Scott McGlashan, senior fund manager of the JOHCM Japan fund, talks to Neal Underwood.
Q: Did prime minister Shinzo Abe’s resignation come as a surprise? And how big was the news in Japan? A:
A:The timing of Abe’s resignation and the manner of it was a surprise. Usually such events are well trailed by the Japanese media, so a sudden announcement on the morning before Abe was due to face questions in the diet (parliament) was unprecedented. It was this that has generated the most interest in the Japanese press.
Apart from a brief flurry of interest when it looked as if [Junichiro] Koizumi might be persuaded to return to the fray, the Japanese public did not appear to be particularly interested in the ongoing news coverage.
Q: What are the immediate implications for the Japanese stockmarket? A:
A:There are few implications for the stockmarket from Abe’s resignation. Whether his successor is Mr [Taro] Aso, or, as seems more likely at present, Mr [Yasuo] Fukuda, will have little bearing on the Japanese economy.
Q: What about the longer-term prognosis? A:
A:The Japanese market has spent much of the past 18 months in the doldrums and the “hot” money, which was attracted to the market in 2005 has long since moved on. I think this has created an attractive opportunity for medium-term investors. Especially when measured in terms of assets or cashflow, Japan has more undervalued companies than almost any other big market.
In the past, this situation persisted because there was no mechanism to release that value; with the advent of a mergers and acquisitions (M&A) market, that is no longer the case. The patient investor can expect a substantial re-rating of these companies over time.
The yen has also strengthened. It seems unlikely, given the increased volatility we have seen recently and further evidence of the yen carry trade unwinding, that carry trade players will return to the strategy to the same extent as before. I think the market will have to revise its over-optimistic outlook for exporters, but domestic stocks should outperform.
Q: So all this political uncertainty is unlikely to have a negative impact on the economy? A:
A:Corporate Japan remains in robust health. First-quarter results suggested that companies have been conservative in their full-year forecasts and balance sheets are strong, and results for those companies that reported in August were mostly ahead of expectations.
We have also seen Japanese companies aggressively buying back their stock following falls in share prices.
The economic backdrop is relatively benign. A slowdown in America should have some negative implications at the margin, but is unlikely to tip Japan back into recession.
Q: Are domestic investors driving the market? A:
A:Domestic investors are becoming increasingly focused on dividends. The strength of their balance sheets has allowed many companies to increase dividend payouts significantly, and we expect this trend to continue.
Possibly because of the threat of M&A, but also because they are aware that domestic investors are seeking higher yielding investments, management in Japan is becoming more sensitive to the need to reward shareholders.
With significant numbers of shares offering higher yields than Japanese Government Bonds, this should prompt domestic investors to think about increasing their allocation to the domestic equity market.
If the current problems in global markets persist, Japanese investors are likely to reduce their overseas exposure in favour of high yielding domestic names.
Q: You are a firm believer that M&A activity in Japan is starting to take off. Is there evidence to support this? A:
A:Although the defeat of Steel Partners’ attempt to take over Bull Dog Sauce generated much media attention and prompted a few commentators to suggest that Japan’s M&A boom was over before it had begun, we have seen a steady flow of deals whereby domestic Japanese companies acquire other domestic Japanese companies for healthy premia. We fully expect this trend to continue.
Q: Are there problems in Japan’s real estate sector? A:
A:No. Real estate prices are continuing to recover. Despite recent comments from the chairman of a Japanese housing company about a “bubble” in real estate, prices have only just recovered to the level they were at in the early 1980s. Rents are also increasing gradually.
Q: Japan’s economy has been described as a lame duck, the result of a disastrous monetary/fiscal mix, which became a dead duck after Abe’s resignation. Do you think this view is overly negative? A:
A:Japan’s economy is not suffering from a disastrous monetary/fiscal policy mix. The Bank of Japan’s actions have been unhelpful at the margin, but with interest rates at 0.5%, it can hardly be argued that growth is being choked off by the high cost of borrowing.
There are many other economies where the monetary and fiscal policy mix may prove to have been much more disastrous than that in Japan.
Q: What will be the effect on the Bank of Japan’s view on interest rates? A:
A:For the time being, the Bank of Japan’s view on interest rates is more likely to be driven by the actions of the Federal Reserve and the European Central Bank rather than by which grey-suited individual is occupying the prime minister’s residence.
Q: Are we back to the revolving doors of men in grey suits? Does Japan need a strong personality as its prime minister? A:
A:The issue of who is the Japanese prime minister is almost irrelevant. Japan has always been ruled by men in grey suits.
Despite the perception of foreigners of Koizumi as a new kind of politician, he was arguably a man in a grey suit as well. His family had been LDP [Liberal Democratic Party] heavyweights for years and his grandfather was a former prime minister.
Although his administration did a much better job at marketing its achievements than some of its predecessors, the limited reforms it did put in place were heavily reliant on expertise from the bureaucrats, who continue to wield the real power and influence in Japan.
Actually, blue suits are more typically Japanese than grey. Perhaps the headline should be: “Shock, horror! Short man in blue suit to become Japanese prime minister.”
SCOTT McGLASHAN has been investing in Japanese equities for more than 25 years and has managed the JOHCM Japan fund since its launch in May 2004. Before joining JOHCM he was chairman of Jade Absolute and from June 2000 was manager of the Close Finsbury Japanese Equity fund. Before founding Jade he was head of Far East investment and a director at Perpetual.