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Are Japanese equities a haven in this high inflationary world?

“Both the Bank of Canada and the Federal Reserve started raising rates in their March meetings,” says Lee. “The market is seeing eight rate hikes for the rest of the year from both central banks, but only six sittings left. Still, the fact is we are seeing higher interest rates, which is generally good for equity markets. No, that presents a slight headwind for North America and many other countries.

Since the obligation for Japan’s central bank to fight inflation is not as high, it represents a relative safe haven for equity market investors compared to other places where monetary policy would not be environmentally friendly. In addition, Lee says that the Japanese equity market has underperformed global markets since March 2020, which means that many investors imply that Japan’s stock market is undervalued and some average reversal. reason.

“When you look at the valuation of the market, it’s cheap,” he says. “Japan’s stock index has a PE ratio of 13.7x compared to the S&P 500, which is 23x, and the TSX which is 18.5x. We are already seeing that many of our institutional investors in some of their international holdings also exceed Japan. carry weight.”

From a sector standpoint, Lee is constructive on Japan’s consumer discretionary and consumer staples sectors, which have healthy exposure to the Japanese equity index. While they are largely domiciled in Japan, those companies – which include the likes of Sony, Nintendo, Honda and Toyota – have global sources of revenue. Also, the wages they pay have not actually increased, which means their costs are relatively constant.

“Because their revenues come from all over the world, those revenues can increase with inflation, especially if they are able to hedge their currency exposure,” he says. “And even though Japanese companies don’t market their products as high quality as American companies, Japanese goods have a reputation for high quality.”

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