Companies are becoming more investor-friendly and profits are about to surge.
There's a lot to fret over in markets today not least Grexit-based catastrophe. But I'm cautiously optimistic that we will see a more bullish autumn. Central banks in Japan, China and the eurozone are still printing enough money to offset any tightening by the US Federal Reserve. And there's a decent chance we've avoided global recession (for now at least). If you agree, there are two attractive-looking opportunities to consider now emerging markets, and Japanese equities.
Emerging markets have been subdued in recent months. Emerging Asia has been the best-performing region, due to surging (until recently) Chinese stocks. Latin America's regional index is down by 9.9%; Russian equities collapsed, then staged a small rebound; and the weakest markets in recent months have been Turkey and Greece.
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The market believes that emerging markets are vulnerable to tighter US monetary policy this year and beyond, because they are so dependent on foreign investment. As American investors sell up, stocks and currencies will drop, prompting local financial crises. If this is correct, it's time to sell.
But not everyone agrees. Research group Cross Border Capital tracks global liquidity flows private-sector, corporate cash flows and central-bank lending. It reckons emerging-market stocks are likely to see improved liquidity over the coming months. Why? Because China will loosen monetary policy to avoid a major slowdown (it's already doing so). And Chinese liquidity is key. I suspect the sell-off in China will persuade its central bankers to act even more aggressively to keep up with their rivals in Japan. That'll reignite GDP growth (and encourage more currency debasement).
If you buy into this idea, then now could be a good time to boost your holdings in emerging markets. Options include the JPMorgan Emerging Markets Investment Trust (LSE: JMG) and Advance Developing Markets (LSE: ADMF). As for unit trusts, consider Fidelity Emerging Markets, Jupiter Global Emerging Markets and the PFS Somerset Emerging Markets Dividend Growth Fund.
Japan: it's not just about QE
But Japan's first corporate governance code came into effect on 1 June, with the goal of improving transparency and accountability to shareholders, using measures such as appointing independent outside directors. Michael Stanes at Heartwood Investment Management also thinks the recently launched JPX-Nikkei 400 "the shareholder friendly index" has helped. This only accepts Japanese stocks that focus on return on capital, and it's already encouraging companies to strive to join the "good company club".
"There have also been more examples of shareholder activism to improve shareholder returns," notes Stanes. "Japan's largest institutional investor, Nippon Life, has stated that it would consider exercising voting rights for companies that fall short of expected standards, including delivering an average of 5% return on equity over five successive years."
This push for both macroeconomic and corporate reform is having an impact on profits and on balance sheets. In short, corporate Japan is in relatively rude health. Japanese firms' operating profits grew for the third year in a row for the 12 months to March 2015, with exporters doing particularly well, says Genzo Kimura, economist at Sumitomo Mitsui Trust, which manages around $453bn in assets. The group expects operating profits to grow by 17% or more this year.
I think we're in the early-to-mid stagesof a bull cycle for Japanese stocks.I suspect Abe will do all he can to boost momentum domestically and get results fast. That means more money printing, an even weaker yen (the real effective exchange rate is already at its lowest since the early 1980s ), corporate tax cuts and extensive reform. This is likely to have at least some impact, and the improving state of company profits and balance sheets will (hopefully) eventually feed through into stronger consumer demand and wage rises.
So I'm tempted to "overweight" Japanese stocks but hedge your currency exposure. Wisdom Tree's Japan Equity Fund (LSE: DXJ) is a currency-hedged (between the dollar and the yen) exchange-traded fund.
The currency-hedged Aberdeen Japan InvestmentTrust (LSE: AJIT) might also be sitting pretty, although the stand out managerin this sector is usually Baillie Gifford using the Shin Nippon InvestmentTrust (LSE: BGS), of which Merryn Somerset Webb, editor-in-chief of MoneyWeek, is a non-executive director; or their Japanese Smaller Companies unit trust. There's also the superb Legg Mason Japan Equity Fund as well as Jupiter's Japan Income Fund and Neptune's Japan Opportunities Fund.
