This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Tom Becket, chief investment officer of Psigma tells investors not to give up on Japan.
Here are some of the consensus views on Japan;
1) Abenomics has failed
2) You should avoid Japanese equities as there are no catalysts
3) Japanese shares are expensive after last year's fireworks
4) The consumption tax rise is 1997 all over again
Here are my responses;
1) The changes in Japan over the last eighteen months have been extraordinary and far-reaching. Abenomics is working and structural reform is taking place
2) Care less about catalysts. Look for value opportunities – Japan is one. Focus on the corporate earnings that remain solid
3) Japanese equities are as cheap as they ever have been against US equities. They are also cheap on a global context. They are also cheap on a historic basis. Finally, they are cheaper than they were before the advent of Abenomics. Within the Japanese market, banks are as cheap as they ever have been vs. the wider TOPIX index
4) The issues around the consumption tax rise in 1997 were hugely amplified by domestic issues (the banks were bust) and exogenous factors (Asian financial crisis anyone?). The Japanese economy is now strong enough to withstand the rise and this is borne out by anecdotal evidence from the likes of Fast Retailing, the Japanese retailer
I could easily just stop there, but feel that I should justify these points further. On the first point, I remember back two years ago, sitting jet-lagged in Lazard's Japan offices discussing the outlook for the market with a fund manager there. He didn't know what would change Japan but he agreed that change was coming and the effects on Japanese stocks would be mighty.
Something was about to break and within a few months he was right. If we had drawn up a list then of Japan discussing the Trans Pacific Partnership, a material shake-up at the Bank of Japan, the adoption of super-charged QE, the embarkation upon a path of corporate reform, the writing a Stewardship Code for equity holders to take management to task, a big overhaul of the omnipotent Government Pension Investment Fund (GPIF - who are set to increase their domestic equity allocations shortly, in our view), the creation of a new equity index focussing on return on equity, the introduction of Japanese ISAs and growth in corporate profits of over 70%, I would have been rightly committed.
But the above has all happened. If I was then to suggest that Japanese equities would de-rate by 20% over the period that they made all these enhancements, I would surely have been laughed at. However, this is exactly what has happened. Yes, the market has gone up a long way, but so have earnings, contrary to the experience of many other global equity markets such as the US, that are so en vogue. Japanese equities are now outstandingly cheap. The recent falls have offered investors who missed the boat last year the chance to benefit from this great growth opportunity and we are increasing our Japanese overweight. We are focussing on funds that like the banks, property and consumption names, which have performed appallingly this year, because Abenomics is finished, and see them as one of the best opportunities across all global financial markets.
If you want a catalyst, the GPIF news is potentially huge and has been glossed over by investors who obsess with the lack of recent downward momentum in the yen.
I don't care if we are all by ourselves. If investors wait for the catalysts they may well miss the chance. I might still be the proverbial leper for many years to come, but this trade will be good for a while longer.
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