risks to Japan s economic progress Despite a relatively positive story for Japan s economy post-election, we caution that risks still lurk and could potentially disturb the bullish trend for equities. One risk to consider is a slowdown in China s economy, Japan s closest export economy; any weakness in the Chinese economy could have a significant impact on Japan s exporters and the global economy at large. In addition, the geo-political turmoil with North Korea remains a significant tail risk, as Japan s geographic proximity and political allegiance puts it at risk. While Shinzo Abe aims to maintain a positive relationship with the US, any protectionist measures that the Trump administration implements could have a negative impact on Japanese exporters. However, the recent free trade agreement between Japan and the EU should provide a boost. A broader risk is public debt. Abenomics has generated high government debt, as well as a large primary deficit. The Abe administration s pledge to turn the deficit into a surplus by fiscal year 22 remains optimistic in our view. Read more of our latest investment thinking online: www.unigestion.com/publications/ Unigestion (UK) Ltd I 4/5
Conclusion While the overall outlook for Japanese equities remains positive, investors should consider a more prudent investment approach. Our 36 risk managed approach to equity investing provides a good exposure to Japanese equity markets within a strategy that vigilantly manages forward risks and provides downside protection in the event of market stress episodes. Given today s uncertain market and geo-political risks, albeit amid a favourable economic outlook, we believe a risk managed strategy that provides growth exposure while managing risk is optimal. Our 36 risk managed approach provides a good exposure to Japanese equity markets within a strategy that vigilantly manages forward risks and provides downside protection in the event of market stress episodes. Unigestion Equites Team, November 217 For further information, contact: clients@unigestion.com Important Information This document is addressed to professional investors, as described in the MiFID directive and has therefore not been adapted to retail clients. It is a promotional statement of our investment philosophy and services. It constitutes neither investment advice nor an offer or solicitation to subscribe in the strategies or in the investment vehicles it refers to. Some of the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments, which may experience substantial and sudden losses including total loss of investment. These are not suitable for all types of investors. The views expressed in this document do not purport to be a complete description of the securities, markets and developments referred to in it. To the extent that this report contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks. Data and graphical information herein are for information only. No separate verification has been made as to the accuracy or completeness of these data which may have been derived from third party sources, such as fund managers, administrators, custodians and other third party sources. As a result, no representation or warranty, express or implied, is or will be made by Unigestion as regards the information contained herein and no responsibility or liability is or will be accepted. All information provided here is subject to change without notice. It should only be considered current as of the date of publication without regard to the date on which you may access the information. Past performance is not a guide to future performance. You should remember that the value of investments and the income from them may fall as well as rise and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. An investment with Unigestion, like all investments, contains risks, including total loss for the investor. Uni-Global-Equities Japan is a compartment of the Luxembourg Uni-Global SICAV Part I, UCITS IV compliant. This compartment is currently authorised for distribution in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Spain, UK, Sweden, Switzerland and Singapore. In Italy, this compartment can be offered only to qualified investors within the meaning of art.1 D. Leg. 58/1998. Accordingly, its shares may not be offered or distributed in any country where such offer or distribution would be prohibited by law. All investors must obtain and carefully read the information memorandum which contains additional information needed to evaluate the potential investment and provides important disclosures regarding risks, fees and expenses. Unless otherwise stated performance is shown gross of fees in JPY and does not include the commission and fees charged at the time of subscribing for or redeeming shares. Complied: 23/21217 Issued: 23 November 217 Read more of our latest investment thinking online: www.unigestion.com/publications/ Unigestion (UK) Ltd I 5/5