“Ultimately, the only way we’re going to get a stockmarket that can continue to go upwards – as we don’t think this bull market is over yet but will be characterised by a lot of sideways action – is if we see earnings growth. We may start to see that pick up because of these two headwinds turning into tailwinds.”
This year has also been something of a test for Japanese prime minister Shinzo Abe’s economic strategy, known as Abenomics. Sumi Trust lead strategist Katsunori Kitakura admits Mr Abe’s “three arrows” of reform have not exactly soared this year.
Mr Kitakura says: “The rapid rise of the yen during the first half on the back of global stockmarket turbulence has been damaging for Japanese corporates and brought back the ghosts of deflation. In this risk-off environment, Japanese equities were sold off across the board and as sentiment deteriorated, forward earnings destabilised. Domestic demand and defensive stocks held up well through the storm, as did IT, telecoms, paper and pulp and construction stocks.
“Exchange rates still hold the key to Japanese corporates’ performance over the next six months. Interest rate spreads between the US and Japan point to a stronger dollar and weaker yen in the second half of the year.”
Andrew Rose, Japanese equities manager at Schroders, says his main concern is the impact of China. “This was a big part of the fear seen in the market at the start of the year. People have got more relaxed about China and that, at some point, might be proved to be misplaced,” he says.
Closer to home, what is the outlook for UK equities?
Ciaran Mallon, UK equities fund manager at Invesco Perpetual, comments: “In the short to medium term I suspect we will be slightly challenged. The rolling 12-month earnings forecast is currently right back to where it was in 2009, despite the stockmarket’s huge recovery. There has been quite a rerating of the stockmarket but earnings haven’t really made much progress, which probably means short-term returns won’t be wonderful.”
But Matt Hudson, head of business cycle for UK and European equities at Schroders, adds: “On a positive note, after a sustained period of pressure on the earnings base of UK plc, we are beginning to see some signs of a more stable period ahead, which should see UK equities start to deliver better performance, especially against other global equity markets.”
Ellie Duncan is deputy features editor at Investment Adviser
