Japanese equities have performed broadly in line with global peers over the quarter, and over the last year as a whole. The Japanese economy and a large proportion of the companies that make up the Japanese equity market will benefit from a resurgent global economy, particularly in manufacturing.
One risk is the focus on manufacturing in the Japanese economy and stock market. As the global economy reopens, it is likely that marginal spending will be towards services rather than goods. This may impact exports from Japan, as well as the earnings of many large Japanese corporates.
We continue to struggle to gain a strong macro view on the Japanese equity allocation and retain a neutral positioning. Nevertheless, Japanese equities remain good diversifiers and are attractively valued relative to the global equity market.
Asian and Emerging Markets Equties
Asian and emerging markets equities have become increasingly in favor over the quarter as investors have been encouraged by the handling of COVID and buoyed by a strong rebound in China. The support of goods exports due to demand from developed market consumers in lockdown has also been a benefit.
While there is significant dispersion in the prospects for different emerging markets, in aggregate the benefits from a weakening dollar, increasing demand for goods and commodities, and further down the line, tourism should mean that the asset class will continue to have a tailwind.
Although the allocation has performed well over the year, valuations remain unstretched and the outlook is robust, reinforcing our small overweight positioning.