Income 1: Growth 0 in a year of two halves
2018 was a year to forget for growth investors. While many stock markets in the developed world hit...
Six years ago, in December 2012, Shinzo Abe was formally elected prime minister of Japan and ‘Abenomics’ – his extraordinary stimulus programme – was launched.
The result: after decades of stagnant growth and false dawns, life was finally breathed back into the economy. Growth remains robust and the stock market (as measured by the TOPIX) is up some 114.75%*.
In September this year, Abe won his party’s leadership contest convincingly, and so has another three years to continue with his reforms. Can investors expect more of the same?
We asked some Elite Rated and Elite Radar managers their views.
Archibald Ciganer, manager of T. Rowe Price Japanese Equity, says that while talk of Japan’s improvement since the global financial crisis focuses on Prime Minister Abe, the more important factor has been that the political establishment, bureaucrats and corporate leaders have united behind the Abenomics program, suggesting a clear – and long-overdue – commitment toward addressing the country’s problems.
“One of the most significant achievements of Abenomics is the improvement in Japanese corporate governance,” he said. “Corporate governance and stewardship codes have been implemented with unexpected speed and determination, visibly changing the corporate atmosphere. Japan’s regulatory reforms are pushing companies to raise return on equity and be more receptive to external directors. This regulatory change is irreversible.
“A striking example of this can be seen in the changing representation on Japanese company boards. In 2004, the majority of Japanese companies had no independent, outside directors. Today, almost all companies have at least one external board director.
“In terms of opportunities, the structure of the market is becoming less reliant on exporters and traditional manufacturers, while domestic sectors, like consumers and services, are becoming more influential. The positive trend is a clear reflection of the evolving Japanese economy, with new and influential areas of domestic demand emerging.”
Andrew Rose, manager of Schroder Tokyo, agrees that exports are less of an issue than many investors believe.
“There is a misconception that Japan is an export-led economy,” he said. “Exports are only around 6% and a lot of that is to the UK, with the rest to Asia and the US.
“After two decades of deflation, inflation has started to come through. Corporate profits are good – although wage costs could slow their growth slightly – corporate governance has improved and the labour market is strong. We have experienced the longest period of quarterly consecutive growth in many years.”
Before Abe came to power, there had been five prime ministers in as many years. “Abe has brought with him stability of leadership,” Andrew said. “However, the true test of his Abenomics will be when the yen becomes less influential on stock market movements. Since he came into power, the stock market has tended to rise when the currency has fallen. The economy needs to be strong enough that this no longer happens.”
One of the main aims of Abe’s structural reforms has been to encourage Japanese companies to stop hoarding cash (a habit that started in the 1990s when the Japanese equity bubble burst and banks stopped lending money) and either reinvest the money or give it back to shareholders.
Attitudes have started to change and, although income payments are starting from a low base, dividend payments have been steadily increasing over the past few years.
Karen See, manager of Baillie Gifford Japanese Income Growth fund, believes that a reforming Japan now presents a unique proposition for income investors.
“For a long time, many global income hunters have excluded Japan from their income-generating strategies due to the low income yielding nature of many Japanese businesses,” she said. “Only 8% of the top 1,200 companies had an explicit dividend target in 2004. In 2016 this figure had risen to 43%.
“Over half of Japanese listed companies have a net cash position, compared to around 21% in the US, so there is plenty of room for companies to return cash to shareholders without impeding their growth efforts.
“With dividend payments starting to rise, we should begin to see a more sustainable stream of income from Japan,” Karen concluded.
*Source FE Analytics, total returns in sterling, 26 December 2012 to 3 December 2018.