4 August 2016 /
Given the seismic political events surrounding the UK’s historic ‘Brexit’ referendum, and the implications for global markets, one could be forgiven for focusing on little else of late.
However, perhaps more than ever we believe it is important to maintain global perspective. To that end, two portfolio managers from Sandaire’s investment team (myself from Singapore and Stuart Fox from London) visited Tokyo to meet a variety of fund managers, economists and strategists, in order to better understand the fascinating Japanese economy.
Since the first announcement of the now famous ‘Abenomics’ reform programs in Japan in late 2012, Sandaire portfolios have had a large relative exposure to Japanese equities, through a combination of ETFs and active managers. After initial success from huge packages of monetary stimulus and fiscal reforms, these wide-ranging tactics, unprecedented in scale in modern Japan, have seemingly begun to falter. With Japanese equity markets sharply down in 2016 and the JPY substantially stronger than its recent nadir of 125, we felt it was appropriate to explore the view from the street.
We began a packed four-day schedule of meetings with a trip to the gleaming Roppongi Hills offices of Goldman Sachs. There we met their Chief Japan Economist, who gave us an excellent briefing on the current economic situation (summary: macro economy very difficult, micro very interesting).
We went on to meet a variety of active equity fund managers, both long-only and long-short, from extremely large (SuMiTrust – AUM $470bn) to small boutiques (Atlantis – $30m), all the while struggling with Tokyo’s baffling street address system – it boggles the mind that any Gaijin (foreigners) were able to find their way around before the days of Google Maps!
Over the course of the week, we heard a number of recurring opinions, from different sources – summarised as follows:
I. ‘Abenomics’ is working, particularly its corporate reform measures, but the long-term nature of the structural reforms requires patience from foreign investors.
II. Japan remains at the mercy of foreign investor sentiment and fund flows; the BoJ is powerless to weaken the Yen whilst it is being heavily bought as a ‘safe haven’’.
III. Large domestic institutions (such as the GPIF) have massively distorted valuations by making huge asset allocation shifts; in particular ‘Smart Beta’ indices favouring yield and low volatility continues to widen the gap between value and growth.
IV. Japanese small caps are highly inefficient; lack of analyst coverage presents (mostly) domestic investors with great valuation opportunities.
V. Japan’s total lack of political opposition means continuation of the current ruling coalition is not in doubt.
We also made a number of personal observations, occasionally inspired by the odd glass of local sake. Firstly, it is not long ago that Japan’s remarkably low bond yields were viewed as an anomaly for their freakishly low levels. Today, however, with government bond yields of most of the world’s developed economies trading close to, or even below zero, it seems that, as with most things, Japan was simply ahead of the curve. We believe without a doubt, Japan is the world’s foremost ‘super mature democracy’, and it appears that in our current low growth environment, the US, UK and Germany are all heading in that direction. One substantial difference is that currently each of these economies allows immigration to refresh the demographic pool. One would hope Japan’s current deflationary malaise and worrying demographic trends should be a warning for other mature democracies seeking to limit their own inward immigration; recent polls seem to indicate large proportions of these populations will be unlikely to heed this very real empirical example.
Away from the boardrooms and presentations, undoubtedly one of the ‘highlights’ of the week was a ‘traditional Japanese night out’ as guests of Tokio Marine, a company with which Sandaire has a long standing relationship. Before being treated to a delicious dinner in Ginza (Tokyo’s swankiest neighbourhood) we were amused to discover that we were to visit an Onsen – a natural hot spring spa. This involved first a ‘fish pedicure’, where one allowed innumerable live fish to clean one’s feet by nibbling at them – for the ticklish this was something of a trial! This was followed by a dip in the hot spring in the ‘full traditional way’ – something of a challenge for those of a reserved British nature… Suffice to say it is fortunate no cameras were allowed!
Overall, the primary objective of the trip – to seek out interesting potential fund managers with which to invest – was certainly a success, and we will be further exploring a number of these in due course.
We departed with a renewed appreciation for Japanese culture and a greater understanding of the substantial and conflicting pressures the Government and Central Bank are wrestling with. It is no great insight to say that Japan is a country of great contrasts – at once ultra-modern yet resolutely traditional – and it is through this prism that we view the struggles of the Japanese economy. Domestic resistance to stoking inflation is deeply ingrained, although, in reality is a highly necessary step in boosting the economy by encouraging consumption. While we believe the ‘Abenomics’ reform programmes are still working, whether foreign investors and domestic voters give Abe-san and his Central Bank the necessary time is another matter entirely!
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