Japanese equities have the potential to deliver impressive value for investors over the coming decade following a coordinated, state-sponsored campaign to transform the corporate landscape.
The country has already seen 10 years of solid stock returns. Thanks to ‘Abenomics’, up to the end of April 2022, the Topix generated a compound annual growth return (CAGR) of 11% in local currency terms.
“All of this return was generated by earnings and dividends, with none of that return coming from valuation expansion,” said Carl Vine, co-head of Asian investment at M&G.
This compares with the S&P500 Index, for which nearly a third of its 13.5% return during the same period came from an expansion in valuation. Further, the CAGR from other key, global markets such as EuroSTOXX 50 and FTSE All Share were in the mid-single digits.
Ready to rise
Following the period of what Vine describes as “self-improvement” in the wake of Abenomics, Japanese prime minister Fumio Kishida’s new policy agenda – ‘a new form of capitalism’ – aims to now deliver broad-based and sustained economic growth.
“The institutional infrastructure surrounding Japanese companies has now evolved to the point where it is actively supporting the type of corporate change that is required to deliver another decade of double-digit earnings growth,” explained Vine.
With an expanded toolbox, domestic corporates are more shareholder friendly, in turn paving the way for investors to benefit from balance sheets that are awash with excess assets.
M&G says that around 40% of Japanese companies have at least 20% of their equity value sat in cash.
“There is also excess real estate, cross shareholdings and inefficient working capital to take into account. Balance sheets are loaded with latent value,” added Vine.
New goals for growth
The current political regime is focused on labour productivity and wage growth, led by tax incentives and other government schemes.
A marked shift in Japanese household balance sheets is also on the horizon, to turn the estimated one thousand-trillion yen in deposits – which are earning zero interest – into opportunities.
“We have now got a prime minister that is very supportive of ongoing corporate change and a set of domestic policies coming down the pipe which are supportive for domestic economic growth and for equity ownership in Japan,” said Vine.
Further positive factors for Japanese equities include the fact that voting capital now has a value.
“Thanks to improvements in stewardship and governance, more and more companies today are embarking on journeys of self-improvement. Increasingly, they are looking to shareholders for guidance,” he added.
