Investors may have been momentarily disappointed by the surprising news that Japan’s economy has contracted, but any doubt they may have had on the effectiveness of “Abenomics,” Japanese Prime Minister Shinzo Abe’s reform program aimed at rebuilding and reflating the economy, reversed quickly on the back of Abe’s swift response and evident commitment to the plan.
Abe used the third-quarter GDP news to call snap elections in an attempt to renew his mandate. The election “may be a calculated gamble to earn his administration four more years in office at a time when the opposition is bereft of ideas,” The Financial Times speculated.
With “Abenomics” still a reality and Abe himself likely to be in the lead for some time to come, here’s how investors see Japan.
GDP has nothing to do with stock market performance
For the past 20 years, the correlation between corporate earnings and GDP in Japan has been a mere 2%. And though nominal GDP has fallen by 7% since its 1997 peak, pre-tax recurring profits for Japanese corporates are up 104%, said Dale Winner, co-manager of the Wells Fargo Advantage International Equity Fund, “which means there’s really no link between overall GDP numbers and the Japanese market.” That makes Japan, already an overweight in Winner’s portfolio, an even more attractive investment opportunity that’s further bolstered by the ongoing fiscal stimulus, which has resulted in a significant decline in the yen and improved corporate profits.
The recent announcement in Japan that the country’s largest pension fund will be increasing its exposure toward domestic equities, has also increased the appeal of Japanese stocks, Winner said.“All in all, if you put things in context, it’s clear why we’re overweight Japan,” he said. “Not to mention that Japan also trades 20% than the U.S.”
More competitive companies that have yet to realize their full potential
In the aftermath of the global financial crisis, many Japanese corporations that had been hurt by the weakness in the U.S. dollar and the overall economic slowdown also initiated significant restructuring programs in order to lower costs and remain competitive. These endogenous efforts by corporates to improve their core competitiveness, coupled with more helpful exogenous global growth and currency conditions, have not yet been appreciated, said Vincent Musumeci, who manages the Henderson International Opportunities Fund Japan sub-portfolio”.
“Following on from efforts to structurally improve margins—which are still ongoing—we are now seeing the corporate sector improve its focus on capital management and we are now entering a phase where the Japanese listed corporate sector is structurally moving in the right direction in terms of margins, and gradually also now asset efficiency and leverage,” Musumeci said. “This is where the real opportunity lies, especially because Japanese corporate management teams are becoming enlightened towards the cost of capital and increasing dividends and share buybacks in order to lift RoE”