Abenomics is working and Japanese equities are a buy as corporate earnings experience sustained growth, said a Swiss alternative investment manager.
“Corporate profits in Japan continue to grow significantly faster than in any other major market, driven by a broad-based expansion of profit margins,” said Mikio Kumada, global strategist at LGT Capital Partners, in Investment Europe. “The global corporate earnings season for the second quarter of 2015 has produced a clear winner: Japan.”
Kumada said Tokyo’s easing of monetary policy and market-friendly reforms have helped Japanese corporations reported the fastest growth in earnings and sales world-wide, far surpassing consensus estimates. Japan was the only major market in which all ten sectors reported higher-than-expected growth.
Of the 310 components on the MSCI Japan Index, 296 reported growth of at least 35% in second-quarter earnings per share, compared with the year-ago quarter, beating the consensus estimate.
Kumada compared this to earnings-per-share growth of 2.4% in the emerging markets and just 1% on the MSCI World Index. The Eurozone was the second best with a growth rate of 19%.
“All in all, Japan enjoyed the strongest profit growth across all sectors, while analysts continue to err on the side of caution,” said Kumada. “This is the perfect combination of reasons to own equities: robust, underestimated and – in our view – sustainable growth in earnings. Japanese earnings momentum should hold up.
The strategist said the outlook for Japanese equities continues to look good. He thinks Japanese companies will experience above-average growth in earnings in the near future, and maybe even for several years.
With no broad optimistic consensus on where Japan is headed, Kumada says Japan’s economic has much room to grow because the recovery and bull market are still at a relatively early stage.
Efforts to use economic and monetary policy have helped Japan reverse deflation. This should lead to expanding nominal gross domestic product – which in turn forms the basis for corporate earnings.
He said “Japan’s companies now have plenty of room to cut cash and equity in favor of raising debt, boosting dividends, and launching share buybacks, without unduly weakening their balance sheets. That would be highly beneficial for shareholders and support higher equity valuations.”