Japan will get more than its fair share of headlines next year thanks to the Tokyo Olympics but fund managers believe investors should be paying attention to the country for more than just the sporting extravaganza.
The Olympic and Paralympic Games Tokyo 2020 will run between 24 July and 9 August as the country hosts the event for the first time since 1964. However, it is unlikely to lead to much direct benefit for investors – but that doesn’t mean they should overlook the world’s third largest economy next year.
Dan Carter, manager of the £553.2m Jupiter Japan Income fund, said: “Whilst the event will no doubt command plenty of column-inches, the time to invest in the theme was during the construction phase, and that is long gone. Fear not though, beneath the sport-centric headlines there are other potentially Olympic-sized themes to which investors will want to be alive.”
There are several factors that Carter thinks will be important to Japanese equity investors in 2020 and the first is “the potential realisation of huge latent corporate value”.
He noted that Japanese stocks are widely regarded as being cheap but, despite this, overseas investors have tended to be sellers rather than buyers of Japanese equities and there has been relatively little in the way of M&A activity.
“In short there have been few takers despite the apparent value,” he said.
“This appears to be changing on a number of fronts; both private equity companies and activist investors are smelling opportunity whilst Japanese companies are taking matters into their own hands by buying up their own shares in quantities never seen before. Expect this to continue in 2020 with potentially striking results.”
Performance of indices under Abe (in local currencies)
Source: FE Analytics
Secondly, Carter highlighted the number of businesses that are “queuing up to list in Japan”. Many of these firms are involved in cutting-edge parts of the market, dealing in information rather than hard assets.
“These businesses inject much needed vibrancy into the Japanese equity market in sharp contrast to its staid image,” the manager said.
“Great investment opportunities are likely to be found in this new crop of potential unicorns but success is far from guaranteed and there will be plenty of nags too. One thing is clear – things are about to get interesting.”
Daisuke Nomoto, head of Japanese equities at Columbia Threadneedle Investments, believes that the Tokyo Olympics could have some upside for investors. He pointed to the 1964 event, when Japan showcased its pioneering high-speed Shinkansen train.
“This time it will showcase its many ground-breaking technological innovations, from robotics to autonomous driving,” he added. “This is just one more reason why we believe 2020 will be a good year for Japanese equities.”
Nomoto, who runs the £758.9m Threadneedle Japan fund, argued that the many structural reforms that the country is pushing through – especially those that concern corporate governance – could be “game changers” for long-term equity investors.
This renewed focus on putting excess cash to work through share buybacks, dividends and acquisitions has already had a tangible effect in Japan, with return on equity doubling to around 10 per cent over the past five years. This puts it in-line with European averages.
“We believe there is further to go which can only be positive for share prices,” he added.
In addition, Nomoto is optimistic about Japan’s economy. While global growth slowed in 2019, there are signs that it has already hit the bottom and Japan's industrial production has rebounded, as reflected in upticks in exports and machine tool orders.
Meanwhile, the Threadneedle Japan manager suggested Japanese equities have priced in most of the downside risks of the US-China trade dispute and would do well if the ongoing talks resolved this tension.
“Even mere stability would benefit Japanese equities, especially cyclical stocks,” he said.
For Schroders head of Japanese equities Ken Maeda, the most important event on the horizon is not the 2020 Tokyo Olympics but the end of prime minister Shinzo Abe’s term in 2021.
“For 2020, there is some uncertainty over what the prime minister will look to achieve in his remaining time in office. It is widely known that his personal ambitions include reform of Japan’s constitution but there is little evidence so far that he is building the kind of consensus which he would need to get this done,” Maeda explained.
“As equity investors, we would much prefer his efforts to be focused on more pressing economic reforms and would regard anything else as a distraction. Short-term economic decisions will centre around the scale of additional fiscal stimulus, as evidence of the impact from the increase in consumption tax on 1 October becomes clearer over the coming months.”
At present there is little visibility on Abe’s likely successor, but his Liberal Democratic Party seems “virtually certain” to retain power, suggesting that there will be strong continuity in both fiscal and monetary policy.
Furthermore, Haruhiko Kuroda will remain as governor of the Bank of Japan, which means it is unlikely that the country’s monetary policy – which has a very loose stance in a bid to stimulate the economy – is in for any changes.
“Additional easing, including cutting short rates further into negative territory, is possible, especially if any strengthening of the yen generates renewed downward pressure on inflation,” Maeda said.
Like all of the above commentators, Maeda pointed out that Japan’s valuations look compelling when compared with its international peers. However, he argued that there might need to be better visibility on near-term earnings growth to drive the market up to the next level.
“Against other developed markets, however, Japan continues to offer very good value, although this has been the case for so long that we all seem to regard it as ‘normal’,” he concluded.
“Nevertheless, we do have conviction that the moves towards better governance and better capital allocation will improve companies’ return on equity and will ultimately remove the discount at which Japan has consistently traded in recent years.”