Swiss & Global’s JB Japan Stock Fund fund manager Ernst Glanzmann says investment opportunities in Japan remain strong
Despite a strong rise in Japanese stock prices since November 2012, opportunities still exist for investors. With solid economic policies in Japan, steady growth in much of the world and continued yen weakness, earnings estimates are likely to be gradually upgraded giving support to a healthy equity market.
Improvements in operational efficiency unrecognised until recently
Since the financial crisis of 2007-2008, Japanese corporates have been confronted with a currency appreciation of 60% against the US dollar. They also had to deal with the Fukushima disaster in March 2011 and severe flooding during the monsoon season in Thailand later that year.
Business leaders took vigorous steps to maintain competitiveness in this tough environment and continued to expand overseas. However, an unremitting strong currency had masked improving operational efficiencies. As a result, the Japanese equity market remained flat while other markets moved higher from the lows of 2009.
Better operational efficiency in corporate Japan comes at a time of heightened optimism for reform under the new government. Prime Minister Shinzo Abe introduced a plan of “three arrows” to revive the world’s third-largest economy through monetary measures, fiscal stimulus and structural changes to improve competitiveness.
Unlike previous policy changes, the measures were seen as credible by financial markets. Subsequently, the yen has fallen back to the lower trading range of 100 to 120 against the US dollar, last seen before the financial crisis, and the equity market has essentially closed the gap.
Corporate profit growth to exceed other developed markets
According to our analysis of Bloomberg data net profits of the MSCI Japan constituents should double within the next three years. Roughly 60% of this increase will likely be realised this financial year and the remaining 40% in financial years 2014 and 2015.
The main contributors to this substantial turnaround are expected to be automobile assemblers and components manufacturers. In addition, electric power producers should move from a position of heavy losses following Fukushima to generate meaningful net profits by March 2016. Equally, more rigorous measures to improve profitability should enable a weakened consumer electronics industry to be back in the black soon.
After a big jump this financial year, corporate net profits should grow by 15% per annum thereafter until the end of March 2016. This growth rate compares favourably to other developed markets, which are expected to grow by 10% per annum.
Impending reforms boost economy
Forthcoming structural reforms in Japan are likely to include free trade agreements (for example, the Trans-Pacific Partnership, trade and investment negotiations among 11 nations bordering the Pacific), special economic zones, corporate tax cuts, deregulation in the agriculture and healthcare sectors, as well as raising female labour participation and an overhaul of the country’s energy policy. Although free trade agreements will further expose Japanese companies to global competition, the benefits are likely to more than compensate. Strong companies should benefit not only from the lower trade barriers, but also from industry consolidation.
JB Japan Stock Fund celebrates triple anniversary
The JB Japan Stock Fund celebrates a triple anniversary in the midst of a positive reversal in the fortunes of Japanese corporates. The fund’s 20th anniversary coincides with Ernst Glanzmann’s tenth year as fund manager, and the fund’s “two-pool” investment strategy, which combines a bottom-up approach to stock selection and a quantitative strategy, has now been in place for five years.
Since launch on 28 May 1993, the fund has returned 25.6%¹ outperforming its benchmark, the MSCI Japan Local by 31.8%. The fund has returned 59.0%¹ in the 12 months to 31 May 2013. Over three years the fund has returned 40.0% outperforming its benchmark, the MSCI Japan Local, by 3.1%. Over five years the fund has outperformed the benchmark by 15.1%.