Japan: Why it pays to enter the market now?

luglio 02 2014

The Japanese stock market has benefitted from PM Shinzo Abe's expansive fiscal policy. Historically low stock evaluations and good growth forecasts create a first-class environment right now for fundamental stock pickers to enter the Japanese market - before many international investors have enough confidence to return to the Tokyo market.

Shinzo Abe can do it, believes Stefan Breintner. The deputy fund manager of GAMAX Maxi-Fonds Asien believes the Japanese PM is taking the correct approach to finally break the twenty-year deflationary spiral of the Japanese economy.

"The Japanese central bank recently confirmed that their 60 to 70 trillion yen (435 to 507 billion euros) per year bond purchases will continue. No central bank has ever stimulated an economy so aggressively. The liquidity provided and low interest rates of 0.6 per cent at present for 10-year securities are tempting more and more domestic investors to invest in shares," notes Breintner on developments over the first half of 2014.

In Breintner's view, rising demand together with the expectation of a boost in domestic economic activity are positive signs in favour of a targeted investment in promising Japanese shares:

"After the Nikkei's historic 2013 59% jump in local currency or 25%rise in euros, short-term international investors cashed in some gains at the beginning of 2014, and the Nikkei sagged a little by 6% in the first half of 2014. About 80% of international investors are currently either underweight or neutral on the Japanese market. Judged against the backdrop of recent price trends, many Japanese shares are valued very low.

It's not only Japanese companies which are increasingly buying back shares. With average price/earnings ratios of 15 for the 2014 fiscal year, versus 18.4 last year, and with average price/book ratios of 1.2 in comparison to almost 2 in 2005/06, this is a clear “buy” signal for countercyclical stock picking.“

Recently published economic indicators from Japan however have been relatively disappointing. The export share fell by 2.7% against last year, and if one eliminates volatile food prices, the rate of inflation failed to meet the 2% target in May 2014, falling back slightly from 1.5% to 1.4%. This demonstrates that Abe's 3-arrows policy cannot be expected to show short-term impact. Breintner is not worried about this temporarily weak economic data, however, because it could lead to even more aggressive quantitative easing from the Japanese central bank.

"The planned structural reforms, such as recently-announced tax reductions for companies, need more than a couple of months to take root and develop long-term impact. The yen will further decline if the trade balance deficit rises further in the short term due to decreased demand in Asia and the USA. This drop will strengthen Japan's competitive position and in the final analysis have a positive impact on exports," says Breintner.

The Japanese share of the GAMAX Asien fund was systematically expanded from 11% to the current level of about 30% since the beginning of 2013. Fund management has focussed in particular on cyclical consumer goods, financial assets, energy shares, and securities in the chemical sector. The Fund‟s top Japanese holdings are bicycle component manufacturer Shimano with an excellent global market position, the technology company Panasonic, which especially stands to profit from any yen devaluation, and the construction and property company Daito Trust. The Fund holds these positions on the basis of their favourable valuations and their attractive dividend policies.