Japan offers competitively valued equities
Recently, there have been a number of subtle yet significant developments in Japan. Prime minister Abe, normally regarded as both a nationalist and populist, failed to visit the Yasakuni shrine on the anniversary of Japan’s defeat in the Second World War, in a move seen as designed to mend relationships with Japan’s key trading partners South Korea and China.
Another key development was the appointment of Yuko Obuchi as industry minister. Her role will be to lead some of the key third arrow reforms, but importantly, in the near term, to smooth the way to reopening some of Japan’s nuclear plants, reducing the strain of imported liquefied natural gas, particularly with a further weakening yen.
Abe is one of Japan’s longest serving post war prime ministers, and while tangible progress on his reforms is difficult to identify, recent actions suggests he remains committed to achieving them and continues to consolidate his popularity. The renewed weakness of the yen should provide a boost to the economy in the meantime.
Unlike most other markets, in Japan it remains possible to find companies that appear genuinely good value. Outside of the most obvious mega cap international names, Japanese companies offer in many cases the rare combination of strong underlying fundamentals and low valuations. We have recently added a number of new holdings in Japan such as a supermarket chain, Valor, with a successfully competitive strategy trading at close to book value and 10 times earnings.
Another example is solar water heater manufacturer Chofu Seisakusho, which is currently valued at less than book value. Similar examples of mid-sized Japanese profitable companies at less than book value are numerous and many of these have consistent records of high returns and growing profits.
Our expectation is that as Abe’s policies begin to bear fruit, investor interest will reignite in Japan which should allow valuation gaps to narrow. The potential upside from both improving fundamentals and valuations is significant.
David Jane is manager of Miton’s Multi Asset funds