Japan: A bargain left behind by the global bull run? - J.P. Morgan Asset Management
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Japan: A bargain left behind by the global bull run?

Contributor Ian Cowie

On some measures, Japanese shares look cheap compared to those in most developed economies. This might prove important because the first step for investors seeking to make a profit is often - but not always - to buy low. However, it is proving harder for investors to find low share prices more than 10 years after America - the biggest economy in the world - began its longest-ever period of rising stock markets, also known as a ‘bull run’. Many developed economies have followed its example and their markets have also reached new peaks but Japan is an important exception to this trend.

Japan is the world’s third-largest economy (Focus Economics - November, 2018) but it is nearly 30 years since its stock market hit an all-time high. Since then the Nikkei 225 index - a benchmark of the Tokyo stock market - has lagged behind major rivals and remains more than 40% below the peak it reached in 1990 (Nikkei 225 long term chart 6 MAY 2019 ). The Tokyo Stock Exchange Price Index or TOPIX, another measure of this market, also remains far below its level of 30 years ago. (Macro Trends – May 6, 2019).

This could represent a value opportunity compared to relatively expensive equities elsewhere for medium to long-term investors. JPMorgan Japan Smaller Companies Investment Trust plc and JPMorgan Japanese Investment Trust plc offer professionally-managed exposure to this economy for investors seeking income or growth or a mixture of both.

Seeking value

One way to assess whether individual shares or stock markets are expensive or cheap is to measure share prices as a multiple of corporate earnings per share; the price/earnings ratio (P/E). A low P/E ratio may mean shares are cheap; whereas a high P/E may mean they are expensive. This is not an infallible guide but it can give investors an idea of what they would pay today to buy a share or stock market’s underlying earnings.

This indicator can be further refined to take account of P/E ratios seen in the past to calculate a cyclically-adjusted ratio or CAPE. On this measure, Japanese shares may offer better value than American shares because the former trade on a CAPE of about 24 compared to nearer 30 times for the latter (Star Capital on Stock Market Valuation as of 30.04.2019). Star Global Ratings On this measure, Japanese shares are a fifth cheaper than American shares.

Reasons to be cheerful

Shareholder-friendly reforms and other economic policies introduced by Japan’s Prime Minister Shinzo Abe have made this country more attractive to investors. The Japanese version of quantitative easing — or the injection by the government of vast sums into the economy — have helped the Tokyo market to a partial recovery.

Abe, who has led the country since 2012 after also being prime minister in 2006-7, has also set out to improve corporate governance - or the way companies are run. These reforms have led to increased focus on delivering value to shareholders. This has included increased dividends - or the income that may be paid to shareholders - and share buybacks. The Nikkei index has more than doubled under Abe’s stewardship to its current level above 22,600 (Macro Trends – May 6 2019).

Artificial intelligence, real advantages

In addition to Japan’s long-established strengths in electronics and engineering, its stock market also offers exposure to new technologies, such as artificial intelligence or AI and robotics. Necessity is the mother of invention in these sectors because Japan’s population has been shrinking since 2010, according to official figures (Ministry of Internal Affairs, Financial Times April 12, 2019).

Japan’s response to a shrinking workforce has given it advantages in cutting-edge technologies that may be adapted elsewhere in future. According to the International Federation of Robotics, (J.P. Morgan Asset Management, May 2019) sales of robots - primarily business to business - increased by 30% last year and there are now three robots in Japan for every 100 workers. By comparison, there are fewer than two robots per 100 workers in America and the global average is near 0.75 robots per 100 workers.

Stock selection opportunities

About 2,400 different companies’ shares are listed in Japan, including many small or medium-sized businesses that may offer scope for substantial growth. Small businesses - those with a stock market capitalisation or total value of between $100m and $1bn - (source: J.P. Morgan Asset Management) and medium or mid-cap stocks - those valued between $1bn and $5bn - are often overlooked and undervalued.

For example, small and mid-cap stocks account for about 90% of Japanese companies. But fewer than a fifth of the smaller companies are covered by six or more stock market analysts and more than 1,000 of these businesses are not covered at all. Where a share is in fixed supply, reduced demand will tend to lower the price and fewer analysts often means a lower valuation. This can create opportunities for global asset management companies with large numbers of dedicated analysts and fund managers.

Income and growth

Income-seekers often overlook Japan’s stock market because dividends used to be low but some pooled funds now offer professionally-managed exposure with an attractive yield. For example, JP Morgan Japan Smaller Companies (stock market ticker: JPS) was established in 1984 and pays dividends equal to 4.5% of its share price (Association of Investment Companies as at 06.05.19). According to independent statisticians Morningstar, JPS has delivered a share price return of 130% over the last five years and 258% over the last decade, as at May 6 2019, but its shares still trade at a discount of 7.7% to its net asset value (NAV).

Investors whose priority is capital growth can obtain an even bigger discount when buying shares in JPMorgan Japanese Investment Trust plc (JFJ) which was established in 1927 and is priced 9% below its NAV. Its yield is modest at 1.2% but dividends were increased by an annualised average of 12.3% over the last five years, according to the Association of Investment Companies, as at May 6 2019. If that rate of growth were maintained - which is not guaranteed because dividends can be cut or cancelled without notice and past performance is not a reliable indicator of future results- then the yield would double within six years. JFJ’s share price return was 121% over the last five years and 260% over the last decade (Association of Investment Companies, May 6 2019).

Buying low is often the first step toward making a profit but it is proving difficult to find low-priced shares more than 10 years after most developed markets began to recover from the global credit crisis. While American shares hit all-time highs, Japan’s stock market indices remain far below the peaks they hit nearly 30 years ago.

Japanese shares appear to offer good value when their price is assessed in relation to their corporate earnings. Japan enjoys important advantages in artificial intelligence (AI) and robotics, as well as traditional industries such as electronics and engineering. Many companies listed in Tokyo are not followed by any fund managers’ analysts and so may be overlooked and underpriced. JPMorgan Japan Smaller Companies Investment Trust plc and JPMorgan Japanese Investment Trust plc offer professionally-managed exposure to the world’s third-largest economy for investors seeking income or growth or a mixture of both.

Investors should remember that share prices can fall without warning and that you may get back less than you invest. However, investment trusts seek to diminish the risk inherent in stock markets by diversification and professional fund management. There are hundreds of investment trusts to choose from. For more details see the Association of Investment Companies.

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