In the hunt for yield, investors need to be creative - looking further afield for diversification and dividends. But one attractive, often overlooked market is Japan.
More: Lyxor adds Japanese equity product to quality income ETF range
In a sweet spot
Japan's appeal as an investment destination is growing. Short-term, the country remains in a policy "sweet spot". With domestic demand improving, the widening difference between ultra-low domestic rates and those overseas should help the yen weaken further to around 115 USDJPY from 112.5 today. Broad based indices like the Topix stand to benefit from the dual improvement in domestic demand and weaker yen more than the MSCI Japan or the Nikkei 225.
Long-term catalysts
Over the long term however, our eyes turn to economic recovery. Reflation could finally be making a very welcome return. House prices are increasing by over 4% a year, and total income from employment is on the rise - albeit not through wage growth - leading to more consumption. Earnings per share are growing faster than in any other major markets.*
Shinzo Abe's snap election call could be a bump in the road, with the rise of the New Hope party representing a risk. We don't however expect any major disruption to the political - or the policy - stance in its aftermath.
Rates will be low for some time yet, even with Governor Kuroda's mandate coming to an end in Q1 2018. More domestic-focused, smaller stocks should do well in a reflationary environment, pointing to an even stronger preference for the Topix in time.
*Source: Lyxor Cross Asset Research, Macrobond, 29 September 2017
>>View the outlook for income - staples, protectors and alternatives.
Dividend transformation
Another clear trend is emerging: Japan's journey from relatively uninspiring destination for dividend seekers to viable equity income play is nearly complete. The country now yields more than the US and, because its payout ratio is so low, has the safest dividends in the developed world. There's no better time to launch the SG Japan Quality Income ETF - the latest addition to our quality income stable.
>>View the Lyxor SG Japan Quality Income ETF
3 key charts on dividends
- Current yields - Japan yields more than the US
- Payout ratio - Japan has the safest dividends in the developed world
- Balance sheet strength - Japanese companies have the strongest net cash positions
Source: Societe Generale Cross Asset Research / Equity Quant, MSCI, Datastream, Factset. July 2017
Our new Japan Quality Income ETF selects 60 of the finest stocks, stress-tested for leverage, balance sheet strength and the size of their dividend yields. And, with a current yield of 2.40%, and a track record of higher returns and lower volatility than mainstream indices, what's not to like?
Source: Societe Generale Cross Asset Research / Equity Quant, MSCI, Datastream, Factset. Data as at June 2017
Lyxor ETF offers a range of low cost ETFs targeting income. For more information on passive funds to boost or protect your income, visit LyxorETF.co.uk
Unless otherwise stated, all data is sourced: Lyxor & SG Cross Asset/Equity Quant Research teams 29 September 2017. Opinions expressed are as at time of writing. Past performance is no guide to future returns.
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