Investor eyes are firmly fixed on this week's G20 summit in Osaka, with most keeping a close eye on a possible resolution of the US/Chinese trade dispute. However, away from the Trump and Xi talks, the summit provides an opportunity for investors to take a closer look at the often-ignored Japanese equity market, which has quietly been undergoing major shareholder-friendly reforms. Below, five investors discuss the opportunities currently on offer.
Archibald Ciganer, portfolio manager of the T. Rowe Price Japanese Equity Fund
The Japanese equity market is undergoing significant change, with positive longer-term implications for investors. An improvement in Japan's business environment and in company fundamentals is already evident - reflected in record company profits, increasing shareholder returns, and substantial inflows of foreign investment. Three important market influences have emerged in recent years - rising activism, improving governance and resurgent entrepreneurship - that we believe will underpin Japanese equity returns over the years to come.
For example, new governance codes have been implemented with unexpected speed and determination, effectively changing the playing field for Japanese companies. Where there was previously little in the way of guidance, a clear framework now exists, urging companies to focus on financial management and improving returns to shareholders.
These are not short-term deviations or trends, but meaningful, irreversible shifts in the Japanese investment landscape. Many investors seem to underappreciate the impact of these changes. For us, this disconnect is an opportunity.
Ben Peters, portfolio manager of the Evenlode Global Income Fund
While Japanese brands have become household names in the West, the Japanese equity market derives 58% of its revenues from domestic customers - compared to just 20% for Germany and the UK. Doing business in Japan represents something of a walled garden.
Its distinctive social hierarchy and communication means it can be difficult for overseas companies to penetrate the market. The idiosyncrasies of the market allow plenty of space for domestic firms to operate. This is illustrated by IT consultancies like Itochu Techno-Solutions, which executes IT projects in a manner that suits the Japanese way of doing business.
Other cultural factors play into the hands of domestic firms offering up uniquely Japanese business models. Abe is attempting to loosen up the labour market, but a very high degree of job security is still demanded - and engineer outsourcing firms like Meitec and TechnoPro have built businesses taking advantage of this fact.
Joël Le Saux, portfolio manager of the OYSTER Japan Opportunities Fund at SYZ Asset Management
Japan is on the cusp of a step-change in shareholder friendliness. The amount of share repurchases announced in April and May were twice as large as last year - hitting the highest level in over a decade. The government also recently explored the removal of the ‘poison pill', or takeover defence, which has been a major impediment to improved governance. As Japanese corporate governance is reshaped, shareholders have a unique window of opportunity.
The Japanese economy has finally emerged from a spiral of deflation, economic conditions are robust and company fundamentals have vastly improved. Moreover, we believe trade war fears are overdone. The complexity of the supply chain means Japanese exporters are less vulnerable than many believe.
Domestic plays, underpinned by secular trends, provide a route to growth. Japan's rapidly ageing population is lending support to the railway sector, as the older demographic increasingly chooses to travel within the country. We are also taking advantage of land shortages in booming cities, namely Tokyo, which is attracting a growing number of workers into a scarce amount of land.
Alex Hunter, global equities analyst at Sarasin & Partners
Japan is a test bed for countries set to follow in its demographic footsteps. As the developed world heads towards ‘Japanification', with decreasing fertility rates and an increasing average age, investors cannot ignore lessons of the archipelago.
When investing in Japan, it is imperative to have a sound awareness of its demographic situation. We see a number of compelling investment opportunities in innovative businesses providing solutions for Japan's ageing population and shrinking workforce challenges.
One such company is Cyberdyne. The robotics firm produces Hybrid Assistive Limb ‘exoskeletons', or wearable shells, able to interpret neuronal signals and produce movement. By enhancing the wearer's bodily functions and accelerating the motor learning of cerebral nerves, this transformative technology could drastically improve the quality of Japan's ageing population, particularly patients suffering from Alzheimer's and Parkinson's disease.
Stephen Quan, senior research analyst at Cohen & Steers
We continue to favour Japan in our global real estate portfolio, with developers offering particularly attractive valuations. Amid a more uncertain global trade outlook, share prices should be supported by domestic sector rotation from export-oriented industries to real estate, which has historically exhibited more predictable cash flow profiles.
Our portfolio is biased towards names offering strong asset value growth and improving capital management policies. We also have a positive stance towards J-REITs, especially those growing cash flows organically, such as office and hospitality REITs. We believe these names will outperform those more reliant on external growth drivers, given the current competitive acquisition market. Our view on logistics REITs has also become more positive, as strong demand led by e-commerce has led to accelerating leasing, and companies are showing more discipline when it comes to capital raising.
The Japan office market remains strong, with record-low vacancy rates in Tokyo and strong leasing for new projects. Capital values are well supported by investment demand, positive rental growth expectations and the low-interest-rate environment.