Japanese stocks are far from ugly – here’s how to buy in

Here’s something interesting – an article in the FT that is supportive of the Japanese stockmarket but that isn’t written by me. Leo Lewis is looking at Japan and seeing some good stuff.

There are record dividend payouts and there is a guaranteed buyer (the Government Pension Investment Fund and the central bank are huge buyers). There’s a big new buyer in town too – with the introduction of negative interest rates, buybacks are suddenly running at levels well above any previous year (this by the way was exactly the mechanism by which very low rates in the US have given us equity bubbles). Add up the total these three players will buy this year, says Lewis, and you come out at around ¥23bn.

There is also rising evidence that Abenomics is not dead (or at least, says Jonathan Allum in his Blah newsletter, that it is refusing to lie down). Most recent data has been full of pleasant surprises. So why then are foreign investors selling? Lewis says they have sold around ¥10trn of Japanese stocks in the last 12 months alone.

It seems that “all they can see is ugliness”. That makes some sense – there is uncertainty around zero interest rate policy and around the huge intervention into the markets by public bodies. But in the end, stock prices come down to two things – price and the flow of money. Japan is not expensive (down 15% in the last year) – and certainly not relative to the likes of the S&P500.

Our old friend Hugh Hendry of Eclectica is with Lewis on this. He is buying. People have been predicting that the currency would collapse for years, he told Citywire Wealth Manager. But it hasn’t happened. Nor has the long-forecast collapse of the bond bubble. What’s more, reckons Hendry, it isn’t going to happen – something that gives Japan pretty much free rein to keep on printing money and buying assets in its bid to create some kind of inflation. All good for equities.

How should you get in? We’ve looked at lots of different funds in the magazine over the years, but at the moment I am particularly interested in one of the things mentioned above – record payouts to shareholders – and hence in the launch of various new funds around this theme.

One of the newest is the Baillie Gifford Japanese Income Growth Fund. Its starting portfolio yields 2.5% (very good for Japan) and if you get in in the next three months you will pay a management fee of 0.25% for the next 12 months (after that it goes up to a still reasonable 0.65%). Baillie Gifford has an excellent record in Japan (I sit on the board of the Shin Nippon investment trust which has delegated its fund management to them) and that, I think, makes this new fund worth a look – particularly at this price.