Key insights
- 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.
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.
Risk Factors
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.
Risks
The following risks are materially relevant to the portfolio. Currency risk- Changes in currency exchange rates could reduce investment gains or increase investment losses. Small and mid-cap risk- Stocks of small and mid-size companies can be more volatile than stocks of larger companies. Style risk- Different investment styles typically go in and out of favour depending on market conditions and investor sentiment.
General Portfolio Risks
Capital risk- The value of your investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the portfolio and the currency in which you subscribed, if different. Equity risk- In general, equities involve higher risks than bonds or money market instruments. Geographic concentration risk- To the extent that a portfolio invests a large portion of its assets in a particular geographic area, its performance will be more strongly affected by events within that area. Hedging risk- A portfolio's attempts to reduce or eliminate certain risks through hedging may not work as intended. Investment portfolio risk- Investing in portfolios involves certain risks an investor would not face if investing in markets directly. Management risk- The investment manager or its designees may at times find their obligations to a portfolio to be in conflict with their obligations to other investment portfolios they manage (although in such cases, all portfolios will be dealt with equitably). Operational risk- Operational failures could lead to disruptions of portfolio operations or financial losses.
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