Equity Strategy: Japan stays key OW in regional allocation; In a European context, one should consider UK

Speaker: Mislav Matejka, CFA - Head of Global Equity Strategy

From a global equity perspective, we had upgraded Japan to OW in Dec ’22. While we still think that USD is likely to be stronger from here, it might not be crucial to hedge JPY anymore, as the interest rate differential between the US and Japan looks set to start converging this year. For the continued bullish view on Japan, we reiterate: First, TSE reform is set to lead to improved corporate profitability and greater shareholder returns, given that more than half of Japanese stocks are still trading net cash, and 40% are trading below tangible book. Second, even though it feels as though Japan is a consensus overweight, we think that flows are still at an early stage. Foreigners bought 5trn Yen of Japanese stocks in 2023, which compares to 35trn Yen during the Koizumi era and 25trn Yen during Abenomics, the last two times when Japanese stocks moved up more than 100%. Third, there is a case to be made for some reflation in Japan, through house price appreciation and positive wage growth for Japanese consumers, and lastly, Japan is the only large DM market with dividend yield above bond yield, vs historical. In a European context, after outperforming strongly in 2022, the only large DM market up in that year, the UK lagged significantly in 2023. This has left UK at record cheap, even ex US. UK has the highest dividend yield out of all markets, at 4.3% yield, vs 2.0% for MSCI World. With the central bank cutting cycle about to commence, dividend strategies might come into the spotlight. The UK is a commodity-heavy market, and both Materials and Energy lagged last year, dragging the index down. If commodities find a floor, especially as the FCF yields of both Mining and Energy are very high at present, this could help. China outlook could play a role, too. We held a cautious fundamental view on the China market for a while, but recognize that it is heavily underowned and cheap post the big selloff: MSCI China lost 30% in a year. If China sees short squeezes, that could indirectly benefit the UK.

This podcast was recorded on 12 February 2024.

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