Why investors can’t afford to ignore Japanese stocks
Japan boasts the broadest market outside the US, replete with cash-rich, resilient companies that have battled their way through 30 years of deflation, says Merryn Somerset Webb. And it hasn’t been this cheap in years.
Earlier this year it looked as though Japan was having a very good pandemic indeed. Cases had been low. Total deaths were under 2,000, in a country with a population double the size of ours. In April Prime Minister Shinzo Abe announced that this is the result of Japanese exceptionalism – the result of doing things in a “characteristically Japanese way”. His deputy went a little further. The success, he said, was about Japan’s mindo (a not very easily translatable term that refers to the quality of a group of people) being tip-top.
Other suggestions centred around Japan’s very low level of co-morbidities – very little obesity and hence very few type-two diabetics, for example; the fact that the Japanese rarely entertain in their own houses (most interaction is in bars and restaurants outside the home); the existence of local health centres originally set up to track and trace tuberculosis sufferers; the cultural traditions that mean the Japanese rarely touch each other; and finally the prevalence of the tuberculosis vaccine, which is thought to provide some kind of immunity.
The problem? It turns out exceptionalism is less common than one might think. Cases are now ticking up in Japan. Its first two waves were bumps on the graph, but it is now seeing a seven-day rolling average of over 3,000 cases a day, while deaths are nearing 3,000. This is a miserable example (although it is worth noting that, like most east Asian countries, Japan is still doing wildly better than any countries in the West).
But it should perhaps serve as a reminder that while lots of things about Japan are different and interesting, it isn’t, as the newly retired Japan strategist Jonathan Allum says, “uniquely unique” (listen to our podcast at moneyweek.com for more from Allum). That, says Allum, is something that more investors should recognise. Too many shun Japanese equities, or if they don’t ignore them completely, they consider stockpicking in Japan “problematic” and “index their Japanese portfolios even while running the rest of the world actively”.
The market’s breadth is unrivalled outside the US
The first of these things is definitely a mistake – and the second probably is too. Japan’s stockmarket has a “breadth that is unrivalled outside the US”. It is home to some of the world’s most important companies. And its stock of listed companies “is replenished by more than 80 initial public offerings (IPOs) every year” – at a time when many Western stockmarkets are shrinking. It has an increasingly shareholder-friendly bias after many years in which you could have suggested it was taking the idea of stakeholder capitalism to an unwelcome extreme.
Its company reports are no longer impenetrable and its larger firms “employ slick investor-relations departments” and (pre-Covid-19 at least) tour the world to meet foreign investors. There’s more good news. Its companies are in very good shape. Peter Tasker of Arcus Investment points out that of the few companies in the world that are over 200 years old, 55% are in Japan. They must, he says, be “doing something right” (for more from Peter go to moneyweek.com and listen to our podcast with him). There is no way that any that aren’t could have survived the last 30 years. The deflationary environment in place since the crash of 1989 has forced continued cost-efficiency on the corporate world and bred a fondness for cash not seen anywhere else. If the post-pandemic investing buzzword is to be “resilience”, Japan should be the market everyone is heading for.
Its listed companies went into this crisis with the biggest cash reserves ever recorded: around $6.5trn in cash and short-term securities on their balance sheets, says Jesper Koll, an adviser to Wisdom Tree Investments, in the Financial Times. That formed a “war chest” worth some 130% of GDP and one that is nicely spread around the market: in May 54% of Japanese companies had a cash pile worth more than their shareholders’ equity. In the US the ratio is less than a third of that and what cash there is, is jammed into the already too-full pockets of the big tech firms.
This matters. Japan’s cash provides a buffer against the rolling disasters that appear to make up the modern world and could mean that there is a wave of mergers and acquisitions ahead. That’s something that is usually good for markets, particularly ones as fragmented as Japan’s. Look out for activity in the car-parts, insurance, chemicals and base-metals sectors, says Koll. But it also means that Japan can guarantee investors something they really want: income.
The payout ratio has long been pretty low (up to 35% of net profits). But it has been creeping up and is now around 60%, thanks to a rise in both dividends and share buybacks, which were very rare in Japan until five years ago. Buybacks have fallen back a bit this year amid the uncertainty, but the overall market comes with a dividend yield of around 2.5%. Add in the buyback expected next year, says Tasker, and you are looking at a total dividend and buyback return of around 4%. What kind of fool would ignore that in a negative interest-rate world?
There are two other reasons to be invested in the Japanese market in general...
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