Emma Wall: Hello and welcome to the Morningstar series 'Why Should I Invest with You?' I'm Emma Wall and here with me today is Lewis Grant, Manager of the Hermes Global Equity Fund.
Hello Lewis.
Lewis Grant: Hi there.
Wall: So we had you in the studio last year and we talked about how bullish you were on U.S. Things have changed slightly now and you are moving away from the U.S. into other parts of the world. So I thought we could talk about why you were moving out of U.S. and where were you putting that money?
Grant: Sure. We followed a systematic approach to investing. So we really focus on the numbers and the data and the facts. We try and remove a lot of the emotion from investing. And what the numbers are telling us is that the U.S. is looking expensive and we're not surprised with this with such a strong U.S. dollar. We're just seeing a lot of challenges there and we're not expecting to see the growth that we've perhaps seen historically and we're not expecting to see the same sort of growth that we're seeing in Japan.
And Japan is our current topic. So we're very optimistic about Japan for three main reasons, so first on evaluation basis. Japan looks cheaper than the U.S. So the TOPIX is trading at about 15.5 times forward earnings. The S&P 500 is more like 17.5, but the earnings growth expectations in Japan are much higher than the U.S., more like 15% over the next year. The U.S. will be high-single digit growth.
The second reason is based on the sentiment, it's based on how investors are feeling. So we're seeing a lot of inflows into Japan both domestically from the Bank of Japan with its huge stimulus plan as well as from Japanese pension plans we're increasing the allocation to domestic equities, but also from international investors. We're starting to invest more and more money in Japan. It's a very good sign for investors.
The final reason though is the most interesting from our perspective and it's really about a cultural shift in Japan. It's about an increased focus on corporate governance. Now at Hermes, we have a real focus on good corporate governance. And we've actually done research that has shown companies with poor standards of governance have underperformed their peers. And historically, companies in Japan really haven't cared about governance. It has been one of the laggards of the developed markets, but that's changing.
And this year, there was a new corporate governance code coming into effect in Japan, and we think if you can count through those companies who are going through positive change, they can really unlock shareholder value. And for long-term investors such as ourselves, that's a great opportunity.
Wall: I went to Tokyo recently and did a report for our readers on how Abenomics is actually incredibly supportive not just of the economy, but of the stock market. Bringing it back to how you were saying about valuations looking more attractive in Japan and in the U.S. If you don't mind, I just like to pick part that point, the U.S. has looked stretched for a while. What's different now than 12 months ago because we have had gains in the last year?
Grant: Absolutely we have and I think the things that have really changed I say is firstly the strong dollar. I think we're just heading into earnings season now and the strength of that dollar is really going to test a lot of those multinationals. I think it's going to be a really interesting few weeks as we see and we try to quantify the effects of the strong currency.
But also this new corporate governments' code is a game-changer, is a cultural shift in Japan. 12 months ago we didn't see that actually happening so quickly, but now we do and now we're really bullish.
Wall: Let's have a look at Europe. Then I know among the Eurozone countries, you're particularly fond, if I maybe that strong, of Spain.
Grant: That's right. I think Europe is relatively attractive compared to the U.S. I think valuations are better, but Europe has obviously got the Greece issue. There is still a shadow across a lot of Europe. Where we're seeing value within Europe is looking at companies and countries who gone through very positive change, who are now starting to see the benefits of their reforms, Spain's a great example.
They've put a lot of very, very difficult reforms in place. But now they are seeing improved macro data that's actually making this clearer that it's worked. Investors going to actually have some confidence that Spain has turned the corner we're a lot more bullish now.
Wall: And that though those measures presumably were to prop up the economy, but they have had an effect on the stock market.
Grant: They absolutely have and they will be going forward. It gives a lot more reassurance that we can invest our money there much more safely and that the companies are actually now sound investments, which we weren't really sure about 12 months ago.
Wall: Lewis, thank you very much.
Grant: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
