Rising corporate profitability among Japanese companies could see investors rewarded with rising dividends, NN Investment Partners has said.
According to Patrick Moonen, principal strategist for the multi-asset division of NN Investment Partners, improved political stability and corporate profitability in the country meant equity investors are in a far better position for capital growth and income than they would be in the Eurozone.
He said since 2011, Eurozone corporate profitability has been on a declining trend, but it has been rising in Japan over the same period and is close to its highs over the past 15 years.
Data from NN Investment Partners has shown that, in Japan, the return on assets (ROA) is 3.1 per cent, which is now higher than the cost of capital (COC) at 2.9 per cent, whereas in the Eurozone this is not the case (2.2 per cent ROA compared with 2.4 per cent COC).
The equity to total assets ratio for the Eurozone is 29.6 per cent, whereas in Japan this ratio stands at 39.2 per cent and has been rising over the past years.
Mr Moonen said: "This big gap confirms NN IP’s view that Japanese companies are under-leveraged and have room to optimise their balance sheets and hence cut their weighted average cost of capital.
"This could be accomplished by, for example, increasing dividend payments or by buying back shares financed with debt."
He added: “In Japan we see less political risk and better profitability than in the Eurozone. On top of that, on a price to book and a PE-metric, Japanese equities are 20 per cent cheaper than Eurozone equities.
“On the other hand, Eurozone equities offer a higher dividend yield, which in current times of yield scarcity could be an asset.
"And in 12 months' time our political concerns could well prove to be overestimated. For markets, less bad is often good enough. So we stick only to a small underweight Eurozone and a small overweight Japan.”
His comments came a few days after the Bank of Japan (BoJ) issued its latest quantitative easing announcement, which has served to settle market nerves somewhat.
Japanese companies are under-leveraged and have room to optimise their balance sheets and hence cut their weighted average cost of capital."This could be accomplished by, for example, increasing dividend payments
At the much-anticipated September meeting, the BoJ announced it would continue to expand the monetary base until Japan’s economy achieves stable inflation in excess of 2 per cent, while maintaining 0 per cent interest rates, instead of cutting them further.
