With Japan’s stock market back at levels last seen in 1990 and long term spectres of deflation and cross shareholdings moving towards the past tense, Japanese equities are among the most favoured markets by Liontrust multi-asset team.
With the Nikkei breaching the 30,000 level for the first time in three decades in February, and the Japanese economy proving to be among the world’s most resilient in 2020, Jen Causton, an investment manager on the Liontrust multi-asset team, said they continue to be positive about a cheap market benefitting from a global recovery.
“Japanese equities are currently rated a four on our target asset allocation (with one the most bearish and five the most bullish), and we see several attractions for what remains a cheap market – albeit with the potential Covid 19 and vaccine red flags to keep in mind,” said Causton.
“Japan has a large proportion of old economy cyclical and value businesses and its broad exposure to industrials and exporters means the country is well placed amid an ongoing global rebound and reflation,” she added.
Analyst upgrades
With US bond yields starting to rise after a long period of decline, Causton said the general perception is that this tends to benefit old-economy names and penalise growth, or long duration, stocks. As a result, she said areas like technology are thought to be under greater threat as they rely on future earnings and are therefore more vulnerable to an increase in the bond yield used to discount those earnings.
“Overall, Japan has seen a recent pick-up in earnings and analyst upgrades ahead of the US – as would be expected considering the make-up of those respective markets – putting it alongside Europe (including the UK) as a good reflation play,” she said.
“Corporate debt is also fairly low and companies, on the whole, are managed sensibly and conservatively; the long-term criticism has been that they are also run without much diversity, transparency or for the benefit of external shareholders, but again, there are signs this is beginning to change.”
Fostered complacency
Cross shareholdings have traditionally been seen as the worst example of poor transparency, where Japanese companies invest in each other and protect underperforming management teams via a cushion of automatic shareholder support.
While this practice has been declining since the 1990s, Causton noted that about 11% of Japan’s listed companies still have a listed shareholder owning more than 30%, compared with just 0.9% in the US and 0.2% in the UK.
“Critics suggest this has fostered complacency, low returns on equity and poor governance, but developments such as 2015’s corporate governance code and new rules on the Tokyo Stock Exchange (TSE) suggest it could be edging closer to extinction,” she said.
Sloth-like inflation
Meanwhile after a lengthy battle with deflation, in July 2019 the Bank of Japan (BoJ) Governor Haruhiko Kuroda declared ‘victory’, claiming that for the for the first time in about 15 years Japan’s economy was no longer in deflation.
“While deflation is not expected to return, Kuroda has acknowledged the need for vigilance on price moves – putting the BoJ among the many central banks basically collaborating with governments to chart a course through covid,” added Causton.
“New forecasts are for just 0.1% inflation for the fiscal year ending March 2022, down from a previous outlook of 0.5%, and, in contrast to many other countries where concerns are increasing about rising prices, Japanese inflation is not expected to breach 1% until the year ending March 2024.”
To invest in Japan, the Liontrust multi-asset team’s preference is to blend growth, value and core/index funds. Causton explained that while value managers currently see potential for a sustained rotation, there also ample growth opportunities in areas such as digital working.
As a result, alongside a holding in Man GLG Japan CoreAlpha, a value orientated fund managed by Jeff Atherton, the team also hold the more growth-orientated Baillie Gifford Japanese Fund, run by Matthew Brett.
