Why Japan may have further to go

Tony Yousefian, head of investment trust research at FundCalibre, thinks the Japanese stock market has further to go and here's why.

Why Japan may have further to go

On 5th December 2012 Shinzo Abe was elected prime minister of Japan and launched his extraordinary stimulus programme ‘Abenomics’. It’s been an eventful, but largely successful, five years. The Nikkei has risen 112%* surpassing the 22,500 level for the first time since 1991 and, fresh from another landslide election victory, Abe has been given a clear mandate to progress with his policies.

Five reasons to be optimistic

1) Valuations: Compared to most other developed markets, Japan is still relatively good value. Believe it or not, the stock market is still more than 40% below its peak of 38,918 in 1989. It is also under-owned both globally and locally. Despite Japan being the third largest economy in the world, just 3.6% of UK investors’ equity assets are invested in the Japanese stock market**.

2)  Companies: The operating environment for Japanese companies – particularly smaller ones – has improved considerably. Government policy remains geared towards industry deregulation, with a number of progressive policies already implemented. Corporate profits are looking healthy and earnings momentum is on the rise. Profit margins are expanding and more companies are paying dividends.

3) Economics: Japan’s economy has grown over seven consecutive quarters – a trend not seen for more than a decade. Unemployment stands at an all-time low. Apparently there are 1.5 vacancies for each person looking! More women are returning to the workplace.

4) Inflation: After two decades of deflation, inflation is starting to stick. We are starting to see production price increases, which should lead to more sustained wage inflation.

5) QE: The Bank of Japan is still supporting the bond market, as well as equities. Kuroda, the governor, has already hinted that his central bank does not have to go in the same direction as others, suggesting loose monetary conditions will persist.

Five funds to consider

Baillie Gifford Shin Nippon: This trust is the best-performing Japanese fund since Abe became prime minister (out of 75 in the IT and IA Japan sectors). It has returned 358%*. It invests in smaller companies. Shin Nippon means ‘new Japan’ and this trust focuses on emerging or disrupted sectors, where the manager sees innovative growth opportunities.

Baillie Gifford Japan Trust: This is the second best performer of the period, returning 315%*. It is run by the same team but is the slightly less risky option as it invests in medium and smaller companies.

T. Rowe Price Japanese Equity: This fund invests in Japanese companies of all sizes, although with a notable overweight to smaller firms. The manager adapts his investing style as needed to suit changing market conditions. It has returned 144%*.

Schroder Tokyo: This fund was launched near the peak of the Japanese bubble in 1989 and has had only two managers during its lifetime. It has benefited from the cautious, quality-orientated strategy adopted by the management team. It has returned 121%*.

Man GLG Japan CoreAlpha:  The team focus exclusively on large and medium-sized value companies, in the belief that this area of the Japanese stock market outperforms around 70% of the time. It has returned 150%*

*Source: FE Analytics 5 December 2012 to 23 November 2017, total returns in sterling. 
**Source: Investment Association sector statistics, August 2017

 

Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest and tax policies may change. 

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