Our Global Equity strategists remain constructive on stocks in 2019, expecting the Growth-Policy
trade-off to be better than it was in 2018, and keep US as the preferred region. Apart from the US, this
week they upgraded Japanese equities to OW. They were unexcited by Japan for some time, but believe the
risk-reward for the region is improving. Japan is the worst performing large DM market this year and
valuations look very attractive, with P/B now below 2012 levels, post which Japan experienced a strong
rebound. Positioning in the region is extremely light as well, with foreigners having withdrawn as much
as JPY13trn from Japanese equities in ’18, the most in at least 35 years. The upcoming VAT hikes in
October are a headwind but they could end up being postponed, and the potential adverse economic impact
might not be as negative as what was seen in 2014, when the Japanese economy went into recession. In
addition, the BoJ remains an active support as it continues to buy Japanese equities to the tune of 1% of
Topix market cap annually, buybacks are accelerating, Japanese ROE is moving higher and the Topix-JPY gap
has opened up. They fund the move by cutting EM from OW to N as relative valuations and positioning are
not as attractive.
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