Japanese Equities
Recently we have seen a meaningful move higher in Japanese Equities. The broad market Topix Index has added around 12% in local currency terms in the last two months. Some of this strength is a function of a weaker Yen over the period, nevertheless the outperformance has been notable for Sterling-denominated investors. The long-term chart of the Topix reveals that in local currency the index has pushed through to new highs not seen since the days of the bubble in the late 1980s.
Relative to the UK market which has struggled in recent decades relative to more growth-oriented indices globally and adjusted for the GBP/JPY exchange rate, we can see that the Topix has moved back to the top of its recent range. The prior trend of Topix outperformance that occurred in the wake of Abenomics from around 2012 has meaningfully retraced in the last 18 months as the after-effects of the Covid shock permeated through the system.
Japanese stocks have been in the spotlight due to the news that Warren Buffett’s Berkshire Hathaway has upped its stakes in the group of Japanese trading houses that it has owned for some time. The large conglomerates whose names include Sumitomo and Marubeni are essentially diversified investment companies with footprints in industries ranging from energy and minerals to food, retail and healthcare. They tend to be extremely lowly rated, trading on single-digit earnings multiples, have high dividend yields, and actively buy back shares. They are a complex web of underlying businesses, which is partly why they are so lowly rated, but also means they touch much of corporate Japan and are intrinsically linked to global trade, especially regarding commodities.
The bull case for Japan rests upon three main factors. Firstly, valuation. Japanese stocks trade at a discount to many of the high-flying names that populate US stock indices. Secondly, while inflation is off the lows in Japan, it is nowhere near the levels seen in the US and Europe in the past year. Indeed, a dose of inflation is likely exactly what Japan needs. Thirdly, there is a real sense that Japan has thrown off some of the shackles at the corporate level that have held back returns in the prior decades as management teams have become more focused on shareholder returns.
Perhaps most importantly, Japanese equities, due to their long period in the doldrums, are under-owned outside Japan and have proved they can be a source of return diversification which investors should consider when building a portfolio.