Will Abenomics keep delivering?


Japanese prime minister Shinzo Abe’s economic policies, labelled Abenomics, have been successful so far in weakening the yen and continued quantitative easing has a good chance of trickling down and strengthening Japan’s equity market. So which sectors are drawing most attention from equity managers?

When Abe won the upper house elections on 21 July, it came as a blessing for his monetary policy. Spearheading one of the most aggressive quantitative easing programmes ever attempted, and with it several strata of structural reform, Abe can take solace in the fact that he now has until 2016 to see this through as he has become the first prime minister to control both Japanese houses of parliament for six years.

When talking to the press afterwards, Abe said: “We have received overwhelming support from the people for our policies of improving the economy and solid and stable politics. These policies are contributing to the economy already and further improvement is needed, including wage increases, more consumption and more investments.”

On paper, Abenomics look good. However, the problems Japan faces are more complex than they initially appear.

Standard Life global thematic strategist Francis Hudson says even though Abe has bought himself an additional three years before he faces another election, the focus will turn away from macro numbers and political sentiment. Instead, the success of Japanese companies will give more of an indicator.

Hudson says: “There will be no election for a while so it is now more about small companies and the active investor. The hope is that if some of the inflation will happen, then some of the companies will reinvest their cash.

“Abe needs to keep the momentum going. We will have a better idea if he will be able to deliver by the end of the year on what is an ambitious plan of reform.”

Hargreaves Lansdown investment analyst Richard Troue says investors’ ears prick up when Japan is mentioned, with confidence improving in the market. Troue says: “The election was definitely a positive, there is no denying that.

“Now we have clarity, which also bodes well for consumer confidence. The prospect of rising prices is once again on the cards and consumers are willing to put their hands in their pockets again.”

Premier Asset Management multi-asset manager Simon Evan-Cook identities a growing opportunity for active fund management in the Japanese sector. 

Evan-Cook says: “We believe an understandable bias towards ‘value’ investing has evolved over the years. This is reflected in the correlation between fund holders’ returns and the outperformance of the Japan Value index, which has also beaten the wider market over the last five years.”

With Japan largely being an unfavourable investment destination for many years, Evan-Cook feels this comes as an advantage for funds investing in the Japanese universe – hardening them and weeding out the underachieving funds. 

He says: “Tokyo has been out of favour for so long that an element of Darwinism has set in. The strong have stayed afloat.

“From a fund analyst’s anecdotal perspective, the result is a sector that contains a high proportion of well managed, genuinely investable funds, the quality of which would see them clean up in a less competitive but more popular sector such as global emerging markets.”

Andrew Rose, who runs the £1bn Schroder Tokyo fund, recognises there are many underlying factors to consider. For instance, he points to the export industry in Japan which would traditionally benefit from a weaker yen. He says: “Demand has weakened in export markets like China. The underlying fundamentals are more challenging so external factors are important.”

With over 3,000 Japanese companies to choose from, Rose says the furore around Abenomics has affected valuations in some sectors, with some companies within the construction and property realms soon appearing “over discounted”. Rose says: “Some of the beneficiaries of returning inflation went too far. I felt in some cases stocks had become overdone as the domestic individual jumped on the bandwagon as everyone got excited.”

However, Rose has still been adding exposure to stocks within his top 10 holdings while aiming to trim total holdings to be between 70 and 80.

In terms of value, Andrew Millward, who is one of the six fund managers working on the £127.2m CF Morant Wright Nippon Yield fund, is finding a lot of value on the domestic side of Japan’s stock universe.

Millward says: “One thing Japan is known for is on a price-to-book basis. On that basis, it is the cheapest major equity market in the world. You can buy a lot of companies for less than net asset value.”

On a sector specific level, Millward is finding opportunities in financials and property. He says: “Financial sectors have been very strong in the year to date. Also, the property-related sector has done well. Abe is trying to counter-react deflation and one of the key indicators is the health of the housing market. If he does end deflation, the property market will be a beneficiary.”