Should you consider investing in Japan?
There has been plenty of positive news coming from Japan in recent months: the labour market is robust; Donald Trump’s US election victory has weakened the Japanese yen, helping the country’s exporters; and inflation is once again on the rise, signalling a possible end to the country’s persistent deflation.
Foreign investors may feel they’ve heard it all before. After all, the Japanese economy has been in the doldrums for over two decades and official interest rates are in negative territory. The Organisation for Economic Co-operation and Development (OECD) is forecasting lacklustre GDP growth of 1.2% in 2017 and 0.8% next year. Meanwhile President Trump has pulled out of the Trans-Pacific Partnership, an important trade agreement.
Despite this mixed picture, Japan is still the world’s third-largest economy. Its export giants supply high-tech electronics and vehicles to the dynamic markets of Asia, as well as to Europe and the US. And closer to home, there are strong companies focused on serving domestic demand, including pharmaceutical, insurance and healthcare companies that cater for the country’s ageing population.
Japanese companies are also significant investors in US and European manufacturing and technology, while its institutions are big purchasers of Western securities. In the UK alone, Toyota, Nissan and Honda have all built factories, the Financial Times is in Japanese hands and UK tech success ARM Holdings is owned by Japan’s telecoms and technology giant SoftBank Group.
Political will to change
The longer-term outlook for investors is helped by the reform agenda and political stability provided by its prime minister, Shinzo Abe, one of the longest-serving and most popular premiers in Japan. Abe has embarked upon a second wave of his “Abenomics” agenda, following his re-election as the head of the ruling Liberal Democratic Party in 2012. The LDP is shortly set to extend his tenure as party president, enabling Abe to remain as leader of Japan until September 2021.
His government is committed to stimulating economic growth through quantitative easing1 and a package of public works projects and lower taxes on companies. In addition to its purchases of government bonds, the Bank of Japan has become a major investor in the stockmarket as a result of buying Japanese exchange-traded funds, providing support for asset prices.
Putting shareholders first
For decades in Japan, the interests of retail and institutional shareholders were often placed low down the pecking order. An opaque and complex web of cross shareholdings – called keiretsu – insulated companies from stockmarket fluctuations and takeover attempts. It also meant companies were rarely held to account for failing to deliver better equity returns.
Prime Minister Abe has made the introduction of a corporate governance code a key part of his reforms. The code requires companies and financial institutions to unwind strategic cross shareholdings – and it seems to be working. The percentage of Japanese shares held by listed companies in other listed companies has fallen below 10%. As a result, the value of both share buybacks and dividend pay-outs, both a rarity in corporate Japan until recently, has risen to new highs, and with it expectations of improved per-share earnings for listed Japanese companies.
Navigating the shoals of Japanese markets
Of course, understanding the nuances of Japanese corporate life takes experience. There is much about the way business is conducted in Japan that’s hidden from outsiders. That’s why we rely on long-serving fund managers to navigate the twist and turns of Japan’s financial markets.
At Schroders in Tokyo, we have a team of 19 investment professionals who have been employed by the company for an average of 13 years. In addition, our fund managers have worked in the investment industry for 23 years on average, while our analysts typically have 18 years’ investment experience.
We rely on deep research to construct our investment portfolios, and use a disciplined and repeatable approach to stock-picking. As well as conventional measures including earnings-per-share2 and price-earnings ratios3, our analysts and fund managers consider qualitative factors such as quality of earnings, strength of management, growth prospects and focus on shareholder interests to produce what we believe is a fair value for our target companies’ shares. This potentially enables us to identify value that the market has missed, especially among less well-known small- and mid-sized companies.
While there is plenty of uncertainty about the pace of change, Japan is moving in the right direction. Its equities appear to be cheap compared with both US and European stocks and have the potential to surprise on the upside. With an experienced guiding hand, investors could be well placed to take advantage of the shake-up in Japan’s business practices.
What are the risks?
- Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
- Exchange rate changes may cause the value of any overseas investments to rise or fall.
- Investing solely in the companies of one country or region can carry more risk than investments spread over a number of countries or regions.
Schroders has expressed its own views and opinions in this document and these may change.
The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK11861
1An unconventional monetary policy in which a central bank creates new electronic money to purchase government securities or other securities from the market in order to lower interest rates and increase the money supply
2 The profits of a company attributed to each share, calculated by dividing profits after tax by the number of shares.
3 A ratio used to value a company's shares. It is calculated by dividing the current market price by the earnings per share.
Unstructured Learning Time
- Covid-19 poses temporary setback to the energy transition
- European multi-asset: is there anywhere to hide?
- Has the S&P already reached its low for this recession?
- Why pension funds should consider impact investing
- The three most contrarian trades in the stock market
- Why global cities can still thrive despite Covid-19’s impact