24.01 Liontrust Views Winter 2024 - Flipbook - Page 11
2023. While the Japanese government
is still reluctant to declare that deflation is
dead, the picture seems brighter than it has
been for some time, albeit future price falls
should not be ruled out.
in 2022, to reform corporate governance
standards to raise them to a similar level
seen in the West. These changes were
implemented last year; fast forward to today
and there’s been large-scale change.
If inflation continues to rise then this should
push up wages and potentially encourage
Japanese consumers to spend more and
businesses to look at investing rather than
maintaining large cash reserves – all of
which should bode well for the economy
and businesses operating in Japan.
The Tokyo Stock Exchange (TSE) has undergone
its largest overhaul in over a decade and
committed to increase the standards of all
listed Japanese companies. This includes
improving their workforce and board diversity,
transparency and accountability, with a focus
on shareholder returns.
Stock market reforms
A significant contributor to the turnaround for
Japan is the approach taken by the government
to kickstart economic growth. In June 2023,
the Japanese government published a series
of updated proposals aimed at boosting
investment in businesses and people, increasing
wages and tackling low productivity.
While several countries fought soaring
inflation in 2023, Japan has welcomed it
following years of deflation. For the first time in
decades, Japanese businesses are increasing
prices and committing to raising wages.
The plan also included incentives for
consumers to encourage them to put more
money into investments – in particular
Japanese companies – and move away
from deposits. Known as the Doubling AssetBased Income Plan, this is intended to help
households increase their financial income
through assets and also ‘stimulate corporate
growth and increase corporate value’.
This followed moves by former prime
minister Shinzo Abe, who was assassinated
Undervalued
Despite a strong run in share prices in
2023, many Japanese companies are
widely considered to be undervalued, which
could offer an opportunity for investors. A
key measure for this is the price-to-book
ratio (P/B ratio). This measure compares a
company’s market value to its book value to
assess whether a business is overvalued or
undervalued. The book value is the value of
a company’s assets minus any liabilities it has.
If a company’s P/B ratio is below 1, then the
market is valuing a company below what its
assets are worth – in other words, the stock is
potentially undervalued. Conversely, if the P/B
ratio is more than 1, the share price is trading
at a premium to the company’s book value.
According to the Tokyo Stock Exchange (TSE),
Japan has a notably higher rate of companies
trading with a P/B ratio of less than 1 than
the US stock market. In March 2023, the TSE
called on listed companies with a P/B ratio of
less than 1 to consider measures to enhance
their corporate value – and raise their P/B
ratios – including through investment in people
and R&D. Firms were also encouraged to
increase returns to shareholders as a way of
improving the P/B ratio.
Is it working?
Last year, famed investor Warren Buffet
increased the size of his firm Berkshire
Hathaway’s investments in five major Japanese
trading companies – which all then saw gains
on the Japanese stock market, the Nikkei. This
helped investor sentiment in Japanese equities.
James Klempster, Deputy Head of Liontrust’s
Multi-Asset team, says: “Japanese equities
have already rallied significantly this year,
benefiting from relatively cheap valuations,
a weakening currency, robust economic
growth and loose monetary policy. Japan’s
stock market has waited more than three
decades for its moment in the sun and it
continues to offer a combination of relatively
attractive valuations with a positive outlook
for economic growth.”
CHINA AND JAPAN
In contrast to Japan, China has had a
difficult year and has underperformed
global markets. In the last two years,
50% of global GDP growth came from
emerging markets, but none of this was
from China. India accounted for 16% of
total GDP growth.
Political tensions between the US and China
have also seen more companies move
operations closer to home and away from
China – a process called ‘nearshoring’. This
has benefited Mexico, which has been a
major beneficiary with investment from Tesla
and BMW among other companies.
The Chinese stock market remains under
pressure, mainly because of the country’s
disappointing economic recovery since
Covid and the ongoing property debt crisis.
Even supporting measures like sovereign
money injections have shown little effect in
propping up the stock market.
Japan also faces potential currency pressures.
The era of the weak yen has helped to drive
exports – as an exporting nation, a weaker
yen aids business competitiveness. However,
this is at risk if the Bank of Japan decides to
tighten economic policy.
Furthermore, if there is a global downturn,
it could impact Japan harder than China,
due to the significant foreign investment
that global funds have made in Japan in
recent times. According to the Japan Times,
there has been $30.7 billion of overseas
investment in Japanese stocks in the year to
the end of October 2023.
LIONTRUST VIEWS – WINTER
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