Industry Voice: Japanese Equities - Looking beyond headline macro policy

Hiroyasu Sato, chief portfolio manager of the Tokio Marine Japanese Equity Focus Strategy, believes that the impact of the Abe administration/Bank of Japan's macro policy will lessen and now is the time to focus on attractive company fundamentals.

For the past 20 years, Japan has been stuck in an adverse deflationary spiral but we believe that this is slowly changing. Many attribute this shift back to inflation to Abenomics and its ‘three arrows' of aggressive monetary easing, fiscal stimulus and structural reforms, which were intended to revitalise the Japanese economy.

But in fact, we believe the shift back towards inflation had begun even before Abe took office in 2012 and is the result of structural changes at both a societal and corporate level that took place during the deflationary era. As market participants become more accustomed to the Abe administration/BoJ's interventions and their effects begin to wane, examining and understanding these often neglected factors may be the key to making the best investment decisions.

 

What's wrong with an ageing population?

While many people would associate an ageing population with negative connotations, we believe that the change in demography is actually supporting Japan's return to inflation. The first baby boomer generation is now enjoying their current 'retiree' status, the majority of who receive generous company and state pensions. This is in stark contrast to 20 years ago, when corporate restructuring left many fearing for their jobs. At the same time, a tighter labour market from a lack of young workers is helping to lift wages.

 

How have corporates reacted?

While hoarding cash and cutting costs may have worked during the deflationary era, they apply less now in an inflationary one. Companies are being encouraged to deploy accumulated cash and they are doing so - as shown by record dividends and share buy-backs. The introduction of the ROE-linked JPX-Nikkei 400 index and the Japanese version of the Stewardship Code last year coupled with the upcoming Corporate Governance Code this summer should continue to support this change in corporate mindset.

Focus back on company fundamentals

As a local manager, we are beginning to see first-hand a decoupling between headline macro news and company specific performance under a ‘new normal' where ROE is greater than 8%¹ , as shown in Chart 1. This, in our view, is leading to the ‘normalisation' of the stock market, where company fundamentals are reflected rationally.

 

Chart 1: A kink in the relationship between return on equity and price to book ratio shows that company fundamentals are reflected rationally once ROE reaches above 8%

¹ _{Average ROE for Russell/Nomura Large Caps excluding financials is expected to be 9.8% in 2015.}

 

In this growth-biased market, we believe that our strong on-the-ground bottom-upfundamental research and high-touch corporate contact is especially relevant. By quickly identifying and capturing inflection points, such as changes in company strategy, we believe that we can actively select companies with high earnings growth potential.

In fact, we have identified two themes which we expect will strengthen the growth drivers of certain companies.

New breed of exporters: We have been closely monitoring traditionally domestic-facing companies that are transforming themselves into a new breed of exporters. These companies are making inroads into the lucrative Asian market, where incomes have been steadily rising.

Company consolidation: Fierce competition in overseas markets has forced Japanese companies to streamline their business operations and cut product lines in an effort to survive. This has led to some companies unlocking their true growth potential.

Invest wisely in Japan

In our view, Japan still has plenty to offer in terms of attractive investment opportunities but as the dispersion between ‘winners' and ‘losers' begins to widen, we believe that active stock selection is paramount.As a Tokyo-based investment manager with a strong brand name and a vast network of corporate contacts, we feel ideally placed to pick the best stocks and help successfully navigate our clients through this ever-changing investment landscape.

 

Tokio Marine Asset Management is a Japan/Asia equity specialist with 30 years' market experience and approx. $55bn AUM (as of March 2015). The Focus strategy is a concentrated portfolio of 20-40 high conviction stocks using the best investment ideas of today.
For more information about the strategy, please contact Business Development at Tokio Marine Asset Management (London) Ltd.

Email: [email protected]

Tel.: [phone]

Website: www.tokiomarineam.co.uk

Disclaimer

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