Nobody could complain that the Japanese stockmarket has lacked excitement in recent months – or even years. We have seen major swings in prices, with 7 per cent plus in a single day not unusual.
Overall Japanese equities have outperformed the global average in the past few years, but this does follow a period when shares were largely shunned by the international investment community. With so much turmoil in markets over the past year or so, it is interesting to take a longer look at this market that has had the propensity to disappoint in the past.
The Japanese stockmarket had a remarkable run in the 1970s and 1980s, overtaking Wall Street in overall value. The crash of October 1987 barely caused a pause in Japan’s progress. By the end of 1989, the Nikkei 225 Index had come within a whisker of topping 39,000, making it the most valuable stockmarket in the world. But valuations had become severely stretched, with price-to-earnings multiples many times those of Europe or North America.
A setback seemed inevitable and profit taking started early in 1990, taking the Nikkei Dow below 30,000 by the spring of that year. Renowned investor Sir John Templeton, who had spotted the attractions of a rebuilt Japanese economy many years before, had already turned his attention away to emerging markets, citing Japan as overvalued.
And overvalued it proved to be, with a long and seemingly unstoppable bear market developing that continued until 2003. In the spring of that year the Nikkei dipped below 8,000. Over the next few years there were many false dawns and by early 2009 the index was little different to the level of six years previously, admittedly having suffered with all markets from the fallout from the financial crisis. Since then it has more than doubled, but it has been far from a one way street.
Reaching close to 21,000 last summer, Japan has not escaped the uncertainty generated by concerns over China’s economic strength. While the Nikkei index was still above 20,000 in early December last year, it has seen some wide swings in fortune. Though buoyed by a weakening yen, shares have recovered well from a low of less than 15,000 in early February. The real question is: can it sustain the demand that has at last been generated?
Behind the resurgence in demand for Japanese shares has been the so-called introduction of Abenomics – a three-tiered economic programme introduced by Prime Minister Shinzo Abe some three years ago. Aiming to rejuvenate the sluggish Japanese economy, the plan was to introduce aggressive quantitative easing, massive fiscal stimulus and initiate major structural reforms to boost competitiveness.
The result has been a weaker yen, which has helped Japan’s international position, though there is little evidence so far of success elsewhere.
Japan has a multitude of problems. It has an ageing and declining population, huge public debt and labour practices that are inflexible to say the least. Moreover, there is no indication yet that structural reform is likely to bear fruit. Indeed, while it can be argued that under Mr Abe’s stewardship the economy has improved, consensus forecasts suggest that the improvement is modest, with GDP growth of only 1 per cent expected for the current calendar year.
But shares are not expensive in Japan and it is perfectly possible to find income and follow value-driven strategies. We are seeing a greater willingness to raise dividends or even to countenance share buy-backs, so corporate practice there is beginning to resemble more what we are used to in the UK and North America.
With a generally greater confidence that the improvement in the investment climate can be maintained, Japan should remain on investors’ radar.
As for how best to access the sector, seldom have I come across such consistency in performance. Aside from the fact that the Legg Mason Japan Equity fund knocks all the others into a cocked hat, many of the same names occur repeatedly at the top of the tables. Morant Wright, for example, achieves good recognition and is a boutique solely investing in Japan. Fidelity, though it only features once in the top five, remains in the top ten over all timeframes with its Japan Smaller Companies fund.
Similarly, the same names can be found at the trailing end of the performance figures. Neptune, although close to the average over one and three years, has had a tough shorter term experience, losing more than a fifth over six months – more than double the next lowest ranking fund. Scottish Widows, too, has disappointed, being the only fund to have lost money over five years and sitting close to the bottom of the tables over the shorter timeframes. Picking the right fund seems to depend on consistency, rather than strength of name.
Key Takeaway: Japan is the world’s third largest economy and remains a powerful player in Asia. Against the background of a slowing Chinese economy and strong demographic headwinds, prospects for corporate Japan do not look exciting. But many Japanese companies are world-class players, with strong brand recognition, while a weaker yen has boosted export opportunities. Couple that with a stockmarket rating that trails other developed markets, and a case exists to stick with the sector.