Why Japan is still our favoured equity market

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We entered 2016 underweight equities, concerned that markets were still adjusting for the liquidity drain from a stronger US dollar and increasing interest rates.

On the whole, valuations have improved in most equity markets but with momentum still weak and earnings struggling to grow we felt there would be better opportunities for allocating capital.

Japan is still our favoured equity market. Valuations are attractive and Japanese companies continue to deliver positive earnings growth.

We view favourably recent growth initiatives and their focus on unlocking shareholder value. Economic growth is still challenged but cheap oil is a significant tailwind.

A stronger US dollar, increased borrowing costs and an imploding energy sector are all weighing on US equity earnings growth.

On the positive side, valuations are no longer expensive and, with market expectations for earnings very low (flat for 2016) the potential for upside surprise is high. One possible contributor could be the US consumer. Labour markets are solid, wage momentum is finally picking up and the "tax cut" from lower oil price suggests disposable income should be rising.

Emerging markets struggled in 2015 as the triple whammy of falling commodity prices, higher borrowing costs and rising geopolitical risks forced a painful adjustment. The good news is the adjustment has been swift and most emerging market assets look cheap.

It may be too early to call an end to the rebalancing but investors can take some comfort from the valuation "cushion" of lower prices.

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Al Clark is global head of multi asset with Nikko Asset Management. He holds a Master's degree in applied finance from Macquarie University.