16th January 2014
Japan’s ‘Abenonics’ economic reform programme remains on track with investment trust managers upbeat about the prospects for Japanese companies.
With Japan and Japanese Smaller Companies sectors dominating the investment company industry performance tables over the last twelve months, the Association of Investment Companies has surveyed the opinions of three fund managers about the future prospects for reform and the impact on Japanese equities.
Whilst the average investment company is up 15% over one year to 31 December 2013, the Japan sector is up 46% and the Japanese Smaller Companies sector up 34% over the same period. Three year figures are positive too, with the Japan and Japanese Smaller Companies sectors each outperforming the average investment company by 21 and 23 percentage points respectively.
Discounts have narrowed substantially too, with the average Japan investment company now on a discount of -4% compared to -10% a year ago, and the average Japanese Smaller Companies investment company is on a discount of -6% compared to -8% a year ago.
Sarah Whitley, Manager of Baillie Gifford Japan Trust, says:“‘Abenomics’ is a wide ranging programme to revitalise the Japanese economy and raise its growth rate in the long term, as well as provide short-term stimulus. During the past year the yen has weakened significantly, allowing Japanese manufacturing to be re-priced into world markets, company sentiment has improved tremendously and there are encouraging signs that growth is spreading into the broad domestic economy.
“There are many changes, both in the economy and in less visible subtle sea-changes in attitudes, which we believe are encouraging. It is not that ‘old’ Japan has vanished but it is smaller and less important and can be ignored, particularly by active investors such as ourselves. We continue to find exciting opportunities in internet related areas and in companies whose business model attacks the old and inefficient.”
Nicholas Weindling, Manager of JPMorgan Japanese Investment Trust, says: “The outlook for 2014 remains good. While many commentators question the sustainability of the uplift from Abenomics, with doubts centred on the ‘third arrow’ of structural reform, we feel these doubts are overplayed. In fact there is significant structural reform already in play. One development that we have already seen has been the decision by Japan to enter negotiations to join the Trans-Pacific Partnership free trade area. We believe this is a very significant personal achievement of Prime Minister Abe, who has overcome objections from farmers and other protectionist groups that had prevented his predecessors from entering free trade negotiations.”
“In terms of where to invest, we favour companies that are geared to take advantage of economic recovery and demographic change, rather than the monolithic household names such as Sony or Canon, which have lost out to cheaper overseas competitors and are now in many cases market leaders in products that nobody wants.
“Finding the companies that will do well is best achieved through an on-the-ground presence, as sell-side analyst coverage of Japanese companies is poor, particularly for smaller companies. We are able to conduct hundreds of company meetings each year from our permanent base in Tokyo, allowing us to find opportunities that may be missed by overseas-based fund managers.”
Kwok Chern-Yeh, Manager of Aberdeen Japan Investment Trust, says: “Notably, the consumption tax hike is a crucial step towards fiscal consolidation – raising the national sales tax from 5% to 8% will help address the nation’s ballooning public debt. One worry in the short-term is that discretionary spending will fall after the tax has been implemented, although the government is hoping to cushion the short-term impact with a ¥5.5 trillion stimulus package. But, if Abe succeeds in boosting growth, consumers will likely increase their spending when the economy is doing well. Pertaining to the market, valuations are still looking reasonably attractive. Corporate profitability, particularly among exporters, has been boosted, thanks to yen weakness. In particular, consensus forecasts for corporate earnings growth for 2014 are at 20%, among the strongest in the region.
“The jury is out on whether Abe will succeed in completely pushing through structural reforms to create sustained growth – ensuring the full implementation of the reforms remains an uphill task in the face of vested interests. However, Japan is home to numerous great companies, many of which are global leaders in their respective industries, and have shown remarkable adaptability through years of stagnation.”
Share price total return on £100 lump sum in Japan sectors at 31 December 2013
|1 year||3 years||5 years||10 years|
|Overall Weighted Average ex VCTs||115.08||121.33||205.82||272.89|
|Weighted Average Japan||145.98||142.06||192.27||166.53|
|Weighted Average Japanese Smaller Companies||133.92||143.94||193.11||139.37|
|Baillie Gifford Japan||172.07||182.05||251.5||268.83|
|Schroder Japan Growth||138.31||136.01||179.7||172.16|
|Atlantis Japan Growth||129.77||146.73||184.3||164.69|
|Baillie Gifford Shin Nippon||150.07||187.12||321.93||246.41|
|Fidelity Japanese Values||134.57||121.36||166.42||136.24|
|JPMorgan Japan Smaller Companies||135.4||133.77||131.95||92.36|