July 2020 / OUTLOOK
Taking Advantage of Performance Disparities
Japan Equity Quarterly Outlook Q3 2020.
- 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.
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.
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