21 October 2016
A weaker yen is benefiting Japanese exports and helping the bottom line of Japanese companies. Photo: Internet
A weaker yen is benefiting Japanese exports and helping the bottom line of Japanese companies. Photo: Internet

Why Asia-Pacific equity funds are attractive

Just recently, I was talking with friends about the weakness of some foreign currencies and how that is making some imported products more attractive.

Polly, who’s a big fan of Japanese products, was quite excited to see the Japanese yen dive to a 12-year low.

Japan’s central bank has kept pumping money into the market in a bid to restore economic growth and offset deflation.

Last year, the Japanese yen lost 12 percent against the US dollar, although the decline has moderated to 4 percent so far this year.

In order to achieve its target of 2 percent inflation, the Japanese government is widely expected to step up its monetary easing, which could further weaken its currency.

The weaker yen is also partially caused by a stronger US dollar amid mounting speculation of a rate hike this year.

Various reforms are taking place in the Asia Pacific after new leaders took over the helm. For example, Japan has adjusted its Government Pension Investment Fund portfolio, China has accelerated its market opening, while South Korea has tightened rules on corporate transparency.

As a result, risk assets in the region are much sought after by global investors. Regional equity markets have performed well; the Japanese market has outperformed with a double-digit rally so far this year.

The Japanese government has encouraged local companies to improve governance and raise the wages of workers. Most Japanese firms are willing to grant salary hikes, and that could boost household consumption given the low inflation and delayed consumption tax.

Also, the weaker yen will benefit Japanese exports and help the bottom line of Japanese companies.

The constituents of the TOPIX index have posted nine straight quarters of higher-than-expected earnings since the third quarter of fiscal 2013.

In addition, corporate management culture in Japan has witnessed some new developments. Many listed companies have raised their dividends and launched share buybacks to the benefit of shareholders.

Last year, share buybacks reached nearly 450 million yen (US$3.64 million), the highest in six years. Some firms also set return on equity ratio targets for the medium term, which has been applauded by investors.

Generally speaking, risk assets will be underpinned by massive monetary easing measures and improving company earnings.

The Japanese yen is unlikely to plunge further, and this would boost investment values in the market.

Investors who want exposure to Japanese market could buy Japanese equity funds to capture the upside potential.

However, a single market fund usually has greater volatility. Conservative investors could bet on Asia-Pacific equity funds with exposure to Japan market in order to diversify their investments.

This article appeared in the Hong Kong Economic Journal on June 12.

Translation by Julie Zhu

[Chinese version 中文版]

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Head of institutional business for Greater China and Southeast Asia at Allianz Global Investors HK Ltd.

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