Is it time to invest in Japan and its “cheap” stock market?

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Japan has a new prime minister after the leadership of the ruling Liberal Democratic Party has been taken over by Fumio Kishida, who, after taking over from Yoshihide Suga, will be tasked with reviving an economy severely damaged by the Covid-19 pandemic.

The Japanese stock market has had a year of ups and downs, on top of many years of soap opera, but some investors believe it continues to look cheap compared to its global peers, such as the United States. , and potentially offers a longer-term lucrative opportunity.

Recent figures show that Japan’s GDP grew faster than expected in the second quarter of 2021, but slow progress in Covid-19 vaccinations and ongoing pandemic restrictions mean the country’s economic recovery remains fragile.

Japanese stocks had a mixed year, but analysts believe the market continues to look cheap

Japanese stock markets had a volatile year.

The Nikkei 225 hit the 30,000 mark in February, the index’s highest level in 30 years, supported by the Bank of Japan’s pandemic-induced monetary stimulus and asset purchase programs.

But a series of Covid-related setbacks have squeezed the gains of the index, which is up less than 6% since the start of the year.

Data from index provider MSCI shows that Japanese stock markets have performed reasonably but not dramatically in previous years, with average annualized returns of 7.6% over five years, compared to a global average of 11, 9%.

To put this in context, the UK only scored 0.6% on the same basis, while the US and China got 15.4% and 7% respectively.

Former Foreign Minister Fumio Kishida to succeed Yoshihide Suga as Japanese Prime Minister on Monday

Former Foreign Minister Fumio Kishida to succeed Yoshihide Suga as Japanese Prime Minister on Monday

What’s important to investors supporting Japan is that its companies have undergone a constant process of reform in recent years, hiring independent directors and placing more emphasis on creating shareholder value.

The desire is to make the nation a more shareholder-friendly place, and Japan was one of the best dividend producers in the world until 2020, when companies around the world were forced to cut investor payments.

Ben Conway, head of fund management at Hawksmoor, said the arrival of a new prime minister should not change the long-term outlook for the Japanese market.

He said, “Japan is certainly still cheap compared to other markets. We do not place too much emphasis on the political situation because we believe that the reasons for investing in Japan: cheap valuation and a marked improvement in corporate governance, will not – or have not been – – assigned by a new Prime Minister. ‘

Is the Japanese stock market cheap?

The gap between Japanese and US stock markets on valuation using the Cape ratio has widened significantly

The gap between Japanese and US stock markets on valuation using the Cape ratio has widened significantly

The Japanese stock market is often referred to as cheap, but investors should carefully weigh this claim.

Duncan Lamont, of Schroders, warns that no global stock market is looking really cheap right now, but says, “In terms of relative value, Japan seems to offer better value, but it has always been underperforming and n This is not without risk, and the same is true for the United Kingdom.

This contrasts with the United States, which seems particularly expensive for a variety of measures. Still, US stocks have been in this position for some time and have continued to offer high returns.

It is certain that the gap between Japan and the United States in terms of valuation using the cyclically adjusted price / earnings ratio has widened considerably.

Schroders’ analysis shows that, while the United States is trading well above long-term averages across Cape Town, measures of price / earnings, price / book, and forward and forward dividend.

Japan is relatively cheaper than the United States, but only trades based on its own long-term averages.

How major markets compare to valuation by different metrics

How major markets compare to valuation by different metrics

The potential value in Japan has not gone unnoticed in the UK, with personal investors pouring a total of £ 223million into Japanese funds from the start of the year to the end of July, according to data from the Investment Association.

But the average IA Japan fund returned just 18.7 percent, 48.8 percent, and 134.9 percent over one, five, and 10 years respectively.

This reflects the underperformance of these active funds relative to the Nikkei 225’s 27.9% one-year return, 74.7% five-year and 238.5% 10-year.

“The main opportunities remain to invest with managers who can access the cheaper segments of the Japanese market, combined with a willingness to engage with company management to unlock value,” says Conway.

“It is also a question of investing with managers who can take advantage of the wide dispersion of valuations within the market”.

He pointed out Jupiter Japan Income, Value of the polar capital Japan and M&G Japan Small Business as good examples of funds that should benefit from the value offered by Japanese equities.

Square Mile Investment Consulting and Research investment research analyst Ajay Vaid also selected Jupiter Japan Income as a fund to watch for investors “looking for growing income as well as capital growth.”

He says, “It focuses on identifying typically large and medium-sized businesses that are financially stable, with high quality and committed management teams, and net cash on their balance sheets.

“As a revenue-driven strategy, it also aims to own businesses that can grow their profits and cash flow to enable them to pay growing dividends.”

Vaid also highlighted the “highly regarded fund management team” behind Baillie Gifford Japanese, which “seeks attractive valued growth companies of all sizes” with investment decisions based on “a detailed analysis of a company’s individual merits and long-term growth potential”

Japanese high-conviction fund BG has a number of well-known global brands among its holdings, with Nintendo, Sony and Softbank among its top 10 positions, with a relatively low ongoing charges figure of 0.61%.

All Japanese sector investment trusts are currently trading at a discount (AIC)

All Japanese sector investment trusts are currently trading at a discount (AIC)

But there are cheaper ways to buy exposure to the Japanese stock markets, through passively managed exchange-traded funds.

The average total expense ratio of MSCI Japan ETFs is between 0.12 percent per year and 0.59 percent, according to justETF.

The site lists HSBC MSCI Japan UCITS ETF (USD), Lyxor Core MSCI Japan UCITS ETF and Xtrackers MSCI Japan UCITS ETF as the “best” options, based on one-year performance at the end of August.

There are also a number of potential bargains currently in the world of UK listed investment firms investing in Japan, which are currently trading on average at a 6.7% discount off net asset value, according to data from the Association of Investment Companies. .

A similar, but less serious, situation is true for the Japanese small business investment trust sector, which currently enjoys an average discount of 1.8 percent to net asset value.

In fact, each investment fund in the Japanese sector is currently available at a discount, ranging from 13.64 percent to NAV for CC Japan Income and Growth to a 2% discount on the net asset value for Baillie Gifford Japan.

Japanese JPMorgan is currently trading at a 7% discount to the net asset value of £ 748million, which Kepler analysts say reflects a good opportunity for investors to “buy down”.

The London-listed investment trust returned 56.6% and 121.2% over three and five years, respectively, outperforming its Japan-focused peers during those periods. It also outperformed on a total return to net asset value basis.

However, JPJ had a more difficult year, having underperformed its peers and the broader index.

Kepler analysts said, “We believe JFJ is an attractive strategy for a growth-oriented investor. This isn’t just because of its impressive track record, but also because of the way its managers focus on capitalizing on the age-old trends that drive Japan.

“These trends often have long avenues for growth, given the time it takes for them to materialize. Two examples of multi-year trends are corporate governance reforms and the aging of the Japanese population, with significant progress still being made in addressing these issues. ‘

> Watch a video interview with the Japanese manager of JP Morgan from summer 2020

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