Dividends yields from Japanese stocks are higher than those offered by the S&P 500 – and they will continue to rise, according to JP Morgan.
Speaking at an investor conference in London this week, Nicholas Weindling, co-manager of the JP Morgan Japanese Investment Trust said share buybacks and dividend pay-outs among Japanese companies were growing thanks to strong cash reserves. Japanese listed companies’ cash holdings are currently twice the size of those in the UK – meaning double the potential for dividends or share buybacks.
Share buybacks reduce the number of shares outstanding, increasing earnings per share and elevating the market value of the remaining shares, which in turn can stimulus dividend growth, revenue growth and cash flow.
“Abenomics Has Been a Huge Success for Companies”
A dividend culture in Japanese companies has started to emerge in recent years, thanks to the efforts of Prime Minister Shinzo Abe, Weindling says.
“Corporate governance is changing in Japan, and that is a very big deal. It is having a real impact for shareholders. For the corporate sector, Abenomics so far is a huge success,” Weindling said.
Improving corporate governance means that companies have changed the way they think about shareholders.
“Shareholders are now considered important stakeholders in companies, and as a result, we're expecting improved returns from companies as they apply more disciple and improved dividends,” said Sara Whitley, manager of the Baillie Gifford Japan Trust (BGFD).
Low government bond yields in the developed world will also support growth in Japanese stocks as investors will turn to them to look for income, said Luca Paolini, chief strategist at Pictet Asset Management.
What is Abenomics?
Abenomics are a series of radical economic reforms by Japan Prime Minister Shinzo Abe, which aims to instil sustainable inflation and economic growth. The three arrows of Abenomics, include quantitative easing to kick start economic growth, changes to the tax system to help generate more income for the public purse and restoring the confidence of companies and the public in the Japanese economy.
Since Abenomics began, the global backdrop for Japan has been relatively stable and there have been no domestic crises, thus allowing the fruits to ripen, John Vail, chief global strategist at Nikko Asset Management said. Paolini agreed, saying that valuations of Japanese equities are attractive and an expanded monetary stimulus package is set to lift growth and stands to boost corporate earnings.
Political stability also helps as Japan has a popular political party that allows investors to know what they are dealing with, Weindling added, unlike the political headwinds the UK and the US are facing, which spur market volatility.
Will Japan See Further QE?
Unlike the Federal Reserve, which is winding down economic stimulus, the Bank of Japan is expected to continue to ramp up measures.
“Policy in Japan is very supportive, and it will continue to be very supportive. They want their market to go up, they want there to be inflation, and as investors, that cannot be a bad backdrop for us to invest in,” said Weindling.
BlackRock’s head of global fundamental fixed income strategy, Marilyn Watson agrees, saying that with inflation in Japan far below target, she expects the central bank to remain on a loosening monetary policy stance for some time, and she believes that further easing will likely focus on tools other than bond purchases.
Michael Bell, global market strategist at JP Morgan added that he expects the Bank of Japan to cut rates down to -0.3% and to maintain the current pace of quantitative easing purchases in September.
“There are sort of fears at the moment that the bank might step back from easing because they worry about central banks running out of bonds to buy. But I think that is not the case in Japan, they are likely to be emphasised their commitment to hit the inflation target,” said Bell.
Bell also said that the Bank of Japan might apply policy to benefit banks help offset the downside of negative rates, allowing banks to borrow at negative rates will be one of the options. The Bank of Japan is expected announce any changes to its monetary policy on September 21.
Best Funds for Japan Stocks
“One of the best of the GBP-hedged bunch is the Amundi Nikkei 400 ETF. This, as I said, is hedged into GBP. So you're protected on a daily basis against falls and it allows you to participate in any rise in the stock market,” Lamont said.
“Those looking for plain vanilla cap-weighted alternative may consider the UBS MSCI Japan GBP-hedged Fund.”
For investors who are looking for opportunities in funds that are actively managed by fund managers, Gold Rated Schroder Toyko fund, Silver Rated Aberdeen Asia Pacific and Japan Equity fund and Bronze Rated Invesco Perpetual Japan fund are top rated by Morningstar analysts and have positive long-term track records.
Morningstar analyst Peter Brunt named Schroder Torko one of the strongest funds for Japanese equities, adding the fund’s manager Andrew Rose is one of the most experienced equity managers in the peer group.
Another Japanese equity fund that is not rated by Morningstar analysts, Legg Mason IF Japan Equity fund is one of the most ‘clicked’ open-ended funds among Morningstar.co.uk readers in August.
