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Alternative Market Briefing

The case for currency-hedged Japanese stocks

Friday, January 20, 2017

Matthias Knab, Opalesque:

Richard Turnill, BlackRock Global Chief Investment Strategist, writes on Harvest Exchange:

We see a strong case for Japanese stocks on a currency-hedged basis, as this week's chart helps explain. We believe they should disproportionately benefit from global reflation, as well as a potential pickup in Japanese growth ahead. A weak yen is a positive.

A falling yen helps the Japanese equity market in two ways. First, it boosts the earnings of Japanese exporters in local currency terms. This impact can be seen in the chart above, with forward earnings in Japan closely tracking the dollar/yen rate in recent years. Second, it makes Japanese assets cheaper for foreign investors, attracting capital inflows into Japan.

More than just yen weakness

We do see the yen's slide slowing versus the U.S. dollar. Yet the currency is likely to remain weak as zero-anchored Japanese 10-year bond yields encourage local investors to buy higher-yielding foreign bonds. Beyond a weak yen, there are tentative signs local inflation may be picking up, with the biggest month-on-month spike in headline inflation seen in 25 years in October. Our BlackRock Macro GPS economic indicator also implies upside global and Japanese growth surprises could be ahead.

As a result, Japanese earnings estimates are rising......................

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