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In focus: Refreshing the case for Japanese equities
The outlook for Japanese equities remains positive, with our latest observations and discussions on the ground supporting Templeton Global Equity Group’s (TGEG) high conviction in the market, where opportunities driven by corporate reforms and capital expenditure (capex) recovery continue to beckon.
In a recent five-day visit to Japan, TGEG’s Japan equities analyst and portfolio manager attended Morgan Stanley’s Japan Summit 2024, as well as a string of meetings with corporate managements. This month's edition contains a summary of his takeaways and latest thoughts.
Investment outlook
In North America, earnings, interest rates and macro sentiment are likely to drive US market performance in the second half of 2024. Favorable developments in all three would likely contribute to a broadening of equity performance. We are constructive on select stocks beyond the narrow market leadership focused on areas such as electrification, artificial intelligence (AI) and GLP-1 (diabetes) drugs.
In Europe, we believe equities offer attractive value relative to US and global equities, with the small- and mid-cap segment still trading at a significant discount and offering considerable long-term upside. Geographically, having derated strongly since 2016, UK equities look especially appealing to us.
In Asia Pacific, we maintain a positive long-term view on Japan, but the market has rallied, so stock selection is key. Valuations of Chinese and Hong Kong equities remain relatively low, and, with a selective approach, investors can potentially benefit from an asymmetrical risk/reward balance.
Market review: June 2024
Global equities gained in June 2024. As measured by MSCI indexes in US-dollar terms, emerging market equities outperformed the MSCI AC World Index, while developed and frontier market equities underperformed it. Global growth stocks significantly outperformed global value stocks.
Enthusiasm about AI helped drive collective gains in global equities in June 2024, particularly in the United States, though political developments in Europe pressured results in that region. The start of interest-rate cuts in the eurozone during the
month and investor expectations for potential rate cuts in the United Kingdom and the United States during the second half of this year also aided investor sentiment. Global manufacturing activity expanded in June for the fifth consecutive month, and flash reports for June indicated services activity expanded in many regions.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods.
Active management does not ensure gains or protect against market declines.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.