Investment briefing: Japan
The package of measures, generally referred to as ‘Abenomics’, aims to provide fiscal and monetary stimulus to the economy, as well as ushering in a number of structural changes. And although critics argue progress has been slow, they remain broadly optimistic that Japan is on course to become a far more attractive prospect for investors over the coming years.
Ed Smith, asset allocation strategist at Rathbones, insists that Prime Minister Abe’s focus on corporate reforms has already made companies more shareholder-friendly.
“I don’t think Abenomics has been an outright success yet, but you wouldn’t expect it to be so soon,” he says. “It was always going to be a long-term game to get Japan out of 20 years of a deflationary environment.”
The introduction of Abenomics is the latest chapter in the story of this remarkable country, which still manages to combine ancient traditions with high levels of technological achievement. Countless column inches have been dedicated to the burning question of whether or not Japan has truly turned a corner, but flashes of optimism have been dwarfed by troubled periods that have hurt investors.
The Japanese stock market’s ups and downs over the past 25 years illustrate the point. The Nikkei 225 index, which represents the Tokyo stock market, peaked at nearly 39,000 points at the end of 1989 but it’s been a rollercoaster ride ever since.
It’s a similar story over the past year, during which time it has been close to 21,000 points at its best and as low as 14,865 at its worst. It’s now just below 17,000, although the jury is out on where it goes next.
The Japanese may have a legendary work ethic but until recently its economy had spent many years in the gloom. Mark Dampier, head of research at Hargreaves Lansdown, says: “Persistent deflation, or falling prices, meant consumers were unwilling to spend, while a strong Yen made Japanese exports more expensive for foreign buyers. This was a difficult environment for many Japanese companies and their share prices suffered as a result.”
Although investors are feeling more positive on the back of government plans to boost economic growth, increase inflation and weaken the Yen, time will tell whether these measures will be successful over the long term.
Adrian Lowcock, head of investing at AXA Wealth, believes you can make money from Japan but insists you need to choose wisely. The managers that enjoy success, he argues, are those that are able to scour attractive opportunities.
“Japanese large companies have benefitted from a weaker Yen as this helps with their exports but to some extent this has now played out,” he says. “There’s a value opportunity in Japan, but it’s just about being a bit more selective.
“As exporters, Japan’s large companies will be much more sensitive to global economic weakness, particularly towards China’s economic data,” he says. “In contrast, Japanese smaller companies have been outperforming.”
The statistics back up his point. IA Japanese Smaller Companies has been the best performing sector over the past year with an increase of 13%, according to Morningstar data to 18 May 2016. IA Japan, which includes funds that have a focus on larger companies, meanwhile, is down slightly at -0.73% over the same time period.
However, there are only a relative handful of funds in IA Japanese Smaller Companies, which is for funds investing at least 80% of their assets in companies from the bottom 30% by market capitalisation. Returns from these funds have differed widely over the past year so you need to choose carefully.
Andrew Merricks, head of investing at Skerritts Consultants, says: “The reforms are more about the domestic market, so consequently the value has been in the small and mid cap end of the market.” However, he says that he’d be cautious about investing more money in the Japanese smaller companies sector because it has already done so well.
Over the next few years, Kwok Chern-Yeh, head of Japanese Equities at Aberdeen Asset Management, is confident that there will be plenty of opportunities for investors to make money. “There’s been a lot of talk about the problems facing Japan but the country’s best companies have adapted and are set to do well regardless of whether Abenomics succeeds or not,” he says.
Many of the best companies, he points out, have relocated their manufacturing to lower-cost countries, being among the first multinationals to exploit the benefits of globalisation – years before the term became ubiquitous. “Some companies have been expanding overseas revenues for some time,” he adds. “This allows firms to benefit from growth in other parts of the world, especially fast-growing emerging markets where middle class affluence is driving demand.”
One to watch: Schroder Tokyo fund
The Schroder Tokyo fund aims to grow investors’ money by participating in the growth of the Japanese economy – with a particular focus on its manufacturing industry and sectors benefiting from structural change in the economy.
Its manager, Andrew Rose, is experienced and has enjoyed impressive levels of outperformance, according to Mark Dampier, head of research at Hargreaves Lansdown.
“He was instrumental in developing the strategy, which has been used on the fund since 1989, and he officially took over as manager in 2004,” he says. “This fund may appeal to investors looking for core exposure to Japanese equities.”
Although the fund invests in a variety of sectors, the most prominent include electrical appliances, transport equipment, the retail trade, and chemicals.
Its 10 largest holdings include prominent international names such as Toyota Motor, Bridgestone, East Japan Railway, TDK, Mitsui and Japan Airlines.
Mr Rose, who joined Schroders as a Japanese equity analyst in 1981, is based in London but was previously head of Japanese Equities in Tokyo from 2001 until 2006. He holds a degree in Japanese & Politics from the University of Sheffield, and a postgraduate degree in International Economics from Kobe University, Japan.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.