January 2020 / INVESTMENT INSIGHTS
Quarterly Outlook: Easing Trade Tensions Boost Japan's Prospects
- Easing trade tensions between the U.S. and China should benefit Japan’s open economy amid a recovery in foreign demand.
- The 5G technology cycle and upcoming Tokyo Olympics are providing strong support for investor sentiment and Japan’s fundamentals for earnings, the economy, and the equity market.
- We remain committed to investing in durable and improving businesses capable of weathering economic turbulence and are finding particularly attractive opportunities in the information technology (IT) and services, and machinery sectors.
Following strong gains for Japanese equities in 2019, we believe the outlook for the market remains robust. While the domestic growth backdrop appears sluggish, easing trade tensions between the U.S. and China—marked by the signing of a partial trade deal in December—should benefit Japan’s open economy amid a recovery in foreign demand. The coming year will see investors assess the economic impact of Prime Minister Shinzo Abe’s latest fiscal stimulus package, one of the largest since the 2008-09 global financial crisis. The International Monetary Fund (IMF) has already raised Japan’s 2020 growth outlook, citing an anticipated boost from the stimulus.
Advances in 5G and the Olympics a Boon
Two key factors—the 5G technology cycle and the upcoming Tokyo Olympics—are providing strong support for investor sentiment and Japan’s fundamentals for earnings, the economy, and the equity market. The development of ultrafast 5G networks is expected to lead to a jump in semiconductor demand, benefiting Japan’s leading manufacturers in the field. Japanese components and materials remain critical to the production of 5G handsets, and higher component content per 5G phone is likely to provide a significant tailwind for many Japanese technology companies.
The Tokyo 2020 Olympics, meanwhile, are likely to have positive effects on the Japanese economy through two main channels: tourism and construction. While much of the growth resulting from construction will taper off as the building boom subsides, tourism will compensate for some of the losses. Authorities have said that the Olympics present an opportunity to accelerate reforms for the purpose of vitalising not only Tokyo but all of Japan.
Despite these positives, we remain vigilant of the risk factors that could weigh on Japan’s robust performance: a renewed escalation in the U.S.-China trade tensions, delayed effects on the economy of October’s consumption tax rise, a global growth slowdown, and geopolitical uncertainty. Increasing stock-specific dispersion will need to be navigated as investors digest subtle changes in the top-down investment case and react to the surprises always inherent in Japan.
Against an uncertain backdrop, we remain committed to investing in durable and improving businesses capable of weathering economic turbulence. In the IT and services sector, we see scope for improving earnings, while valuations also look attractive. We are also bullish on the machinery sector, where our positions are in world-class companies that are exposed to robust growth trends at the forefront of innovative technology and factory automation.
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