David Soh, Portfolio Manager and Head of Research, RBC Global Asset Management (Asia) Limited, shares his thoughts on 2024 and the year ahead.
The last few years have been quite dynamic for Japan equities. In 2024, we have seen that Japan Inc. is on track to pull itself out of its lost decades of deflation and achieve a mindset shift where corporate leaders focus more on value creation and shareholder returns. We continue to see solid trends in terms of corporate fundamentals.
We believe the fundamentals behind Japan equities will continue to grow more compelling into 2025, although share price movements can still show volatility, largely driven by FX rather than uncertainty in corporate fundamentals. Japan equities are still very much under-valued and under-researched.
In terms of macro, the weak yen should be more of a tailwind to equity investors investing in US dollars or in the euro, supported by the BoJ raising rates and the Fed cutting rates. We are also watching the virtuous cycle between wage hikes and corporates pushing up prices.
In addition, fund flows should be favourable for Japan equities. Domestic pensions and households are allocating more into equities to position themselves for inflation. Japan is the third-largest economy globally and institutional investors are very underexposed. This set-up has the potential to make Japan a once-in-a-multi-decade investment theme.
Watch time: 3 minutes, 20 seconds
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David Soh
Portfolio Manager
RBC Global Asset Management (Asia) Limited
David Soh: The last few years have been quite dynamic for Japan equities. In 2022, in U.S. dollars, the market was down over 15%, and then up over 20% in 2023. And this year, year-to-date, Japan equities are up by about 10%, somewhat lagging other major markets. When global equity markets fell then rebounded in early August, Japan saw more volatility, largely driven by FX, than uncertainty in corporate fundamentals.
If we take a step back, in 2024 we were able to witness that Japan Inc. is on track to pull itself out of its lost decades of deflation and also achieve a mindset shift where corporate leaders focus more on value creation and shareholder returns. In addition to these drivers, one macro, one on corporate fundamentals, fund flows should be a tailwind for Japan equities. Domestic pensions and households are allocating more into equities to position themselves for inflation. Japan is the third largest economy globally, and institutional investors are very under-exposed. This set-up has the potential to make Japan a once-in-a-multi-decade investment theme.
We believe the fundamentals behind Japan equities will continue to grow more compelling into the new year, although share price movements can still show volatility. In terms of macro, the weak yen should be more of a tailwind to equity investors investing in U.S. dollars or in euro, supported by the Bank of Japan raising rates and the U.S. Fed cutting rates. Pace can be fast or slow, but the direction is clear.
We are also watching the virtuous cycle between wage hikes and corporates pushing up prices. We continue to see solid trends in terms of corporate fundamentals. Any given quarter, you'll have two or three of our PMs and analysts in Japan kicking the tires, and repeatedly in our conversations with management, we see they are focused as ever on profitability and shareholder returns.
On the other hand, this story of Japan reflation and corporate governance reform is actually very disruptive. There will be clear winners and losers in any industry. The traditional notion of investing in Japan through equity ETFs or value and small-cap factors driving performance are quickly becoming outdated. Instead, we continue to pick the best businesses bottom-up to build an all-weather portfolio. Our Japan strategy is supported by a team of pan-Asia industry specialists. Our strong in-house research and risk management discipline can help us navigate 2025 as well better than peers.