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July 2020 / OUTLOOK

Taking Advantage of Performance Disparities

Japan Equity Quarterly Outlook Q3 2020.

Key insights

  • We have worked hard to identify quality cyclical companies that stand to potentially outperform as earnings expectations improve from depressed levels.
  • The Japanese equity market registered its strongest quarterly performance since 2016 over the second quarter.
  • Market returns, but also sector and stock dispersion, have been extreme.


During the second quarter, the huge amount of liquidity provided by major central banks, signs of economic recovery in China, and economies reopening following the lifting of lockdown measures outweighed the impact of looming recessionary conditions and growth in the number of coronavirus cases in certain parts of the world. In May, Japan’s Prime Minister Shinzo Abe announced that he was lifting the state of emergency for the remaining five prefectures that were still on lockdown orders.

Investors turned bullish on the news and stocks staged an impressive rally. The unveiling of stimulus packages that in total represent approximately 40% of Japan’s annual GDP provided an additional boost to share prices. As a result, the Japanese equity market rallied over the second quarter and registered its strongest quarterly performance since 2016.

The Japanese equity market registered its strongest quarterly performance since 2016 over the second quarter.

Extreme Sector and Stock Dispersion Created Opportunities

In this environment, returns, but also sector and stock dispersion, were extreme. Pharmaceuticals rallied because of the defensive, quality nature of the sector and its role in addressing the coronavirus pandemic, while electric appliances and precision instruments rebounded following precipitous falls in the first quarter. Overall, Japanese growth stocks outperformed value stocks. Electric power and gas and transportation and logistics lagged.
 

Identifying Quality Cyclical Companies

We have worked hard to identify quality cyclical companies that stand to potentially outperform as earnings expectations improve from depressed levels. We decided to increase the portfolio’s turnover as we took advantage of these performance disparities.

We believe that the coronavirus pandemic will lead to an acceleration in trends that we are already seeing, such as the shift from offline to online in the form of e-commerce and factory automation. We also see opportunities in companies with exposure to China, where the economy appears to be reopening.

Japan is more exposed to the global economic cycle than many other markets. Therefore, we believe that the country is well positioned to benefit from the unprecedented fiscal and monetary easing measures implemented globally to support economies and an improvement in earnings from depressed levels as the global economy enters the recovery stage.

 

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

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Why EM equities look attractive today
202007-1253673
RELATED FUND
OEIC
Class C GBP
ISIN GB00BD446L18
Seeking to uncover the best investment opportunities across the Japanese equity spectrum.
View More...
3YR Return
(Annualised)
12.96%
Fund Size
(GBP)
£285.5m

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