HIDDEN IN PLAIN SIGHT: Japan (EWJ) is the world’s 3rd largest economy, 2nd largest stock market, and best major Q3 performer. This comes as, or because, it is chronically overlooked. Only 12% of our Retail investor survey saw it as one of the best markets, despite its cheap valuation, net-cash balance sheets, low correlation with others (which helps in pullbacks), and world beating stocks. But Japan suffers from persistent deflation, poor demographics, high debt, and low shareholder rights. Not all valuations are cheap (see chart). It is a stock pickers market.
POLITICAL NO-CHANGE: Japan’s equity market recently rallied on hopes of new political leadership. This was short-lived, as consensus candidate Fumio Kishida is now prime minister and called elections for October 31. His focus is on the vaccine rollout and new fiscal stimulus, to boost Japan’s still recessionary PMI and an earnings recovery only half the global average. This could help the market’s strong cyclical sector composition, whilst the weaker currency (JPY), which is the worst performer of the ‘G-10’ major currencies this year, helps its exporters.
BOTTOM-UP: We focus on US and Europe opportunities, but Japan has its attractions, with many world-leading companies, from booming music industry, via Sony (SONY), to autos, like Toyota (TM). Other leaders include gamemaker Nintendo (NTDOY), optical products Canon (CAJ), drugmaker Takeda Pharma (TAK), and the world’s no.5 bank Mitsubishi UFJ (MUFG).
TODAY: OPEC+ surprised markets by holding its 400,000bpd monthly production increase plan steady. Over $80/bbl oil helps neither users (higher costs) nor producers (drives substitution), but is where we are going, with capacity tight and demand rising as the virus eases and winter looms.
All data, figures & charts are valid as of 04/10/2021