(Bloomberg) -- BlackRock Inc (NYSE:BLK). favors Japanese equities second only to emerging-market stocks because the nation’s corporate earnings look solid and share valuations are more attractive than in the U.S.
“We are overweighting equities in emerging markets, Japan, Asia and Europe,” Takeshi Fukushima, chief investment officer at the Japan unit of BlackRock, the world’s largest money manager, said in an interview this week in Tokyo. “That’s not just because the economies are good in those regions, but also they have their own stories. In Japan’s case, corporate earnings are becoming stronger.”
Japan’s benchmark Topix index has rallied 20 percent this year as global growth has helped generate record Japanese corporate profits. Higher local earnings amid a sustained global economic recovery will boost the Topix to 2,050 by the end of next year, according to JPMorgan (NYSE:JPM) Securities. That would be a 12 percent gain from Thursday’s close.
The estimated price-to-earnings ratio for Japan is 15 times for this year, compared with 20 times for the U.S. and 16 times for Europe, based on MSCI Inc. indexes.
Even as Japanese stocks have rallied, valuations haven’t changed much from earlier this year, because investors weren’t aware that companies would have such strong earnings, Fukushima said.
Earnings in the July-September period were above consensus forecasts and positive surprises outweighed negative for the sixth consecutive quarter, according to a report by Goldman Sachs Group Inc (NYSE:GS). last month.
Read about the outlook for emerging markets in 2018 here.
Still Underweight
“The fact that Japan’s economy is in good shape has not yet been conveyed and overseas investors still have the old image” of stagnation, Fukushima said. “Global investors are still underweight Japanese stocks” so they may review their stance on Japanese equities.
Possible headwinds include any breakdown in talks on the North American Free Trade Agreement. That would be an ominous sign for global trade and lead to a stronger yen and hurt Japanese export-related shares, Fukushima said, though he puts the odds of that scenario playing out at 20 percent.
BlackRock’s preferred plays are domestic demand-related value stocks, such as retailers and services, as well as technology shares, according to Fukushima. The company also is interested in small-to-medium sized companies which focus on labor-saving investment, those which benefit from a rise in foreign tourists, and increased participation of women and the elderly in the labor force.
“It’s important to keep a balance between momentum stocks and value shares,” Fukushima said. “Domestic demand-related value shares are not glamorous, but they will probably perform in line with our Japan growth scenario. On the other hand, momentum shares, such as technology shares, depend on the global economy.”
While BlackRock likes technology and financial shares globally, it is “neutral” on Japanese bank shares as they lack a positive story on their earnings, he said.