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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
Earlier this year, we argued that there were several reasons to suggest that Japanese equities could do well in both the near and long term.
A valuation gap between US and Japanese equities had widened over a decade or more, despite Japanese equities performing strongly – the result perhaps of investors seeing equities as a proxy for the economy. Similarly, the Yen sat at low valuations, due in part to its sensitivity to overseas interest rate changes. Furthermore, macro factors, such as the reopening of China’s economy, were fueling a potential secular growth story for the Japanese economy as a whole, with corporate governance reforms poised to attract further capital into the market.
Since then, the landscape has changed. And, while we don’t often like to blow our own trumpets, these changes seem to fall in line with some of what we predicted. At last, we are seeing a wave of good news for Japanese equities.
First, following three decades of almost continuous deflation, inflation has picked up markedly in Japan, in line with its global peers. While this comes with the same societal and economic concerns as in other nations, it also gives the Bank of Japan the space to move away from the ultra-easy monetary policy of the last few years.
This the Bank promptly opted to do, although relatively new governor Kazuo Ueda plumped for a careful approach, making a marginal tweak to the bank’s 10-year bond yield cap in an effort not to spook markets – an effort that has so far paid off with money flowing into Japanese assets since the announcement. A careful approach is also key to longer-term success, given that the inflationary pressures on Japan are expected to ease in the next two years.
The growing positive sentiment around Japan has been reinforced by the relative performance of the Nikkei 225 year-to-date (01/08/2023), which has risen 27.18%, against a 19.68% rise for the S&P 500 and virtually flat performance from the FTSE 100.
In the investment trust world, we have seen investors turning actively more positive on Japan. One noted example of this was Alliance Trust’s (ATST) decision to add a Japanese equities manager, Dalton Investments, to its manager line-up, a decision grounded in what it says is the undervaluation of Japanese businesses and the country’s corporate governance reforms.
However, amongst this context discounts have remained wide in the AIC Japan sector, with the sector average discount at an almost identical level as of 01/08/2023 to where it sat at the beginning of the year.
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