Turning Japanese

After two decades in the doldrums, Could it be Japan’s turn to shine?

 

In the 1980s turning Japanese was all the rage. The Sony Walkman revolutionized the way we listen to music. Companies worldwide were striving to match the quality and efficiency that enabled Japanese firms to conquer the world.

 

Fast forward 30 years and the iPod have replaced the Walkman, and Japan is no longer in vogue. The quality of Japan’s companies has been forgotten. In the minds of investors, high government debt, an aging population and deflation now symbolize Japan. After numerous false dawns, many now shun its stock market.

 

Perhaps investors should remember the words of John Templeton who said “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”. We have highlighted the importance of divorcing economic many times. Nowhere is this truer than in Japan. The underlying economic, demographic and political backdrop has made Japan an unfashionable area in which to invest, but in any mind this makes it all the more attractive; if and when sentiment improves, the market has great growth potential.

The global nature of Japan is a manufacturing powerhouse and a global leader in the development of many cutting-edge technologies. Many Japanese companies are truly global businesses, not reliant on the Japanese population. For example, Sony remains a global leader in consumer electronics, and we see many Japanese cars on UK roads every day.

 

Successfully exploiting global opportunities, including Asian and emerging markets, means many firms’ costs and earnings are outside Japan; movements in the yen affect their competitiveness much less than in the past. Many domestic-facing firms also look in good shape, having cut costs during harder times. It could only take a small improvement in economic conditions for their profits to soar.

Japanese value stocks

Pessimism surrounding Japan has left many shares at bargain basement levels. Many companies trade at, or close to, their ‘book value’ – the net value of their assets. The value of Japan’s entire listed sector is only worth the sum total of its assets, with no consideration given to future profits.

 

The speed with which many Japanese companies recovered from March’s tsunami underlines their quality and efficiency. We’ve been positive on the outlook for the Japanese stock market for some time. Although it undoubtedly faces challenges we believe much bad news is already factored into share prices. We see a great opportunity emerging for long-term contrarian investors.

 

GLG Japan CoreAlpha

Never ones to shy away from a contrarian view, Stephen Harker and Neil Edwards, managers of the GLG Japan CoreAlpha Fund, believe Japan is poised to outperform. Among Japanese stocks they believe financial firms are especially cheap. Having been through the process of reducing the amount of debt on their books over many years, the balance sheets of many Japanese banks look in remarkably good shape. Their share prices have started to outperform those in other global markets, and we believe the future looks bright. Interestingly, retailers are also having a good run with consumer confidence seemingly growing, and the fund is positioned to benefit. The fund can also use derivatives to enhance returns, although this does increase risk. For brave investors looking to invest into what could be the best value global market, we believe this fund is an excellent long-term choice.