Why the time is right to allocate to Japanese smaller caps

Japanese equities have been on a tear of late. The Topix  rose 20.7% for the 12 months between 31 January 2017 and 31 January 2018. Should the market continue to rise, history does seem to suggest the small cap section is a good place to be. An analysis of comparative returns on the small cap versus large cap sections of the Russell/Nomura Index from 1984 to 2017 suggests small caps outperformed in the vast majority of periods where markets rose.

The benefit of investing in Japanese small caps is also apparent when you consider the question of correlation. Investors who do so have the advantage of lower average correlations versus European, Asian ex-Japan, emerging and US indices. These low correlations are even more evident in small cap indices.

People often talk about alternatives when the question of diversification comes up but this aspect of exposure to Japanese equities is regularly overlooked. We’d argue investors looking for ways to diversify their portfolio would benefit from allocation to small cap Japanese stocks given their tendency to perform with relatively limited reference to the movements of wider global equity indices – an important consideration given the current market turmoil.

Miyuki Kashima – head of Japanese equity investments, BNY Mellon Japan

Japanese equities have been on a tear of late. The Topix  rose 20.7% for the 12 months between 31 January 2017 and 31 January 2018. Should the market continue to rise, history does seem to suggest the small cap section is a good place to be. An analysis of comparative returns on the small cap versus large cap sections of … read more

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Chinese new year edition: China’s tourists flex their muscles

The Chinese consumer is starting to flex its muscles to spend more of its growing disposable income on travel. China is already the second-largest tourism market in the world, accounting for half of the growth in the global travel industry, but much of that tourism is domestic, and its citizens only make an average of 0.09 overseas trips per annum, compared to 0.3 and 1.2 in the US and UK respectively.

Given the relatively low overseas-trip frequency in China compared to many of its Western peers the rise of global Chinese tourism is a structural growth story with huge long-term potential. Moreover, in 2016, just 6.3% of China’s 1.3 bn population had passports, but that number is expected to double within five years, with growth expected to stay well over 10% on an annualised basis.

It has been estimated Chinese tourism will become a RMB 7.5 trillion (US$ 1.1 trillion) market by 2020,[1] with the sector expected to produce a compound annual growth rate (CAGR) of 13% over the next five years. Given the explosion in online travel booking in the country, Chinese online travel booking will grow could at an even faster rate – an estimated 30% CAGR[2] – over the same time frame.

Nick Moss – portfolio manager. Newton, a BNY Mellon company

[1]CLSA China online travel sector outlook, May 2016.

[2]Ibid.

The Chinese consumer is starting to flex its muscles to spend more of its growing disposable income on travel. China is already the second-largest tourism market in the world, accounting for half of the growth in the global travel industry, but much of that tourism is domestic, and its citizens only make an average of 0.09 overseas trips per annum, … read more

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Three labour trends keeping a constructive backdrop for markets

In the normal course of events, synchronised growth in activity at the rate we have been seeing across the globe would be accompanied by a clear increase in inflationary pressure that would, as a result, require an increase in interest rates significant enough to hold back risk-asset performance.

That clearly isn’t happening yet. Indeed, the latest inflation levels recorded in key developed economies and the BRICs (Brazil, Russia, India and China) are either not at central bank target rates/ranges, or are not a significant threat to them.

Trends in labour markets around the globe have led to more female, older, self-employed and part-time workers being drawn into labour markets, which in turn has resulted in wage growth that has been far more muted than expected.

At this point in time, we see no reason why more women, for example, cannot be drawn into, say, the US labour market. We can also see no reason why part-time self-employment shouldn’t continue to grow as a percent of total employment.

The big question then, is whether or not these constructive conditions of good growth with limited inflationary pressure can persist…

Steve Waddington – fund manager. Insight Investment, a BNY Mellon company

In the normal course of events, synchronised growth in activity at the rate we have been seeing across the globe would be accompanied by a clear increase in inflationary pressure that would, as a result, require an increase in interest rates significant enough to hold back risk-asset performance. That clearly isn’t happening yet. Indeed, the latest inflation levels recorded in … read more

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High yield in 2018: Will we see more rising stars than fallen angels?

When global growth strengthens credit dynamics generally improve, especially for those most sensitive to the economic cycle. For high yield investors this creates an important investment theme as established companies get upgraded, causing the spreads of their debt relative to government bonds to tighten, presenting new opportunities.

In 2015 and 2016, companies in the oil and gas, and mining, sectors were affected particularly badly, but this turned around as commodity prices stabilised and then started to rise. Companies that controlled costs and paid down debt have since benefited. If the momentum in the global economy continues into 2018, then this powerful technical dynamic within the high yield market should continue.

Uli Gerhard – portfolio manager. Insight Investment, a BNY Mellon company

When global growth strengthens credit dynamics generally improve, especially for those most sensitive to the economic cycle. For high yield investors this creates an important investment theme as established companies get upgraded, causing the spreads of their debt relative to government bonds to tighten, presenting new opportunities. In 2015 and 2016, companies in the oil and gas, and mining, sectors … read more

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