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Japan Q&A: why Abe’s victory cheers investors

Shinzo Abe’s third election victory by no means solves Japan’s problems but it does again highlight value in its stock market.

 
Japan Q&A: why Abe’s victory cheers investors

After the US, Japan has been one of the best overseas markets for UK investors in the past five years. The re-election of prime minister Shinzo Abe (pictured), whose ascent to power in 2013 was largely responsible for the 117% five-year rally in sterling terms, has excited investors that there may be more to come.

What’s happened?

Prime minister Shinzo Abe has won his third general election and regained his two thirds majority in Japan’s Lower House after the coalition of reform parties led by his Liberal Democrat Party swept aside a divided opposition in the country’s snap poll at the weekend.

‘This decision result is likely to strengthen Mr Abe’s hand and implies the continuation of “Abenomics” – his hallmark economic policies designed to jumpstart the stagnant Japanese economy,’ said Neil Dwane, global strategist at Allianz Global Investors.

Cheered by this thought investors pushed Japan’s Nikkei 225 index to a new 20-year high of 21,696. The yen fell against other major currencies on the expectation that the Bank of Japan will continue to ‘print’ money at an astonishing rate in order to stimulate some inflation in the economy.

What’s it mean?

The most likely outcome is a continuation of the Bank of Japan’s ultra-loose monetary policy which has seen it create up to 80 trillion yen (£530 billion) a year – and pump the money into the country’s bond and stock markets – whilst holding interest rates at just below zero.

This is the most aggressive form of ‘quantitative easing’ (QE) that central banks in the UK, US and Europe have also tried, although all three are now starting to unwind their policies, leaving Japan to continue with the gigantic experiment alone.

‘Overall, there could be further upside for Japanese stocks as traders price in the prospect of political certainty and central bank liquidity, both powerful drivers of equities right now,’ said Kathleen Brooks of City Index.

What it won’t mean?

While Abe has delivered plenty on the monetary side of his infamous ‘three arrows’, he has been slow to raise taxes and improve Japan’s fiscal position, although a VAT hike is scheduled for 2019. Meanwhile, economic reform will continue to take a back seat, said Luke Bartholomew, investment strategist at Aberdeen Standard Investments.

‘What’s disappointing is that Abe likely won’t be interested in using the political capital he’s gained winning this election to reform the economy. The so-called third arrow of Abenomics has largely been a disappointment because Abe has chosen to not take on the dogma and vested interests that hold Japan’s economy back. That won’t change,’ said Bartholomew.

What is on Abe’s agenda is changing Japan’s post-war, pacifist constitution to allow it to defend itself, a timely ambition given the increased hostility from North Korea, which is a major source of anxiety for anyone thinking of investing in the country.

Is Japan cheap?

Amazingly, given the QE-fuelled stock market rally, the answer is yes. ‘Compared to the rest of the world, Japan equities currently trade at a more than 16% discount. Twenty years ago, it was a 90% premium,’ said equity strategists at Societe Generale.

Jesper Koll, head of Japan at WisdomTree, a provider of exchange traded funds (ETF) that track Japan’s stock market, believed the country could regain a premium rating. The Topix – Japan’s other main index – currently trades at just over 16 times the earnings, or profits, generated by its constituent companies. A re-rating could see the multiple expand to 20 to 21 times, he suggested if Japan’s tightening labour market prompted businesses to up capital expenditure on machinery and automation. That would propel the stock market higher.

‘Political and policy stability is poised to add momentum to Japan’s domestic business investment cycle. Already leading companies like Canon and Shiseido have announced some on-shoring, ie, building new production capacity in Japan; and the up-grade cycle for small and medium-sized companies is poised to accelerate further,’ said Koll.

What are the dangers?

According to Russ Mould, investment director at funds supermarket AJ Bell, the long-term dangers to Japan are that it cannot stimulate inflation and start to erode the ‘monstrous government debts’ (equal to around 240% of the economy) caused by its lack of growth and ageing population.

‘Inflation has stubbornly refused to consistently advance toward the BoJ’s 2% inflation target and as Japan approaches the 29th anniversary of the peak of its debt-fuelled property and stock market bubble this is why Japan remains a test case for the quantitative easing and negative or zero-interest rate policies now also being employed in the West,’ said Mould.

Why invest in Japan?

Japan’s economy is on a winning streak, recording growth of 1% in the second quarter, its sixth consecutive period of gains. Meanwhile, corporate profits are rising.

‘Fundamentally, the Japanese economy is doing well,’ said Junichi Inoue, head of Japanese equities at Janus Henderson Investors. ‘We believe the economy has entered an autonomous growth phase. The unemployment rate is at an all-time low and there is more than one offer for every job applicant. Household income has been increasing and consumption is growing,' he said.

Where can I invest?

Michael Stanes of Heartwood Investment Management in London said he was under no illusions that the ‘macro story’ in Japan would improve following the election. Nonetheless, he believed ‘entrepreneurial spirit’ was alive in Japan and there were attractive opportunities for investors to exploit, irrespective of the wider economy.

‘We consider these are best accessed through active managers who have a specific tilt, whether in smaller companies and/or in the more value-orientated parts of the market. We aim and believe it is necessary to be very specific about the investments we make in Japan,’ Stanes said.

On that note, here are some of the top-performing active fund managers in Japan, according to Citywire data.

Manager Citywire rating Fund Three-year manager total return
Hideo Shiozumi AA Legg Mason IF Japan Equity A 129.30%
Taeko Setaishi AA Atlantis Japan Opportunities USD  114%
Michael Lindsell AA Lindsell Train - Japanese Equity A  91.60%
Nicholas Price AA Fidelity Funds - Japan Aggressive I-ACC-JPY  85.40%
Chantana Ward AAA Comgest Growth Japan JPY Acc  80.20%

Source: Citywire Financial Publishers. Data from this table to 30 September, 2017

Our sister website Investment Trust Insider has information on the .

6 comments so far. Why not have your say?

David Andrews

Oct 23, 2017 at 15:15

I'm astonished to need to ask, but why no IT's ? There are numerous ones with both better and comparable returns.

When it is solely a question of performance, I really don't understand this blinkered approach of selecting solely from either funds or trusts for your illustrations.

report this

Law Man

Oct 23, 2017 at 15:54

David: agreed. There are some differences in underlying holdings and price volatility, but usually an IT does better.

For information, the following compares the BAILLIE Gifford Japan IT and OEIC Fund.

Baillie Gifford Japan IT

OCF = 0.88%

Price premium to NAV = 5.17%

Price 1 year 29.1% 3 years 126.0%. 5 years 281.2%

NAV 1 year 29.1% 3 years 112.4%. 5 years 221.7%

3 year volatility = 14.07%

FE Trustnet Risk Score = 145

Baillie Gifford Japan OEIC Fund

OCF = 0.63% plus platform charge of 0.45% = 1.08%

Price 1 year 16.5% 3 years 97.4% 5 years 116.1%

3 year volatility = 13.82%

FE Trustnet Risk Score = 125

report this

Peter Rigg

Oct 23, 2017 at 15:54

How about Stratton Street's Japan Strategic Warrants Fund.Effectively 3x leveraged play on many Japan names.If you're bullish then get the maximum bang for your buck.

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Ian Burgess

Oct 23, 2017 at 17:56

Neptune?

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Alan Selwood

Oct 24, 2017 at 00:50

Baillie Gifford Shin Nippon, anyone?

report this

colin overton

Oct 24, 2017 at 11:38

Always nervous buying an IT at a premium. Might go with a UT this time?

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