Financial Professionals

Market Insights

Euclid’s Explanation for Japan’s Weakness

04/21/2014

Market insights from the international investment professionals at Euclid Advisors:

We are currently underweight Japan after being overweight much of the past 12 months.

The third arrow of Abenomics, economic reforms, has been disappointing to date. More important to the near-term direction of the equity market, in our view, is the probable conservative nature of future guidance that will commence with earnings reports later this month and into May.

Japanese corporate leadership is notoriously conservative about guidance compared to their American and European counterparts. They would rather start low and raise guidance as the year goes along. We believe they will be unusually cautious this year due to the Japanese consumption tax increase that kicked in on April 1. They will have had only about a month to see its effects by the time earnings season is in full swing a few weeks from now, and they are likely to be very guarded about the results of the tax increase on their respective businesses.

We envision a scenario for corporate Japan whereby earnings for the year ending March 2014 meet or exceed expectations, but guidance for the fiscal year ending March 2015 may be weaker than consensus expectations. When companies report in line to better than expected quarters or fiscal years paired with disappointing guidance, the result usually leads to investor unhappiness.

The next round of Prime Minister Abe’s economic reforms is expected in June. That could be an interesting entry point given the current backdrop of the market, combined with potential positive news in the second half of this year – and therein may lie the silver lining for the equity markets.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.