LOOKING EAST
It may be time to consider investing in Japan again, says Conal Gregory
JAPAN IS very much open for business even though Japan 2020, effectively the Summer Olympics, has been postponed from next week for a year.
The world’s third largest economy as measured by GDP presents exciting opportunities for investors. Measured by market capitalisation, its equity market is the largest after the US.
The IMF’s revised forecast in June is for Japan’s GDP to shrink 5.8 per cent this year, less than both the UK at 10.2 per cent and US at eight per cent. It compares with an eight per cent fall across advanced economies and a 4.9 per cent reduction globally.
Next year the IMF expects 2.4 per cent growth for Japan. Speaking from Tokyo, Nicholas Price, manager of Fidelity Japan Trust, says that company balance sheets are “in good health relative to other regions and the banks have plenty of capacity to lend”.
“Japan continues to offer an attractive combination of cash-rich companies, low relative valuations and growth opportunities,” says Price, who has seen some dividend cuts and expects buy-backs to be more limited.
Martin Payne, senior investment manager at Brewin Dolphin in Leeds, says: “Japan has performed relatively well in the face of the coronavirus pandemic and the Bank of Japan is on course to overtake the state pension fund as the largest holder of domestic stocks by the end of the year.”
He doubts though that the Bank’s purchases will be enough to drive continued recent outperformance.
The ageing population is a worry. With a median age of 48.4 years, it is the oldest in the world. By comparison, the level is 40.5 years in the UK and just 29 in India. The Japanese government projects there will be almost one elderly person for each of working age by 2060.
When this factor is combined with enormous public debts, some sound alarm bells. However, Prime Minister Shinzo Abe’s ‘Three Arrows’ reform programme and the Bank of Japan’s monetary largesse are providing massive support to the economy and its financial markets.
Yet there is some political uncertainty as Abe is due to stand down in September 2021 under the terms of his party’s constitution, having dominated the Diet since he swept the Liberal Democratic Party back to power in late 2012.
With a shrinking workforce, Japan had almost full employment before the pandemic and no spare workers to improve GDP. Yet “good fund managers can always find opportunities, particularly in companies that are helping to solve problems”, says Darius McDermott from Chelsea Financial Services. He tips Baillie Gifford Japanese and T Rowe Japanese Equity funds.
The former – up 13.2 per cent annually over five years and 13.5 per cent over 10 – is also recommended by Jason Hollands of Tilney. He also likes LF Morant Wright Nippon Yield, a boutique fund run by highly experienced managers.
Leading Japanese equities are trading at over 40 per cent below their all-time high of 38,916, as measured on the Nikkei 225 index. Although that was 31 years ago, the discount “may tempt would-be buyers”, says Russ Mould, investment director at AJ Bell.
Many savers have been put off Japan ever since the early 1990s when a debt-fuelled stock market and property bubble popped. “Corporate Japan has struggled to shake off a reputation for being insular and slow to embrace change,” says Teodor Dilov at Interactive Investor.
Rather than cherry picking stocks, he recommends collective investments, notably Lindsell Train Japanese which is up 16.2 per cent annually over five years and the Baillie Gifford Shin Nippon investment trust for those seeking smaller firms, up an impressive annual 19.9 per cent over five years and 20.1 per cent over a decade, according to Morningstar independent analysis for
“The Land of the Rising Sun may rise again and revitalise economic growth,” quips an optimistic James Rowbury at wealth manager Redmayne Bentley. With highly cash generative businesses and significant cash reserves, he says Japan provides a safe haven exposure in equity markets on both a macro level – in terms of gaining Japanese Yen exposure – and micro level – given the strong balance sheets.
Mould says Japan is home to world leaders in their fields including autos, robotics and pharmaceuticals, as well as shipping and shipbuilding, semiconductors and consumer electronics. It is a major exporter and should be a beneficiary of any upturn in the global economy.
Whilst energy and financials form two of the largest sectors in the UK’s stock market, electrical appliances, information and technology, followed by autos, compose the leaders in Japan.
Therefore holding a modest exposure to Japanese equities gives diversification across industries and sectors for a balanced portfolio.
For company stocks, consider Honda Motor, gaming giant Nintendo and Canon, as well as e-commence and online retailer Rakuten.
Emma Wall, head of investment analysis at discount broker Hargreaves Lansdown, suggests opting for funds that invest in global leaders, notably First State Japan Focus which has a growth bias.
It is run by Asian equities stalwart Martin Lau and rising star Sophia Li. The fund has more than doubled investors’ money since launch in October 2015.
Jean-Francois Chambon, Japanese Equities fund manager at Aviva Investors, enthuses over three fields: tourism, with over 32m visitors last year, automotive suppliers, naming Fanuc, Nabteco and Keyence, and 5G beneficiaries like Murata and Sony.
“It can be argued that Japan is a bit like Europe in that the overall economy is somewhat sluggish, tinkers with deflation, but within it there are some excellent companies,” says Payne.
He looks for the technology and ‘disruptor’ sectors for opportunities but would not generally be overweight in this market.
Historically, Japanese corporate have not been shareholder-friendly. Their reputation for a monolithic, hierarchical culture with cross shareholdings between companies has worked against minority and foreign investors. However, such co-sharing of 60 per cent in 1990 has fallen by around half today.
Many firms had no independent directors until the law changed in 2012. The western practice of incentivising senior executives with company shares is still little seen.
Yet recent merger and acquisition reforms and the rising number of activist shareholders have begun to cause a cultural shift in how business is conducted.
In this context, Rowbury tips both Baillie Gifford Japan Trust and, for small firms, Baillie Gifford Shin Nippon. Morningstar calculate that the former has risen annually by 13.2 and 15.4 per cent over five and 10 years respectively.
If yield is sought, Payne likes Jupiter Japan Income, with a cumulative total return of 145.6 per cent in a decade.
The lowest cost entry is using a tracker. The Fidelity Index Japan P share class is the recommended one on Bestinvest’s list and has a tiny 0.1 per cent ongoing fee.
Finally, the star performer among both open and closedended funds is Legg Mason IF Japan Equity.
Its accumulation version is up annually by 22.5 and 23.8 per cent over five and 10 years, according to Morningstar. In the current virus pandemic, investors may wish to bow in Japanese style to such performance.