Conditions in Japan
The Japanese yen has strengthened 5.7% this year, while the Nikkei 225 Index has remained flat in local currency terms5 as “Abenomics” continues to struggle to deliver on its target of 2% inflation. Please note that a strengthening currency is generally bad for export-driven economies like Japan.
Earnings revisions for Japan were some of the strongest globally, linked to a host of reasons such as improvements in capacity utilization as a result of weak capacity growth, industrial output, as well as yen distortions. However, from our perspective, fundamentally little has changed. Japan’s current governance levels are ranked amongst the lowest in the world (according to Thomson Reuters Datastream ESG data), while company return on equity metrics are still about 400 basis points below global averages.6
That said, valuations are starting to look more compelling, with an average P/E ratio of 13x versus the global average of 17x.6
Our EQV approach
The Invesco International and Global Growth team seeks companies with attractive Earnings, Quality and Valuation (EQV) traits. With the possibility of further volatility, we believe our approach may benefit investors for the following reasons:
- High-quality companies have the ability to adapt to the environment even if geopolitical concerns erupt.
- We believe quality companies tend to fair better during volatility.
- Quality and valuation may become more important to investors, should volatility remain high.
We were able to add several new companies in China during the first-quarter selloff, including Henan Shuanghui Investment & Development Co. Ltd. (China’s largest processed pork producer) and Wuliangye Yibin Co. (a Chinese spirits manufacturer) (0.73% and 0.90% of Invesco Asia Pacific Growth Fund; 0.73% and 0.90% of Invesco Developing Markets Fund, respectively, as of March 31, 2018). Both are in the consumer staples space and both have very strong brands and high market share. These two companies were also holdings of Invesco International Growth Fund as of that date, at 0.76% and 0.60% of assets, respectively.
We also added Sunny Optical Technology Group Co., a new high-quality tech name for both Invesco Asia Pacific Growth Fund and Invesco Developing Markets Fund (0.70% and 0.70% of the funds, respectively, as of March 31, 2018). This company was not a holding of Invesco International Growth Fund as of that date.
In Japan, while there are still relatively few high-quality companies trading at attractive valuations, the increased volatility gave us the opportunity to add a new consumer staple name, Asahi Group Holdings, during the quarter (0.72% of Invesco International Growth Fund as of March 31, 2018). This company was not a holding of Invesco Asia Pacific Growth Fund nor Invesco Developing Markets Fund as of that date.
Looking forward, we welcome further volatility as it could increase the possibility of adding new companies at attractive valuations.
This article has been republished with permission from Invesco Powershares.