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Jupiter's Somerville backs Japanese domestic recovery

by James Phillipps on May 28, 2014 at 15:24

Allied to this is the authorities’ determination to increase the $1.3 trillion Government Pension Investment Fund’s (GPIF) allocation to equities. Although the much-touted policy has taken time to bear fruit, Somerville pointed out that Abe has made changes to GPIF’s board, giving the government more influence and upping its focus on return on equity.

GPIF has around 16% of its assets held in domestic equities and owns around 8% of the entire stock market. If this was increased to 20%, the effect would be significant, Somerville said.

‘You know the changes are happening, it’s just a question of when and how they are implemented,’ he added.

Another factor shaping his optimism is what he perceives as improving corporate governance. He highlights research by CLSA, which revealed that year-to-date on 13 May, 164 Japanese companies have announced share buybacks – averaging around 3%. This is equivalent to around 1% of the Topix and a 3.3x rise, and is indicative of companies allocating capital more efficiently.

This has also bolstered his Japan Income fund. He points to a holding in Amada, a machinery manufacturer, which is a strong turnaround story. ‘It has really struggled for years because of the strength of the yen and unusually it has a 50% domestic customer base where capital expenditure has been moribund,’ he said.

‘Our view is that it would see a pick-up in orders, particularly domestically, and that is what has happened. [Last week] it announced profits were up 3.5x, albeit from a very low base, and it has forecast 73% growth this year.

‘It is raising its dividend by 30% and buying back around 3% of its shares and cancelling them. So we are getting earnings growth, capital efficiency and rising dividends.’

He singled out Message, a nursing home operator, as a structural growth story. ‘They are very localised and used by families who can’t afford in-house nursing care,’ he said. ‘It is playing into the demographics theme. Last year profits were up 24% and they are forecast to rise by 20% this year. It is still cheap on a valuation basis and has plenty of growing opportunities.

‘We have quite a domestic focus and believe the administration’s policies are really targeted at domestic Japan and getting growth back.’

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