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With Japan‘s economy showing fresh signs of life it could be an opportune time to add some Japanese equities funds to your investment pot.
The country has some of the world’s most famous and successful companies such as Toyota, Sony and Nintendo, but share prices have long been facing a headwind of an economy at a standstill.
Many of the top money managers in the City have an ‘overweight’ to Japan in place now though, meaning they are investing a bigger chunk of their clients’ money there than the weighting Japanese shares have in the global stock market.
Money managers in the City have ‘overweights’ to Japan in their portfolios, which indicates confidence in Japanese shares.
This is an important sign of market confidence in the prospects for the asset class and for those managing their own investments it makes sense to follow suit if you have some time on your side.
After throwing the kitchen sink at deflation, the Bank of Japan is finally starting to reap some rewards from its vast three-year long quantitative easing programme.
While excessive price inflation is disastrous for an economy, a small amount of inflation is very beneficial in greasing the economic wheels and getting stock prices moving upward.
After a long period of falling or flat prices, there is at least some inflation in the Japanese economy now, 0.3 per cent to be precise. This is still some way off a healthy level of between 1 and 2 per cent but there are signs this could be on the way.
The labour market there is tightening up, making Japan one of the top places in the world in terms of the number of job openings and level of employment. This should feed through into prices increases soon. The Bank of Japan itself is forecasting inflation of 1.4 per cent by next March.
Another important thing to be aware of is that Japanese companies have begun bringing in much needed corporate governance reforms. For decades Japanese companies have been opaque organisations in most cases, with little accountability to shareholders in comparison with Western companies.
This is slowly changing though and any initiatives that make Japanese companies more transparent and see them making pleasing their shareholders a higher priority can only be good for share prices over the medium and long term.
The merits of any type of investment are always relative to the other options, and here Japan does particularly well by many experts’ reckonings.
The United States stock market is widely considered to be expensive at the moment in terms of how much companies are booking in earnings compared with their share price.
Prime Minister Shinzo Abe’s ‘Abenomics’ policies are starting to get the better of deflation.
That is not to say share prices will fall significantly, but there does seem a good probability that the rises will be restrained in the near term as the Federal Reserve moves though its interest rate hiking cycle.
UK and European equities have significant question marks hanging over them stemming from Brexit and the withdrawal of the European Central Bank’s own quantitative easing programme, which adds to the relative ‘cheapness’ of Japanese shares.
‘The Japanese market has largely been overlooked in recent years as the initial euphoria following Shinzo Abe’s election and his three arrows policy which initially caught investors imagination faded as the challenge facing Japan requires long term structural change,’ noted Adrian Lowcock, investment director at wealth manager Architas.
‘On the economic side the last few years have been mixed, Japan continues to struggle with deflation although it currently has inflation of 0.5 per cent, high for Japan.’
‘While consumer spending is also rising and economic growth, at 0.5 per cent, is rising and unemployment is down to 2.8 per cent. In addition, the Japanese stock market is one of the more attractively valued markets, looking cheap compared to other developed markets such as US and UK.’
Video games maker Nintendo, the company behind Super Mario and Pokemon, is one of Japan’s best known companies worldwide.
‘Last year the policy of negative interest rates had a big impact on share prices of financials is Japan, while Brexit had no impact on the Japanese market the currency swings will have an effect on returns for investors depending on whether they hedge the currency exposure,’ Lowcock continued.
‘But beyond the political landscape there is a lot happening at the company level, profit forecasts are conservative and look set to rise. At the same time corporate governance is improving which is good for shareholders.’
The chief downside to Japan’s economy over the longer term, and by implication its companies’ share prices, is its demographics. Japan’s population is getting older on average by the day as they are living longer and having fewer and fewer children.
So much so, that the country is one of a small few around the world to have a shrinking population.
‘The challenges which face Japan are not small it still has a large aging population and socially the country has struggled to adapt to change which is necessary for Shinzo Abe’s reforms to fully work,’ Lowcock noted. ‘However, the valuations are attractive.’
So you have weighed up the merits of putting some cash into in the Japanese market and decided to move some of your money. The question now is how to invest.
One option of course is to simply buy an ETF which tracks the Japanese stock market. These are readily available on most established investment platforms.
If you would rather have experts picking exactly which companies your money goes into, then there are many active Japanese equities funds and investment trusts to choose from too.
Here are three good options Lowcock suggests considering as a starting point.
GLG Japan CoreAlpha
‘Stephen Harker is a contrarian investor, actively looking for companies out of favour with investors. He uses valuations measures including Price to Book, Dividend Yield and Price Earnings ratio to identify such stocks. He selects companies with strong fundamentals where he believes there is the opportunity for a turnaround, a good example of this is Harker built up exposure in Japanese banks and the fund now has over 20 per cent invested in the sector.’
‘Manager Andrew Rose runs a core Japanese fund with a bias toward small and mid-sized companies. He relies on a team of analysts based in Japan to provide investment ideas which are then stress tested. Rose is sensitive to valuations so the fund does tend to have a bias to this style.’
Baillie Gifford Japan Trust
‘The trust looks for long term growth and has a focus on mid and smaller sized companies. As such it is a risker way to get exposure to Japan. Manager Sarah Whitley heads up a strong, seasoned and experienced team. Whitely is a stock picker and looks for companies where long term sales growth is under-appreciated.’
‘Investments are held for the long term and the portfolio has exceptionally low turnover – 8 per cent of the portfolio changes each year, suggesting an average holding of 12 ½ years. Meeting with company management is also key to evaluate corporate culture, management’s strategy, past stewardship, and how management’s interests are aligned with shareholders.
‘Whitley also incorporates other factors into the stock-selection process such as industry developments, competitor analysis, and consideration of broader factors such as demographics and technology.’