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Archive for the ‘Japan’ Category

Abenomics is a vote-winner

Buy on the promise, sell on the news? That may be the initial temptation of those of us who have been happily playing the Japanese recovery story for the last few months, now that Mr Abe’s Liberal Democratic Party has won a resounding victory in the Upper House elections at the weekend. The result means that with a comfortable majority in both chambers, the flag-waving Prime Minister is well placed to push through his programme of economic reforms, aided by the expansionary monetary policies now being embraced by the Bank of Japan. Despite the size of his majority, some will worry that the impetus to complete the much-needed structural reforms – the so-called third arrow of Mr Abe’s strategy – will weaken now that the election is over. The LDP traditionally represents many of the powerful vested interests that have killed reform agendas so many times in the last 20 years; could they do so again?

It is possible, but my instinct is that answer will be no. The Japanese equity market retains its attractions. The key insight that the professional investors I talk to keep bringing back from Japan is that for the first time in living memory all the interested parties – the government, the central bank, companies and now the electorate – are all aligned in the same direction, prepared to give Abenomics its head. The programme is certainly not without its risks, and it  has important implications for investors in other countries around the globe, as Henry Maxey, the CEO of Ruffer LLP, points out in its latest investment reviewRead the rest of this entry »

Written by Jonathan Davis

July 22, 2013 at 11:46 AM

Hold on to your hats in Japan

The dramatic upwards move in the Japanese equity market since the autumn has plenty further to go, according to Jonathan Ruffer, the founder of the private client fund management group Ruffer LLP, one of the professionals whose latest thinking I (and many others) like to follow closely.  Ruffer as a firm has held an overweight position in Japan for quite a long time, and now stands ready to be vindicated if Japan’s new reflation policy takes hold, as the markets now seem to be assuming. Writing in his latest quarterly review, he comments as follows:

We hold roughly half of portfolios in equities, in the UK, Europe, US and Asia, but the largest geographic position is in Japan. This market was broadly flat when we last wrote to you, although we had made good money in financial and property stocks. In the last quarter these and other holdings surged further, providing a strong finish to a dull year. The rationale in Japan remains intact; it is the warrant on world economic growth, and so more of the same in terms of monetary stimulus should favour Japan without the rest of the world’s downside. The stability of Japan, its lack of overcapacity, and the absence of financial or labour fragilities, give some protection, and afford it the ability to generate a self-sustaining economic recovery. The low expectations built into the possibility of a Japanese economic recovery provide the opportunity for further sharp market rises. The major obstacle to a more bullish backcloth has disappeared with the appointment of Abe as Prime Minister, and the forthcoming retirement of Shirikawa as Governor of the Bank of Japan. In this new world, the investment danger for foreigners is a weak yen (we have been fully hedged), but this is a benefit to the equity market. Read the rest of this entry »

Written by Jonathan Davis

January 21, 2013 at 3:33 PM

Fools rush in while wise men take their time?

The New Year has started well, with plenty of evidence that professional investors are continuing to rediscover their appetite for risk assets, with the price of equities, corporate bonds and high yield debt all heading higher. The charts for leading equity indices, including the S&P 500 and the FTSE All-Share, have been trending higher ever since Mario Draghi, the head of the European Central Bank, announced last summer his intention to “do whatever it takes” to prevent the eurozone from falling apart. He has every reason to be pleased with the response to his intervention, which to date has been effectively cost-free. Would it were always so easy! European stock markets, having been priced for disaster before, have led the way up as fears of the euro’s fragmentation recede. Volatility, as measured by the VIX, has meanwhile fallen to multi-year low levels. Read the rest of this entry »

Is Japan a buy? A new report says yes

My friend and collaborator Dr Sandy Nairn, the CEO of Edinburgh Partners, and former Director of Global Equity Research at the Templeton/Franklin group, argues the case for taking a long, hard look at the Japanese equity market in the latest briefing paper published by Independent Investor. You can download the full 20-page report Is Japan a Buy? for free from the Independent Investor website.  Simply follow the link on the right hand side of the home page.

The case for Japan has been made many times over the last 20 years, but the trend of the market, as we all know, has been one of prolonged decline, punctuated by periodic false dawn rallies. Dr Nairn concludes however, after looking in detail at the 40 year trends in Japanese profitability, growth, national debt and demographics that there are now compelling reasons for buying into the Japanese story. Many shares are cheap and it is a myth that all Japanese companies are condemned to earn lower profits than their counterparts in other countries.

Written by Jonathan Davis

January 10, 2011 at 11:59 AM

Reflections on Japan (Again)

As an investor in one of their funds, I follow the comments of Stephen Morant and Ian Wright, founders of the specialist Japanese investment management boutique Morant Wright, with interest.  Their latest quarterly market review provides a useful snapshot of the state of play in the Japanese stock market. Anyone hoping for a sustained recovery from the 20 year bear market in equities has long since learned to live with disappointment. The down-up-down market cycle in Japan has offered regular trading opportunities, but for many years, despite looking cheap at face value, nothing more in the way of a permanent recovery.

The 20-year graph of the Topix index (above) tells the story. Recent stock market action however has been more encouraging , with both the shorter and long term moving averages moving higher since the summer last year.


There is the added lure, for contrarian investors, that institutional and private investor interest in Japan remains at a historically low ebb and valuations for many companies look attractive in both absolute and relative terms. These are exactly the kind of market conditions from which a roaring bull market could one day emerge. At least one of my regular professional investor contacts has recently upped the Japan weightings in his global portfolio to more than 15%, its highest level for a long time.

In their latest quarterly review, Morant Wright take a characteristically measured view. Here is an extract:

Individual involvement in the stock market is low. Equities account for just 6% of their total financial assets of ¥1500trn whilst cash holdings are around 55%. These figures are similar to the levels at the lows in 2003. There is little margin trading and IPOs last year were at the lowest level for many years. Over time individuals will come back to the market.

Institutional exposure to the equity market is also low, but it is perhaps more difficult to see this changing in the near term. Trust banks, on behalf of pension funds, were big buyers early in 2009 as their equity weightings fell below target, but more recently they have been quiet. There is discussion of the Government Pension Investment Fund taking a more active approach with its holdings of domestic equities, but this may well become mired in bureaucracy. Banks are structural sellers as equities still represent 40% of Tier I capital – too high for most – and the insurance companies still seem keen to reduce risk despite the obvious value. It will take time for confidence to be restored and for institutions to take a proper role in the stock market, as seen in other countries. On the other hand, share buybacks by companies are likely to recover, which might absorb any institutional selling.

The corporate sector has responded in a very positive way to last year’s crisis. Considerable restructuring has been undertaken and some harsh decisions have been made. Not only has there been a reduction in the temporary work force but permanent jobs have also been lost. This looks to be continuing with many companies having early retirement programs in place. Factories have been closed down; for example, Panasonic Electric Works has closed 5 of their 15 domestic plants and Sekisui House has shut a major prefabricated housing factory. This rationalisation and better utilisation of assets seems to be a continuing theme.

The corporate sector continues to reorganise, with mergers and acquisitions occurring across a wide range of sectors. Sumitomo Trust and Banking is merging with Chuo Mitsui Trust. The non-life insurance sector is effectively reducing to three companies as Mitsui Sumitomo combines with Aioi and Nissay Dowa, and Sompo merges with Nippon Koa. Hitachi has bought in a number of its subsidiaries at large premiums. Companies are also looking overseas for acquisitions, with, for instance, Shiseido recently taking over Bare Escentuals in the US.

Companies are also in a very strong financial position. Debt has fallen significantly and 43% of Japanese companies now have net cash on their balance sheet. Free cash flow has also expanded over the last two years as capital investment has fallen. There is a big question as to what companies will do with this money. Final dividends this year have increased by 5% but it is not clear by how much dividends will rise next year when earnings recover. Still the yield on the stock market at 1.9% is comfortably ahead of current bond yields. Buybacks have naturally fallen sharply this year as uncertainty over the outlook gave rise to caution, but as mentioned above they could increase again next year.

Restructuring has had a significant effect on earnings with many companies revising profit forecasts upwards despite fairly lacklustre sales. Earnings for this fiscal year are obviously depressed as a result of the poor first half but brokers are expecting a significant recovery next year and for TOPIX as a whole the earnings per share is expected to be above ¥50. The historic book value of TOPIX is about 820, and the current value is probably a little higher given the recent upward movement in the stock market. The return on equity is thus over 6% and with the price to book a little over 1.2 times the valuation feels very comfortable. Operational gearing appears high and further profit growth is also forecast for the year to March 2012 to well over ¥60 EPS, which should take the market higher over time.

We have all been to Japan recently and also had a significant number of conference calls with companies. We have been impressed by the restructuring and earnings recovery, with nearly all companies increasingly confident about the outlook for profits. Many are emphasising Asia in their longer term plans. Although the market has moved higher it is still modestly rated by historic standards on a price to book basis. The sell off in the autumn of 2008 and early 2009 allowed us to purchase many quality stocks, including some exporters, but we remain mainly domestically focused with a mid-cap bias. Our portfolio trades at around 0.85 times book value, a significant discount to the market.

What is noticeable from the charts is that the recovery in the Japanese market continues to lag significantly behind the MSCI World index. It would be no surprise to see that gap start to close in due course, and for my money it is certainly no time to be reducing exposure to Japan, serial disappointment though it has been.

Written by Jonathan Davis

April 15, 2010 at 9:32 AM

Posted in Japan

Andrew Dalton On The Markets

As someone who is required to read a huge amount of written material about investment, I have spent many years looking for experienced professionals who can write both clearly and with integrity about the the changing dynamics of the markets. By that I mean experts who are not just easy to read and understand, but who have the judgment and experience to be able to distinguish between “noise” and substance – to pick out what matters from the daily torrent of information and data that is now available to all market participants courtesy of Reuters, Bloomberg, the Internet and traditional news media.

One of the few who meets this demanding set of criteria is Andrew Dalton, who spent 30 years as one of the key senior management team at Mercury Asset Management before setting up his own fund management firm, the Dalton Strategic Partnership, seven years ago. He is going to be contributing his weekly market reports on a regular basis in future for Independent Investor. This is his take on the events of the week ending 7 March 2010.

The rally which began in mid February has continued last week. The pressure associated with Greece lifted slightly. The Greek government completed a €5 billion bond issue, albeit at 35bp of yield above the market. This provided modest relief to the Euro on Friday. From a technical point of view, equity markets maybe slightly over-bought on a short-term basis. However, there has been a notable decline in selling pressure over the last three weeks, together with signs of greater buying power.

Markets have broadened, particularly in the United States, where it is now clear that mid cap and small cap indices are above their early January highs, even if the S&P itself is not yet there. Economic statistics, coming out of the US have been complicated by severely bad weather conditions in February. Nonetheless, the US Federal Reserve Beige Book gives some comfort that economic conditions continue to improve albeit at a relatively gentle pace.

The US non manufacturing ISM index rose to 53 in February, which was above consensus expectations. The details included solid gains in the employment and new orders components. The ISM indices typically are not particularly susceptible to storm related distortions, which are likely to have a bigger impact on payroll and consumer spending data.

Reports from the 12 US Federal Reserve districts contained in the Beige Book indicated that while economic activity remains at a relatively low level, conditions have improved modestly since the last review and those improvements are broadly spread geographically than in the last report. Ten districts reported some increased activity or improvement in conditions, while the remaining two reported mixed conditions. In the last Beige Book eight districts had reported increased activity or improving conditions. Most districts reported that consumer spending in the recent 2009 holiday season was slightly greater than in 2008 but still well below 2007 levels.

Retail inventory levels remain lean in nearly all districts. Auto sales held steady or increased slightly since the last Beige Book in most districts. Non financial services activity generally improved in districts that reported on this sector. Manufacturing activity has increased or held steady since the last report. Among districts reporting on near term expectations, the manufacturing outlook was optimistic but spending plans remain cautious.

This is all good news from the equity investor’s point of view – a positive story but not overblown. There is still enough weakness to reassure the banks that interest rates are not likely to go up soon. Towards the end of 2009, home sales increased in most districts, especially for lower-priced homes. Home prices, this time, appear to have changed little since the last Beige Book and residential construction remains at low levels in most districts. Commercial real estate was still weak in nearly all districts with rising vacancy rates and falling rents.

In essence this reaffirms that while there are clearly some divergences of opinion between FOMC members, the Fed will not feel any pressure to tighten policy or withdraw liquidity (beyond what is already scheduled). Elsewhere, notwithstanding the strength of the Japanese yen, Japanese exports are recovering quite sharply. Japanese exports have risen 46.8% from a year ago while imports are up 34.7%. The trade surplus in February was ¥99.4 billion, up from a deficit of ¥141.5 billion a year earlier. On a seasonally adjusted basis, exports have accelerated steadily from 0.6% growth (a month) in July last year to a record 8.6% month-on-month rise in January. Meanwhile, the Japanese stock market is cheap still.

The problem is to identify who will be the buyers. In Japan, foreign investors were net buyers of Japanese stocks for the third week in a row last week by a ¥82.5 billion margin (down from ¥100.5 billion the week before). Japanese trust banks, though, were net sellers of ¥86.6 billion shares. Individuals were net buyers but only by a ¥1.0 billion margin, although this compared to being net sellers of ¥49.0 billion the previous week. The press commenting on the Japanese Ministry of Finance’s latest corporate statistics report are still pessimistic and focused on the weakness of current corporate fixed investment spending instead of the 102% rise in profits. In fact, Investment spending has fallen 17.3% from a year earlier.

Our guess is that it will pick up. Anyway, Japanese corporate profits bottomed in 2009 January to March quarter, albeit at a historically low level. Looking at the four previous corporate earnings upcycles excluding the current one), on a simple average basis they have lasted 13 quarters, which suggests that the recovery will continue quite some more time. Capital expenditure has continued to fall but, historically, capital expenditure bottoms out approximately six months after capacity utilisation bottoms out, which has already happened. We remain modestly positive about Japan.

Written by Jonathan Davis

March 9, 2010 at 10:00 AM