Japan still a 'buy' despite entering bear territory

J.P. Morgan’s top money manager sees fear of China driving long-term reform in Japan and says investors should take recent stock market losses on the chin.
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Is Shinzo Abe's magic starting to fade?
<div style="text-align: left;"> Is Shinzo Abe's magic starting to fade? </div>

The Japanese government’s efforts to stimulate the country’s moribund economy remain on track, says Jan Loeys, J.P. Morgan’s head of global asset allocation and alternative investments, and he urges investors to continue to buy into the country’s stock market.

Loeys maintained his “overweight” stance on Japanese equities even as the country’s key stock market index plunged into bear market territory on Thursday. He says economic reform will be driven by Japan’s fear over China’s territorial ambitions and retrenchment by its ally, the US.

“I’m betting on the long-term view that Japan is waking up out of fear of being abandoned by the US and having a much stronger neighbour in China,” says Loeys, who is visiting Hong Kong to meet investors.

His comments follow investors’ disappointment with Prime Minister Shinzo Abe’s speech last Wednesday on his plans for structural reform, which some criticised for lacking immediate steps towards freeing up Japan’s sclerotic labour market. The speech was followed by a sharp selloff in the world’s second-biggest equity market.

On Thursday, Japan’s benchmark index the Nikkei 225 Stock Average tumbled 6.4%. The broad-based sell-off extended its losses since its recent peak on May 22 to more than 20%, a threshold many investors say marks a bear market.

Loeys told a small group of investors gathered in the ballroom of a hotel in Hong Kong that he has been overweight Japanese equities in his model portfolio since November. He related that in the recent stock market correction he has “taken it on the chin” and made losses.

To be sure, the losses have been limited because his overweight position has been relative to South Korean and Taiwanese equities, Japan’s close competitors, where markets have also fallen.

Despite the losses, he recommended that his clients keep buying Japanese stocks. “I’m still buying,” says Loeys, who is also J P. Morgan’s chief market strategist. “I’m looking at Japan as longer-term political play.” He says growing tension with China over its military build-up and its objections to Japanese control over the Senkaku islands, otherwise known as the Diaoyu islands, will give Abe the groundswell of support he needs to change Japan.

While J.P. Morgan has recently turned more positive on European equities following a string of positive economic data, Loeys says he is sceptical about the prognosis for the region’s long-term economic health.

“Europe is the new old Japan,” he says. Europe is probably in a deflationary state, with no growth policies and nobody in charge. As a result, it is likely entering the deleveraging cycle similar to the one experienced in Japan for 20 years.

“Japan has woken up and Europe has gone to sleep,” says Loeys. 

¬ Haymarket Media Limited. All rights reserved.
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