One outcome from 2018’s market route had been depressed Japanese stock valuations. Today, Japanese cyclical growth stocks are regarded to be generally well-priced, with many companies trading on high single digit to low teen multiples. The belief is that these names will be re-rated once the market becomes more comfortable with Japan’s outlook. This is positive since the medium to long term thesis for Japan today is being buoyed by several factors, and while it is true that Japan is highly sensitive to the global economy, our observation is that several key developments have led Japan to be better placed to mitigate any negative global market impact.

Firstly, Japan’s political environment appears to have stabilised with Prime Minister Shinzo Abe’s September 2018 election victory as President of the Liberal Democratic Party. Following a brief period rocked by scandal and uncertainty, last September’s win cemented a further three year term for the pro-market Abe and returned a measure of stability and predictability which had been missing from the market following the Prime Minister’s implication in a land sales scandal. In addition, the government has also pledged to increase spending to avoid any negative impact stemming from a consumption tax hike slated for October 2019. They plan to do so through a ¥2 trillion stimulus package designed to encourage consumers to use cashless payment methods as well as making shopping vouchers available to households with small children or low incomes.

It is also worth mentioning that we are seeing the fruits of corporate reform that took root among Japanese corporates a few years back. Total dividends paid by Japanese companies to shareholders increased significantly over the past years, providing good downside support to the market. For the first time in Japan, investors are getting paid to wait.

Finally, we believe the upcoming 2019 Rugby World Cup and the 2020 Tokyo Olympics will not only create extra demand, but also put more pressure on the labour market. We predict this may end the decades of deflation that has inflicted Japan since the 90s.

Risk/Outlook

We believe the risk-reward profile in Japan today to be attractive. The year-to-date recovery we previously anticipated is materialising and markets pricing mechanisms are normalising at the time of writing, rewarding us for risks previously taken. And while the market is discounting a recession, we believe that earnings-per-share for Topix-listed companies will continue to grow for the remainder of 2019 as well as 2020. Indeed an intensifying trade war and a rapid appreciation of the yen could potentially derail recovery, but our view is much of this has already been priced in to share prices today.

As always, we believe stock selection to be key in these times of uncertainty, as are attention to valuation and management quality. Based on these criteria, we will continue in our goal of delivering returns to our clients.