Face to face with Andy Dunn, product specialist, Baillie Gifford Japanese
Meeting summary This was a one-to-one, in-person update with Andy Dunn, who talked through Baillie...
Almost four years after Abenomics began, sterling investors have made 16 times more money investing in Japan than they did during the previous four years.
From 26 December 2008 to 26 December 2012, the TOPIX (Japan’s stock market index) returned just 5.29%. From 26 December 2012 to 12 December 2016, the same index has returned 85.8%.
So what’s the outlook for Japanese equities in the year ahead? Well, like most investments, you could make a bull or a bear case.
Abe’s first two arrows were bold, with quantitative easing 10 times the amount of that used by the US – for an economy that is a third of the size. However, the early euphoria waned in 2016, as many people feel that his third arrow—structural reforms—has not yet hit its target.
On the other hand, his policies have delivered a degree of price stability and a number of other good things along the way: improving corporate profits (earnings have risen each year since Abenomics started), increased dividends and better corporate governance, to name a few.
In the summer, Abe won a sweeping victory in Japan’s upper house elections and now holds a ‘supermajority’ that supports a constitutional revision. He’s in undisputed control of Japanese politics and has a once-in-a-lifetime opportunity to make some significant changes. The market is not expensive and could go from 19,000 to 20,000 without too much trouble. From there to 21,000 could be a far slower climb.
Tourism is taking off and we are starting to see production price increases, which should lead to more sustained wage inflation, and a strong dollar should mean a weaker yen.
If you believe in the Trump reflation story, Japanese value stocks could continue to do particularly well. We think the value/growth disconnect, which we can see all over the developed world, is greatest in Japan, and the rotation, should it continue, will mean value strategy funds could do very well.
There are still huge problems and risks: the ageing population of 127 million is a huge issue. Companies are even arranging dating events for employees or giving financial rewards to have kids. And the fastest growing band of criminals are the over 65s, as the standard of living in prisons is better than at home!
Government debt is eye-watering, with little hope of paying it down. The central bank has run out of options and it is possibly just a matter of time until they resort to helicopter money and monetise the debt.
If you believe that Abe will continue to make a difference, the likes of Baillie Gifford Japanese and Schroder Tokyo, two of my favoured Japanese equity funds, are worth a look. If you want a deep value fund, Man GLG Japan CoreAlpha fits the bill. And if the yen continues to weaken it will help Neptune Japan Opportunities, which is permanently hedged, and has been hurt badly in currency terms over the past 12 months.