William Davies, Head of Global Equities at Threadneedle Investments
Quantitative easing has been credited with sparking one of Japan’s strongest rallies in decades. There is, however, a lot more to ‘Abenomics’ (the economic policies advocated by the current Prime Minister of Japan, Shinzo Abe) than QE. Not only has the new government also ushered in expansionary fiscal policy in the form of corporate and investment tax cuts and higher defence spending, it has unleashed a growth strategy encompassing free trade agreements, healthcare research, employment reform and deregulation and privatisation.
In combination, these three measures – or, in prime minister Abe’s words, ‘arrows’ – have caused a monumental shift in the outlook for Japanese companies and left investors scrambling to identify well positioned companies and quantify the benefits of likely policy changes. In our view, while Japanese stocks have run up a long way, they came from a very low base and there is a lot more to go for. We think that the market is overwhelmed by the scale of changes and consensus estimates are likely very wrong.
So how are we playing this ‘new’ Japan in our global equity portfolios?
We hold industry leading exporters such as Toyota and Makita as a lower yen is a clear tailwind for margins. Both stocks also have exposure to an improving US economy.
We like the property and financials sectors. REITs such as Activia Properties benefit from rising rents and asset values, and homebuilder Sekisui Chemical is seeing a pick-up in demand for new energy efficient, earthquake-proof housing. Amongst banks we are invested in a traditional property lender; Aozora Bank, as well as Nomura, an investment bank which is leveraged to increased trading and deal making activity in Japan.
In terms of the domestic economy, we think retailer Aeon and brewer Asahi should both profit from inflation and a chance to raise prices in an economy where they have been falling for years, suppressing margins.
Elsewhere, the government has talked positively about issuing casino licences in Japan. We own Konami, which makes casino games, and Las Vegas Sands, a likely bidder. Analysts estimate the Japanese gaming market could be twice as large as Macau, currently the biggest in the world.
It has been decades since Japan was last an attractive market for global investors, but ‘Abenomics’ is strong policy promoting a reversal of fortunes. With the yen weakened and QE beginning the first effects have already been felt by equity markets. Analysing and taking advantage of further policy measures such as trade agreements will be the next stage for investors, and we expect Japan to be an area of increasing focus for some time.