By Katsuaki Ogata
As Japanese equities struggle to make headway this year after an explosive 2013, new questions are being asked about the economy’s direction. From an investor’s perspective, we think the sluggish export trend may be masking a more positive environment for stocks.
Prime Minister Shinzo Abe’s economic policy has faced plenty of skepticism. Critics of “Abenomics,” which is centered on aggressive monetary easing, have focused on the failure of a sharp depreciation of the yen to trigger a significant rebound in Japan’s export volumes. Indeed, the country’s trade deficit swelled to 13.7 trillion yen in fiscal year 2013 (through March 31, 2014) - the largest shortfall on record.
Meanwhile, Japanese equities, which rose more than 50% in 2013, have stumbled this year. Against this backdrop, the trade data may seem like damning evidence that last year’s stock-market rally was yet another false dawn.
But is the situation really so bleak?
In our view, while the stubborn trade deficit reflects several worrying factors from a macroeconomic standpoint, it is also the flip side of some encouraging trends for stock investors.
For example, look at the reasons behind the muted exports. One major factor restraining an export volume rebound is that Japanese exporters have opted to keep the foreign currency-denominated prices of their products relatively steady. In yen terms, export prices have risen (Display). So instead of going after market share by cutting prices in destination markets, exporters have opted to recoup profit margins. Indeed, exporters’ profitability has recovered sharply. As the earnings season for fiscal year 2013 unfolds in the coming weeks, we are likely to see many companies report a solid recovery.
The yen has settled into a relatively narrow range since mid-2013. So the earnings recovery for the current fiscal year is unlikely to be as dramatic as that of the previous year. But since the currency is trading more than 20% below the historic highs that it marked a few years back, there’s plenty of maneuvering room for good companies to organically improve their earnings. As those companies have become leaner and meaner during the hard times, the amount of sales they require to break even has dropped sharply from a few years ago (Display). This means that they’re better positioned to withstand unforeseen external shocks.
What’s important for equity investors, in our view, is that the market is entering a phase where selecting those good companies is becoming more critical than it may have been during the more indiscriminate, across-the-board rally in 2013. In such an environment, we believe that rigorous research to identify pockets of attractive opportunities will be richly rewarded.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio- management teams.
Katsuaki Ogata is Chief Investment Officer of Japan Value Equities at AllianceBernstein.