19th October 2017 by Darius McDermott
With an election looming, Clive Hale, director at FundCalibre, looks at the prospects for the Japanese market. (Darius McDermott is currently away)
Having reached its peak at the end of 1989, the Japanese equity market spent the next two decades in decline. Back then, the Imperial Palace and its grounds in Tokyo was valued at a price greater than all the real estate in California! it was a ‘proper’ bubble and, when it popped, the Nikkei 225 fell from a high of 38,918 that December, to a low of 7,055 in March 2009 – losing almost 82% of its value*.
Perhaps unsurprisingly, Japanese equities have been unpopular with UK retail investors since then. Despite Japan being the third largest economy in the world, just 3.6% of equity assets are invested in the Japanese stock market**.
A few false dawn’s have added to investor unease over the years. Every now and again, the economy – which stagnated for most of this time – would show signs of life and the stock market would pick up, but the improvement was invariably short lived.
Five years of Abenomics
In 2012, however, more permanent changes started to take place. Shinzo Abe was elected as Prime Minister and he introduced a package of policies, later coined ‘Abenomics’. They were his plan for getting the Japanese economy working again and consisted of three ‘arrows’: monetary easing; fiscal stimulus and structural reforms.
There have been a few hurdles along the way but, by and large, he has been successful. The economy has grown for six consecutive quarters, which has not happened for 12 years, and corporate profits are looking healthy. The labour market continues to tighten with job vacancies rising, and inflation has turned positive, which is encouraging, as the deflationary spiral has been one of the main causes of Japan’s economic woes. Investors should continue to benefit from improving corporate governance.
Could the snap election take the stock market higher?
Having called a snap election on the 22 October, Abe is hoping to get a third mandate, enabling him to implement further reforms and the polls, thus far, put him well ahead.
The stock market – which enjoyed spectacular gains in the first couple of years of Abenomics before levelling off – has also been buoyed and has reached the 21,000 level for the first time since 1996. This behaviour is not unusual in the lead up to an election but is it a case of ‘buy the rumour, sell the result’?
Should the result be a surprise win for the opposition, the market will undoubtedly have a setback, but most commentators do not believe this will be the case – rather that Abe will retain his supermajority.
The key test will be if the market can keep its head above the 20,000/21,000 level. If it can, we could be in for a more exciting ride. The Bank of Japan is still supporting the bond market, as well as equities, and Kuroda, the governor, has already hinted that his central banks does not have to go in the same direction as others: suggesting loose monetary conditions will persist.
The combination of a favourable operating environment and low valuations relative to the US and UK means that Japanese equities represent a very compelling proposition for long-term investors.
Likely candidates to benefit from this boost would be Baillie Gifford Japan Trust for medium and smaller company exposure (where there is arguably greater value than in larger companies), plus its sister trust Baillie Gifford Shin Nippon. “Shin Nippon” means “new Japan” and this trust focuses on emerging or disrupted sectors, where the manager sees innovative growth opportunities. Open-ended funds that are also Elite Rated by FundCalibre include T. Rowe Price Japanese Equity, which invests in Japanese companies of all sizes, but has a notable overweight to smaller firms, and Schroder Tokyo, which was launched back in 1989. It has benefited from having a cautious, quality-orientated strategy and only two fund managers in that time.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’ views are his own and do not constitute financial advice.
*Source: Macrotrends, chart of the Nikkei 225, 16 October 2017
**Source: Investment Association sector statistics, August 2017
Clive Hale is a director of FundCalibre