Japan Equity (FX Hedged)

GlobalClients…GlobalPortfolios

disclosure: The opinions expressed in this Investment Theme report are those of the author. The materials and commentary are strictly informational and should be used for research use only. This bulletin is not intended to provide investing or other advice or guidance with respect to the matters addressed in the bulletin. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions that comply with matters addressed in this bulletin. Charts and information used in this report are sourced from Bloomberg, Credit Suisse, UBS, JPMorgan, Morgan Stanley, and Barclays.

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Thematic Value – Japan (FX Hedged)

Japan trades at a Forward P/E discount to both the US and EuropeAttractive Valuations

GPIF will double its target weight in equities, from 24% to 50%. A $190Bn. inflowPensions Shifting to Equities

Yen weakness will boost margins, corporate balance sheets point to share buy-backsEarnings Momentum

Japan is highly sensitive to Global Industrial Production with 60% in cyclical sectorsCyclical Equity Market

Deferred sales tax, potential corporate tax cut, and falling oil prices Improving Domestic Demand

WhyinvestinJapan?

In October, Japan announced a $150Bn. increase in monthly asset purchasesBoJ to Remain Proactive

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Thematic Value – Japan (FX Hedged)JapanleadstheglobeinthenumberandsizeofEPSrevisions

Source: Credit Suisse

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Thematic Value – Japan (FX Hedged)YenWeaknessisimprovingexportsandprofitmargins

Source: Credit Suisse

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Thematic Value – Japan (FX Hedged)JapanremainsattractivelyvaluedrelativetotheUS&theEurope

Source: Credit Suisse

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Thematic Value – Japan (FX Hedged)Japan’sDomesticDemandisexpectedtoimprove…

Higher taxes have weighed on GDP, Fiscal drag is now decreasing

Japan is a primary beneficiary of lower oil prices… boosting confidence & GDP

Source: Credit Suisse

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Thematic Value – Japan (FX Hedged)Japan’slargestpension,GPIF,ispoisedtobuy$190Bninequities

There are $2.75Trn in total Public Pension Fund assets in Japan…  A marginal 5% increase in the domestic equities allocation equates to 

$140Bn in net buying, 5% of the Topix market cap.

Source: Credit Suisse

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Thematic Value – Japan (FX Hedged)JapanwillbenefitfromaGlobalEconomicRecovery

Japan’s Earnings are highly sensitive to Global Industrial Production

Japan’s market cap is nearly 60% weighted to Cyclical Sectors ex. Energy

Source: Credit Suisse

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Thematic Value – Japan (FX Hedged)

— December2012— BOJimplementsaggressivemonetaryeasing,— Targets2%inflationand2%realGDPgrowth— Goal:EndDeflation

— A13trillionyen($135billion)deficit‐financedgovernmentbudget— Newpublicworksspending(Largestsince2009)— CorporateTaxCuts(to25%from38%),anddeferredSalesTaxHike(to2017)— Goal:Giveshort‐termeconomyboost

— Promoteprivatesectorinvestment‐ledgrowth— Reformemployment,energy,medicalcare,agriculturalexports— Goal:Setstageforlonger‐termgrowth,improvecorporatecompetitiveness

AggressiveMonetary

Policy

ExpansionaryFiscalPolicy

GrowthStrategy

and Reform

1

2

3

Abenomics101…

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Thematic Value – Japan (FX Hedged)AbehasbeenveryAggressive…andshouldremainproactive

Source: JPMorgan