Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Tom Becket, CIO of Psigma explains why Japan still has plenty to offer investors.
Change is a word totally applicable to Japan at this time. The difference in the attitude of people you meet here, be they staff in your hotel to fund managers, is markedly different to that depressionary atmosphere that I first encountered in 2007. Admittedly there are few signs of excess or over-confidence, but there is a general sense that things are getting better. I believe the politics, the economy and are encouraging.
A whole host of companies are still resolutely steadfast in their uselessness
However, the greatest excitement that I feel towards Japan is at a corporate level and my first two days of my most recent trip have been totally focussed on the micro opportunities in Japan. Many companies are bowing to the pressure from the government, regulators and shareholders and starting to improve. Of course, this is Japan, and a whole host of companies are still resolutely steadfast in their previously comfortable uselessness, but elsewhere there are a growing number of companies, who are doing the right things.
Corporate governance improvements are being pursued with the enthusiasm of a zealot in many boardrooms in Japan, providing us as investors with a rich seam of opportunity to exploit on behalf of our clients.
Rather than simply doing all they can to protect their easy and relaxed status quo, many company managements are employing external directors to ensure that they hold a high stand of accountability in their operations. This year the Corporate Governance Code was launched in Japan, which states that every listed Japanese company must appoint two independent directors to their board to provide additional scrutiny.
Companies Adopt International Standards
Of course, there will be comedy appointments and a continuation of cases of cronyism, but many companies are now fulfilling this responsibility. In addition to this welcome change, companies are being encouraged to switch to international standards of accounting (IFRS), as well as producing their results in English, which will come as music to the ears of international investors. Even the barking tradition of holding nearly every AGM on the same day is starting to reverse. Shareholder interaction is being encouraged, as the Stewardship Code launched in 2014 starts to take effect.
As well as these improvements, the other major benefit to investors is that Japanese companies are focussing upon shareholder returns. Dividends are rising rapidly, soaring way, way above the income available on bonds, and Japanese companies are now buying back their shares at such a rate that 1% of the entire market capitalisation of listed Japanese companies is being retired every three months! A renewed focus on return on equity, in part inspired by the Nikkei 400 Index – to be included you have to have a certain level of consistent return on equity – is also helping to make Japan Inc more investible. The government and regulators fresh focus on winding down cross-shareholdings is also a welcome change.
Japan: A Stock Pickers Paradise
So the opportunity in Japan has developed from that which we first became so enthused about in the early part of this decade. Rather than a contrarian value opportunity, which it first was in 2011 and 2012, and then an economic and profit recovery story, which it was in 2013 and 2014, Japan has become a stock-picker’s paradise.
This corporate change theme could well be fruitful for some years to come and the managers we have employed to run our clients’ assets place a huge deal of emphasis on this subject. Being Japan it will likely take time to come through properly, but the signs of hope are undoubtedly obvious.
That Japan is likely to be a multi-year investment opportunity is in itself is a major change from the violently cyclical trading call that Japan was for the first decade that I worked. Just as I changed, Japan can and is changing and it will be very rewarding for those that pick the right stocks and last the distance.
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