Snap election success gave Shinzo Abe a strong mandate to continue with his reforms. In the first of two reports, Japanese equity managers dish out the gold stars as they appraise his performance so far.
Shinzo Abe is on track to become Japan’s longest-serving post-war prime minister following his decisive victory in the country’s snap election at the end of October.
The result is a tonic for Japanese investors who have experienced 11 different leaders over the past 20 years, and fund managers are warming to this trend of stability.
Abe is expected to use his newly-reinforced mandate to increase economic stimulus and revise Japan’s constitution, which is an easier task now, given the ‘super majority’ his Liberal Democratic Party-led coalition (LDP) gained.
‘In a country where prime ministers tend not to last, Shinzo Abe has been hugely successful. Since his election in 2012, he has presided over unprecedented stability,’ says Alex Lee, who runs Japanese equities at Columbia Threadneedle.
While Abe has sought to continue with his plans, Citywire A-rated Steven Andrew, who runs the M&G Episode Income fund, says the overall strength of the market, away from Abe’s obvious influence, cannot be overlooked.
He says: ‘Genuine fundamental dynamics appear to lie behind the recent strength in the Japanese equity market, and it is these, rather than attempts to forecast political and policy developments, which should be the focus for investors.
‘The Japanese equity market now looks significantly different from a valuation perspective. An earnings yield at 7%, compared with less than 2% in 1994, offers attractive potential returns both on an absolute basis and relative to MSCI World index, while the equity risk premia remains one of the most attractive in the market.’
Hiroki Tsujimura, CIO of Nikko Asset Management, is among those who believe overall investor sentiment is improving, and not just among domestic Japanese investors who have remained largely loyal during difficult periods.
‘Foreigners, who were negative on Japan for most of the past year, despite the fact that the Topix has performed in line with the S&P 500 when measured in US dollar terms, are now getting quite excited about Japan. Foreigners are a key factor in Japan’s market sentiment, so it is not unreasonable to expect a re-rating to 17.5 times in the quarters ahead.’
Abenomics has gained a lot of media attention, and, despite recent criticism of its impact, fund managers believe this latest election victory will boost confidence.
‘It now seems clear that Abenomics has many more years to run, so one should be wary of Japan sceptics,’ says Tsujimura. ‘Long-time watchers of the Japanese market are often jaded, but this attitude now seems misplaced given the market has doubled since October 2012 when Abe was chosen the head of the LDP.’
Thumbs up for Abenomics
Tsujimura’s view is echoed by Hermes IM’s Louise Dudley, who oversees global equities: ‘While it will continue to have its critics, Abenomics represents Japan’s best chance of ending decades of stagnation.
‘Abenomics has been under scrutiny since it was unleashed on a Japanese economy in the doldrums, but it has begun to bear fruit. Corporate profits have recovered, the jobs-to-applicants ratio has improved and the Nikkei is at a 20-year high.’
The election victory ends a tough political period for Abe, according to Columbia Threadneedle’s Lee, who says the prime minister’s shrewd cabinet reshuffle in August has helped ease the pressure.
‘Abe appointed some cabinet members who have been openly critical of his policies, probably to prove that he does not always favour his supporters and friends,’ says Lee.
Syz Asset Management’s Joël Le Saux says even though Abe’s pre-election approval rating had dropped to one of its lowest levels during his six-year tenure, his economic record continued to shine.
‘Abe has overseen six straight quarters of growth and the revival of the Japanese stock market, which has hit multi-decade highs. A win means a fresh lease of life for Abenomics and market support, while a loss would probably have buried his economic project and threatened market stability.’
Dudley says the ‘third arrow’ of Abenomics, which includes structural reform and corporate governance improvements, is also proving positive.
‘The once staid and conservative boardrooms of Japanese companies have already embraced large-scale reform on governance issues following the implementation of an official Corporate Governance Code in June 2015.
'The wave of progress has recently gathered pace due to the leadership shown by GPIF, which has the largest pool of retirement savings in the world.’
These comments originally appeared in the December-January edition of Citywire Selector magazine.