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Japan showing signs of real change, says T Rowe's Mallet

Japan showing signs of real change, says T Rowe's Mallet

Investors should ignore the idea of Japan as a value trap and instead use current price dislocations to find opportunities in the country.

That is the view of Sebastien Mallet, who manages the T Rowe Global Value Equity fund.

In an investment update, Citywire + rated Mallet said volatility in Japan’s stock market, as well as disappointing data about the economy, had led investors to sell out of the country.  

'Japan’s return on equity has moved above that of Europe for the first time in over two decades in 2016 as a result of the capital return trend, which has also seen Japan’s dividend yield rise above that of the US for the first time in the Abenomics era. This is real change in a country where change is often resisted, certainly at the corporate level,’ Mallet said.

'Fundamentally, many Japanese stocks remain disproportionately cheap, based on earnings, prospective free cash flow or book value metrics. While catalysts are always helpful, valuation and patience remain our primary priorities while we wait for an improvement in fortunes that may drive a change in stock prices.'

Japan is the second largest country exposure in the global equity fund at 11%, which is overweight against the benchmark by 2.1 percentage points.

Mallet’s largest country allocation is the US at 54.9%. There are no Japanese companies in the top ten positions but Mallet said investors should take advantage of current prices.

'Japanese equity valuations are also more divergent than is the case for many other markets, reflecting the deep concern over Japan’s domestic prospects and the swings in sentiment toward the export sector depending on the strength or otherwise of the yen.

'This stock dispersion is often the friend of value investors given such extremes rarely persist, leading to opportunities among the unloved and uncovered stocks in the market – just where we seek to take advantage,' he added.

Corporate governance

Improvements in the way Japanese companies are run is making Japanese companies more attractive to investors as a whole, he said.

Mallet said added changes to corporate governance were working and the country had many self-help companies that were waiting for investors to discover them.

'While Abenomics has failed to deliver on the headline growth and inflation promises, it has thrown up very interesting trends that we believe are highly investible.

'The enactment of Japan’s Corporate Governance Code in 2015 and the creation of the JPX-Nikkei Index 400 which contains specific profitability-driven targets for inclusion, mean that we are seeing observable changes in corporate governance.

'Companies are also increasingly appointing independent board directors, and together, these changes mean that momentum in share buybacks and dividend hikes is happening, creating a positive change for investors,' Mallet said.

Over three years to the end of December 2016, the T Rowe Global Value Equity fund returned 12.96% in US dollar terms. This compares to a rise of 12.27% by its Citywire-assigned benchmark, the FTSE World TR USD, over the same time frame.

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