Yunyoung Lee, portfolio manager for the Japanese smaller companies strategy, says strong fundamentals relative to other developed markets mean prospects for Japanese companies should remain good into 2019.
What are the key themes likely to shape markets in 2019?
Compared to other major markets such as the US (end of tax benefits, US China trade wars), Europe (Italy, Brexit) and EM (global tightening, US China trade wars), Japan offers relatively strong fundamentals in the next year. Thanks to a weak yen and improving domestic economy, corporate Japan continues to deliver strong earnings momentum. Before July upper house election and October GST hike which are two most important events for the final phase of Abenomics, the government will fully focus on supporting the economy and market via supplemental budget and market friendly policies. Highly cash rich corporates accelerate to do share buyback together with Bank of Japan.
Where do you see the most important opportunities and risks within your asset class?
We see strong corporate earnings momentum, stable political background, market friendly central bank stance and improving corporate governance continue to drive the market higher. We currently like companies in sectors which benefit from the strong domestic economy, for example, construction. We also like companies which benefit from price hike. Given rapid change of sector leadership in the market, we continue to focus to the company specific stories based on our intense management interviews program. The risks to the market include a Chinese hard landing, increasing oil prices and a sudden strengthening of the yen.
How have your experiences in 2018 shifted your approach or outlook for 2019?
We haven’t changed our approach. We continue to use the strategy of stock selection based on ‘catalysts’ ie events with potential to trigger a change in company performance, as well as portfolio rebalancing based on quarterly management interviews. We continue to make our fund concentrated with high conviction ideas based on a bottom up approach.
Which themes have the potential to redirect markets in 2019? Download our one-pager summary to find out
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