Investors who have benefited from the ultra-stimulative economic policy of Japan's prime minister Shinzo Abe can expect more of the same, according to two investment trust managers active in the country.
At a meeting organised by the Association of Investment Companies this week, Andrew Rose of Schroder Japan Growth (SJG) and Nick Price of Fidelity Japanese Values (FJV) said they expected Abe to easily win the snap election he has called for next month in order to shore up his support at a time of high tension with North Korea.
A third successive win for the leader of Japan's Liberal Democratic Party (LDP) would enable the reappointment of Haruhiko Kuroda as governor of the Bank of Japan (BoJ), the fund managers said. This would ensure the continuation of the massive 'quantitative easing' (QE) experiment under which the central bank has created trillions of yen and bought over 40% of the country's government bonds in a desperate bid to reverse two decades of deflation.
With Japanese anxious after Pyongyang fired two ballistic missiles over their country, Rose expected Abe would win the election ‘handsomely’ as in times of crisis he said voters ‘vote for the incumbent person they trust’.
The threat from North Korea is having less of an impact on Japan's stock market than expected. After a three-year surge following Abe's election, Japan's Nikkei 225 index retrenched for much of 2016 and even after a 12-month rally has yet to regain its end of 2015 peak.
Rose suggested the market's resilience was down to ‘missile fatigue’ and complacency. ‘[The threats] move the markets but the difference is it is worried for an hour not a few days now,’ he said.
However, the Tokyo-based manager said the Japanese were ‘pretty relaxed’ about the threat from North Korea but it was ‘creating short-term, risk-on, risk-off moves and [stocks] may get sold down day-to-day’.
The biggest impact of the election could be on the reappointment of Kuroda. His term ends in April 2018 and while he is seen as a strong contender, defeat for Abe may spoil his chances.
An extension of Kuroda's term of office would be a first in Japan but a break in tradition that the fund managers would welcome. Although QE has not succeeded in reviving inflation, the economy has grown for six consecutive quarters, which Rose said had not happened in 12 years.
‘Corporate profits have entered a positive phase of the revision cycle…valuations are relatively attractive and investors should continue to benefit from improving corporate governance, one of the main successes of Abenomics,’ said Rose.
If Kuroda remains at the BoJ, Rose said Japanese monetary policy would remain as it is and 10-year bond yields would be kept at 0%.
‘At the minute this is proving easy because the BoJ owns 40% of the bond market and it can control the yield,’ he said.
Despite the growth in the Japanese economy, the Japanese stock market has lagged other markets this year which Price said meant share price valuations were more favourable.
‘The current economic expansion is the third longest in the post-war period and with global growth running above trend, the near-term outlook for the Japanese economy remains favourable,’ he said.
‘Corporate earnings have recovered strongly from the second half of 2016 and the latest quarter produced a near 30% increase in net profits, led by the manufacturing sector. And with forward earnings multiple below 14x, valuations compare favourably with other developed markets,’ he said.
Price is focused on small and mid-cap stocks, where he said there is a dearth of research with over 1,000 companies not receiving any analyst coverage.
He sticks to four themes when investing: Asian consumption, internet services, environmental technology and global industry leaders.
Price highlighted retailer Muji as a company to watch in Asian consumption as it is ‘really expanding and rolling out over China in the next five years and will also go into the US’.
Shima Seiki was his preferred stock within the global industry leaders theme. The company creates knitting machines used to manufacture ‘fly knit’ material used in Nike trainers, he said.