Should Japanese equities be an overweight in portfolios?

Ability to generate uncorrelated returns

We are unable to predict what trends and macro forces will drive stock prices in 2017. However, in our view the strong macro headwinds which impacted Japanese equity markets in 2016 created an environment in which markets may again become focused on the fundamental value of individual stocks.

While we are constructive on Japan equities, we are not convinced by the broad-based arguments, including cheap valuations, which suggest Japan equities should be overweight in a portfolio. The first half of 2016 saw a massive outflow of foreign capital and the Topix index ended at -19.48%.  To put this into context, while the post-Abenomics period from December 2012 until Q4 2015 brought net inflows from foreign investors of approximately ¥20trn, about half of this was sold off in the first half of 2016.  During this time, foreign money was leaving the Japanese equity markets abou...