Clearly the view a fund manager takes of Japan’s short to medium term macro prospects has a strong determining influence on their view of Japanese equities. Simon Edelsten, senior fund manager of the Artemis Global Select Fund, likes the fact that neither Japan - nor the rest of Asia - has adopted the EU’s penchant for austerity, or seen their banks have to de-lever to the same extent.
“We run a level playing field with global equities, with the aim of finding companies that whatever the economic cycle, have a reasonable chance of growth over the next five to ten years,” he says. “It is simply a fact that a lot of our picks end up being Japanese stocks.”
Chern Yeh Kwok, Aberdeen Asset Management’s head of investment management for Japan, argues that the Japanese domestic market is huge enough for a stock-picking manager to find some excellent buys, irrespective of their macro views of where Japan is going. One company he likes is Dr Ci:labo, a manufacturer of face creams. Japanese women spend a small fortune on cosmetics and this company has prospered over the last 10 years. And of course, the top exporters stand out, too.
“Ten years ago there was no point Toyota trying to build cars in China for the Chinese,” says Edelsten. “Talk to a Japanese business about where they are expanding and their target will be consumers in Asia.” Andy Tidbury, product manager and analyst with Invesco, points out that 55% of Japan’s exports now go to Asia and there are huge growth prospects for Japanese companies. Andrew Rose, fund manager on Schroder Investment Management’s Japanese equities team, also argues that the proximity to China is a medium to long term structural positive for Japan’s corporate sector.
However, many US fund managers, particularly those who believe that the ‘world class’ status of many Japanese companies has been shredded in recent years, scoff at the idea that they have a particular edge with China, or other emerging markets. Dan Morris, global strategist at JP Morgan Asset Management, points out that since the bursting of the bubble in 1989, Japanese companies have a long history of performing below the standard of world-class companies outside of Japan.
It may well be true that Japanese companies are getting better at selling into Asia, but there is no lack of investment from all round the globe into emerging markets in general: the fact is that everyone is better at selling to China.
“What you see is compression along the coast in China, with wage advantage deteriorating there, and companies from every quarter are now looking to go inland in China, or into Vietnam or Cambodia to gain real wage arbitrage advantage,” says Morris. “Everyone is doing it and Japan holds no particular advantage there.”
Benjamin Segal, managing director in International Equities with Neuberger Berman, is also far from convinced. “Equities there might look cheap, but I want to pay a discount right now for Japanese stocks,” he says. “They need to improve their track record in giving cash back to shareholders.” Segal points to companies like the factory automation specialist Fanuc, which had $7bn (€5bn) in cash on its balance sheet in March. Fanuc has a tremendous market and is key to helping emerging countries move up the value chain through automation. While a manager like Schroders’ Rose notes that that level of cash holding is not unusual for Japanese firms, and points to the growing number of Japanese companies with dividend policies that parallel anything in Europe. Most would at least regard it as a questionable use of shareholder’s money. Add the Olympus scandal, and it becomes difficult to accept the arguments of those who say that corporate governance is improving.
“To go overweight Japanese equities today, you need to believe that the fundamental outlook for Japan has changed,” says Morris. “Right now Japan has a new prime minister who looks a lot like his predecessors and things are going along pretty much as they always have […] To me Japan is in relatively pleasant terminal decline, and its citizens seem relatively content with that picture. The US, on the other hand, is pushing for productivity gains through innovation and IT. I know where I would rather be as a stock picker.”