Heidi Richardson, global investment strategist for BlackRock, writing in that investment management firm’s house blog, argues that there remain investment opportunities in Japanese equity.
This is a tricky case to make, because as Richardson acknowledges up front, the Government Pension Investment Fund is due to hit its equity target soon.
GPIF: A Spent Force
The GPIF’s move into equities in a big way this past spring was dramatic news, described in Institutional Investor for example as the “secret weapon of Abenomics.” That periodical quoted one manager as saying that this was the “biggest politically driven portfolio shift” he had ever seen.
And the consequences for the Nikkei 225 are what one might have expected. On April 1st the index stood close to 19,000. By mid-July it was above 20,800.
BUT, then it plateaued for the remainder of July and through much of August. And then … and then … the Chinese dragon started coughing up hairballs. (Scale-balls? Whatever dragons might cough up.)
The dragon’s troubles, combined with the sense that the GPIF move is a spent force, has meant for the Nikkei the loss of all the ground had gained over the summer.
Five Points in Japan Equities’ Favor
Still … it wouldn’t be alpha if it were easy. What is Ms. Richardson’s case? She makes five points: valuations; earnings momentum; return on equity; the posture of the central bank; and the institutional world beyond the GPIF.
As to valuation: working from Bloomberg data, the price to book ratio for japan is still just half what it is in the United States, she says.
Well yes, one has to reply, but this isn’t a new development. What Richardson doesn’t mention here (perhaps she thinks it too well known to need mention – in which case I’ll commit the faux pas of spelling it out) is that the Japanese stock market has traditionally been characterized by high valuation levels relative to the rest of the developed world. So this fact itself – that the long-running relationship remains in effect – doesn’t scream “bargain.” Still, it gets us started.
Earnings momentum is a more time-bound point. Japan economy deserves some credit for having pulled itself out of a recent recession, and it is “beginning to show signs of benefitting from a weaker yen” Richardson says.
Well, yes. But (again there’s a but) … the benefits from the weaker yen may themselves have hit a wall. The yen is up in recent days due to its safe-haven status.
This brings us to the RoE. Richardson is here referring to a development in Japanese corporate culture, one in which the managers are embracing RoE as their metric. As a consequence they’re doing such things as giving out larger dividends and repurchasing shares. There is room for more change in this direction, and that is sound grounds for optimism.
Meanwhile, the Bank of Japan doesn’t share in the Federal Reserve’s recent proclivity to talk of normalization, with the scary sound that has to equity investors. The BoJ is still is balance-sheet-expanding mode. Indeed, the BoJ – much more than the Fed or many other central banks – sees the critical equity index as its own barometer of policy success, so the recent decline in the Nikkei mentioned above gives investors reason to believe the bank will ease further.
Finally, in Richardson’s list, there are other institutions, including other pension fund managers, ready to step up and pick up the slack that the GPIF may be about to leave. The Japan Post, in particular (a very important and impressive institution with political winds at its own back), may be about to shift into stocks from bonds.
What “underpins” these reasons?
After working through this list of reasons why Japanese stocks may deserve a good look from investors, Richardson switches to discussion of a meta-reason: something that she says lies beneath the whole list: the continued prevalence of a political climate labelled by the word “Abenomics,” the inflation-and-exports friendly philosophy associated with Prime Minister Shinzo Abe. Abe is a resourceful politician, and he has staked his legacy on nurturing Japan’s public equities. So an investment in Japanese stocks in a bet on him.
To that there is no “but.” It is its own “but.”