Japan fund bullish on rising corporate earnings

Japan fund bullish on rising corporate earnings

A potential market rally is driven by a weakening yen, rising capital expenditures and improving corporate earnings, according to Bloomberg Asset Management's Japan equity fund.

In an interview, the $459 million JPM The Japan fund is bullish about companies such as machinery maker IHI Corp. and infrastructure firm JGC Holdings Corp., said Daisuke Nakayama, a fund manager at the firm. The fund returned 3.2% this year, beating 80% of its peers, according to data compiled by Bloomberg. Japan's benchmark Topix Index is up 1.3% for 2022, while the Nikkei 225 is down 1.4%.

Nakayama's optimistic view comes as Japan has proved to be one of the most resilient developed equity markets during this year's global rout, with the Bank of Japan dovish stance making it an outlier among major central banks. The MSCI World Index of developed-market shares has lost 17% year-to-date, it is heading for its worst annual loss since 2008.

While Japan's monetary easing led to a tech boom and coincided with a decline in the relative importance of capital investment over the past decades, funds may flow back from the digital names to the real economy, Nakayama said. The strong performance of Japan's fundamentals is coming back to its historic high since the 1990s. The capital goods and services sector, which makes up a large number of value stocks, accounts for 8.5% of the S&P 500 Index. The sector accounts for 24% of the Topix index. According to Nakayama, there could be a tailwind for Japanese shares.

Nakayama said that JPMorgan Assets'fund has a bottom-up strategy, which includes companies with potential for high profit growth and a focus on shareholder value. Game maker Sega Sammy Holdings Inc. lender Resona Holdings Inc. and cable maker SWCC Showa Holdings Co. are some of its top picks.

Other analysts have expressed optimism about the economy. Norihiro Yamaguchi, a senior economist at Oxford Economics, wrote in a note that the economy should remain relatively resilient despite pent-up demand, a recovery in the auto industry, support for monetary policy and a strong base effect. According to a note from Junichi Makino, chief economist at SMBC Nikko Securities, expects the economy s recovery to accelerate on the nation's strong purchasing power, waning Covid impact, and better terms of trade.

Nakayama, who looks at trends over a 10 to 15 year period, said that as fundamentals improve, the stock market will reach a turning point in which money may flow back into industrial-related names that have been undervalued. The topix shares are holding near a three-year high relative to growth shares, according to the gauges that track them.

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