Can Earnings Trend Continue?
When one looks at similar estimated P/E ratios for Europe and Japan (as measured by the TOPIX) and lower valuations than the United States, the question becomes, which region has better prospects for earnings growth going forward?
In a Japan strategist roundtable in February, I shared the views of Jesper Koll, Director of Japan Equity Research at J.P.Morgan Japan, who has an above-consensus outlook on earnings based on potential margin expansions, which you can read more about here. His base case is that margins get past their levels of prior to the financial crisis and head towards 5.4%. I tend to agree with him that Japan has more room than most for margin expansion, whereas many are expecting U.S. margins to face pressure in the future. I disagree with that forecast, but it is worth pointing out that Japan faces a better situation on the margin front and thus, I think, has more room for potential earnings growth.
The weaker yen has helped start the economic engine, but I feel we are still in the early innings of Japan’s transformation. A more positive virtuous cycle has been kick-started with the weakening of the yen and signs of inflation instead of deflation in price levels. I expect some positive wage developments to occur over the coming years—which can support the earnings momentum that we have seen above.
1Jonathan Garner is a Managing Director and Chief Asian and Emerging Markets Equity Strategist at Morgan Stanley
2Source: Bloomberg; refers to the TOPIX from 01/01/13 to 01/31/14.
3Source: Bloomberg; refers to the MSCI Emerging Markets Index from 01/01/13 to 01/31/14.
Important Risks Related to this Article
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments focused in Japan are increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.