Investment Strategies

Why Discount Japan Offers Compelling Relative Value - SYZ

Joël Le Saux, 20 February 2020

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Japanese shares remain relatively inexpensive versus certain other major developed markets. Although the economy has been improving, foreign investors still "under-allocate" to Japan, the author of this article says.

The following article looks at the case for investing in Japan. At a time when Asia is caught up in the coronavirus saga, disrupting economic activity in the region and further afield, it might be wise to stand back and examine a specific country. Under the Shinzo Abe-led government in Japan, the country has instituted reforms including supply-side measures to make it easier to improve companies’ returns. Decades of sub-par growth have left investors disappointed with Japan, but maybe the country’s time has come. 

To explore these points is Joël Le Saux, portfolio manager of the OYSTER Japan Opportunities fund at the Swiss firm, SYZ Asset Management. The editors here are pleased to share these views; the usual editorial disclaimers of course apply. To comment, email tom.burroughes@wealthbriefing.com or jackie.bennion@clearviewpublishing.com

Following decades of deflationary despondency, the Japanese economy is springing back to life. Yet foreign investors continue to under-allocate, creating a discount to other developed markets. The Topix is trading at a price/earnings ratio in line with its seven-year average, and significantly beneath that of both the US and Europe. The question is: will this trend reverse in 2020?

Despite stubborn negative market sentiment, the underlying dynamics of the world’s fourth largest economy have created a fertile bed for equity investors. 

Below, I explain the reasons why Japan valuations have been suppressed and discuss why the archipelago offers investors compelling long-term value in 2020.

Tax hike fears overblown
The latest consumption tax hike was delayed due to fears that it would negatively impact consumption, before finally being implemented in October of 2019. However, the enactment was successful, with minimal impact on the economy, no changes in consumption patterns and, more importantly, no return into deflation.

This was partly due to preventative measures, which exempted food products from the tax, and partly due to the robustness of the economy, with jobless rates at multi-decade lows and wages rising.

The number of train users – the best measure for the health of the Japanese economy – is still increasing and GDP growth for Q3 surpassed expectations.

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