Investors should reconsider Japan

Corporate earnings are growing and returns to shareholders have been improving

With the general election of members of the House of Representatives due to take place in Japan on the 22nd October, Architas' investment director Adrian Lowcock takes a look at the investment opportunities in Japan.

investors should reconsider japan

Investors should reconsider Japan

In spite of the recent good news and performance in Japan foreign investors have continued to pull money out of the region and foreign investment is at the lowest level since 2011, before Shinzo Abe became Prime Minister the following year.

This behaviour is extremely unusual and tends to be short term in nature. Foreign investors into Japan tend to be extremely pro-cyclical buying Japan as part of a global growth story or a proxy for China. Historically the Topix index has risen as foreign investment in Japan increased.

For many investors the Japanese recovery story petered out as Prime Minster Shinzo Abe struggled with the implementation of his third arrow; structural reform. In reality this was always going to be the hardest part of his plan as making changes to the way a country operates is a huge task and the rewards are never immediate and often unclear.

But Shinzo Abe’s surprise announcement of a snap general election has bought Japan back into focus.  While Abe’s re-election is by no means guaranteed we believe it remains the most likely outcome. A victory for his Liberal Democrat Party would bring four more years of very accommodative monetary policy; continued reforms in child care, education and women in the work place; and a supportive Bank of Japan, as the incumbent Governor, Haruhiko Kuroda, is also likely to get re-elected in 2018.

It is also clear that some of Shinzo Abe’s policies since his election in 2012 are having an effect. Core inflation, excluding energy and food, has been positive since the summer of 2015.  Unemployment continues to fall as the number of jobs outweighs applicants and has been growing since the financial crisis.  At the same time business sentiment remains positive suggesting confidence in future growth.

Overall the picture is looking increasingly positive for Japan, corporate earnings are growing and returns to shareholders have been improving. If Abe can secure his re-election then the country, and its markets, could be set for a further boost.

Three reasons why Japan will continue to shine

Improving labour market – Unemployment is now around 3% in Japan and real wages, after inflation, are starting to rise for the first time since 2010 where wages spiked up following a big drop during the financial crisis. The job to applicant ratio has been rising strongly since it bottomed in 2009 and now there are nearly 1.5 jobs to each applicant.

Corporate earnings are improving – The earnings per share of Japanese companies have continued to rise, offsetting the rising value of the Topix index. With company earnings growing, capital returned to shareholders through dividends and share buyback has reached record levels over the past three years with 2017 expected to continue this trend.

Valuations remain attractive – Japanese market has a P/E ratio at 14.3 times compared to 18.1 for the US and an average of 16.6 times for developed markets. Japan’s average P/E ratio since 2004 is 15.4 times. Despite reaching a 21 year high last week, Japanese stocks remain cheap compared to its own valuations as earnings growth has supported the market.

Three fund ideas for investors

Man GLG Japan Core Alpha – Stephen Harker is a contrarian investor, actively looking for companies out of favour with investors. He uses valuation measures including Price to Book, Dividend Yield and Price Earnings ratio to identify such stocks.  He selects companies with strong fundamentals where he believes there is the opportunity for a turnaround. The portfolio is currently positioned to benefit from a stronger economy in Japan with exposure to cyclicals and financials.

Baillie Gifford Japanese – The focus of this fund is very much long term growth which can result in short term underperformance and volatility in the fund.  The managers Matthew Brett, Donald Farquharson and Sarah Whitney look at a company’s fundamentals, in particular a sustainable high return on capital. They are looking for companies with steady growth, special situations, cyclical stocks and secular themes. The fund has exposure to cyclical industrials and car manufacturers and technology.

Pictet Japanese Equity Opportunities – This fund is a long short equity fund, so can  invest in areas of the market the managers, Adrian Hickey and Go Shiina, believe will fall as well as those they expect to rise. The ability to short the market is used more for capital preservation than to add outperformance through stock selection. The fund takes a growth at a reasonable price approach looking for companies where the price does not reflect growth potential. There is also a small and midcap bias within the fund.

Investors & Equity Release

What Is Equity Release?

Equity release is the use of financial arrangements that provide the owner of a house, or other property, with funds derived from the value of the property while enabling them to continue using it.

How Does Equity Release Work?

Equity release is aimed at homeowners aged 55 and over. It allows you to take some of the value of your home as cash.

Private Equity Release in Japan

Any person who manages the investment of a partnership-type collective investment fund (which includes a PE fund), must register as a “financial instruments business operator” and comply with certain restrictions applicable to its activities under the Financial Instruments and Exchange Act (FIEA). Also, any person that offers interests in a partnership-type fund must register as a “financial instruments business operator”. For foreign PE funds, even if the general partner is located and the limited partnership is established outside Japan

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
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