Friday, 31 July 2015


Japan’s Nikkei fell on Monday from the impact of losses in US shares, mainly in response to reported slower earnings. The Nikkei fell 0.8% to below its 25 day moving average for the first time in two weeks. In the US, the S&P 500 and Nasdaq experienced their largest fall since March on Friday, lowering US Treasury yields. Nonetheless investors should not be concerned about the Fed raising rates in the short term however it does seem probable in September or next year. (More about the Fed rate hike in our next posts).

Globally, the second half of 2015 started slowly. Activity in China’s factory sector fell in July at the fastest rate in over a year, and manufacturing in the Eurozone was slower than expected. The global downturn would have reined in investor attitude to risk and contributed to the fall in the Nikkei, in particular, the price of financial stocks should attribute their decline to this.

Nonetheless, the Japanese market should sustain outperformance in the global market given expectations for stronger company profits due this week and strengthening economy. Its push for renewal all indicates Japanese equities are worth investing in today. Unlike the US stockmarket, which accounts for a disproportionate number of tech firms whose fortunes are irrelevant to the nation’s consumption behaviour, Japan’s weight in the MSCI World Index has fallen to reflect its economic weight. (In 1989 it contributed 17% of global GDP while representing 44% of the MSCI World Index, which leads to a distorted portfolio).

Government and shareholder actions have facilitated such investor interest in Japanese equities. The proxy advisor Institutional Shareholder Services advised voting against director reappointments if return on equity has been less than 5% for five years. The Abe government’s corporate governance regulations have discouraged large passive positions in other organisations, which used to be a common means of supporting their peers. Instead effective capital management is now implemented as shareholdings in other corporations must be justified.

These structural shifts mostly affect the financials sector. Due to greater capital efficiency even when growth in earnings is slow, share prices should rise. High end manufacturers and a growth in domestic and inbound tourism are other sectors with potential for stronger results. With this positive sentiment however, Japan’s demographic profile may be a red flag to watch: population is forecast to fall by 17% by 2040 with 20% of that population expected to be over 75.

Australian Financial Review, Sydney Morning Herald

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