The asset manager pointed to the fact that eurozone corporate profitability has been declining in recent years, while it has been rising in Japan since 2011, and is in fact close to its 15-year high.
But even more importantly, the return on assets in Japan (3.1%) is now higher than the cost of capital (2.9%), whereas that is not the case in the eurozone (2.2% versus 2.4%).
“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% cheaper than eurozone equities,” said Patrick Moonen, principal strategist multi-asset.
“On the other hand, eurozone equities offer a higher dividend yield, which in current times of yield scarcity could be an asset,” he added.
Underleveraged
In NN IP’s view, Japanese companies are underleveraged 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,” said the firm.
The equity to total assets ratio for the eurozone is 29.6%, while in Japan this ratio stands at 39.2% and has been rising over the past years.
“Political uncertainty in the eurozone is higher, given elections in the Netherlands, France, Germany and potentially in Spain over the next 12 months, a referendum in Italy in November on constitutional reforms, fading unity in the European Union and the Brexit-discussions set to be a long-lasting process that will impact the UK and the rest of Europe,” said NN IP.
However, said Moonen, in 12-months’ time the political concerns could 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.”
