Magazine issues » July 2021

Roundtable: How well geared are Japanese assets for a new world?

Funds Global – Overall, are you optimistic or pessimistic about the investment landscape in Japan over the next 18 to 24 months? Temperley – We have to give a balanced view to investors and people who are looking at stock markets. We also have to acknowledge the headwinds as well as the following winds, so obviously the demographic situation in Japan is challenging and we can’t do anything about that per se, but the good news is there’s an ongoing trend of more women coming back into the workforce, so that can bring an economic stimulus. It’s also very good from a societal perspective. When we talk to Japanese corporates about their policy towards flexible working, there’s a genuine embrace of flexible working so that mothers can come back into the workforce, and that sounds like an easy win, but I can tell you that Japan is very late to the party on that. That in itself is very encouraging and a way of Japan improving its productivity, improving its fulfilment for people, which again is another way of improving productivity. If you have a happy workforce, you probably have a more productive workforce and provision of childcare goes along with that. #Above and beyond that, listed Japan still faces the global economy, and they’ve benefited from Chinese demand. The halo effect of that has been good news for Japanese companies making consumer products – cars, technology and so forth. The good news is India’s coming up alongside China, and I’d argue that we thought this century would be about China, but I feel it may be more about India going forward. That’s the exciting thing to watch and Japan is very well placed to benefit from that. Despite the demographic headwind internally, domestically Japan is very well placed to catch the tailwind of that going forward. Niihara – Over six to 12 months, I’m optimistic due to a catch-up or normalisation of the Japanese economy, and there is some discussion on the valuation and estimation of that. We have technology supporting manufacturing which will benefit in the coming normalisation period. Over 18-24 months, I would say there’s a strong impact coming from global markets including the US, so it’s more about the US monetary policy and economic cycle. Japan could do well. However, the Japanese government has limited capacity to spend money compared to others, especially the US. We couldn’t issue Japanese Government Bonds (JGBs) to support spending and the political situation is less stable than in the past and other regions, so in the long term there are some concerns to support overall growth other than specific companies. Therefore, I’m mixed about the long-term outlook. Ciganer – Today I feel we are much closer to the bottom of the cycle than the top, and so it’s a good time to be optimistic. Likewise, for the next six to 12 months it’s almost a given that you will have a nice recovery and so profits and equity prices will follow, so that’s why I am very relaxed about that. There are always unforeseen risks, but generally speaking it’s a good time to be constructive. Over the course of 24 months, I am sure by then new risks will materialise and maybe the economic recovery will start to slow down. I wonder whether we might be ignoring the risk of deflation because we are all talking so much about inflation, but the pandemic has driven a huge amount of demand destruction. Right now, consumers and corporates are on a sugar high because of government subsidies, but when those run out, you might end up with a global economy that is more deflationary than pre-Covid. That could be a risk for two years out, but it’s too early to say. However, I’m optimistic in the short term. In the long term, Japan has many interesting tailwinds that will continue to deliver decent returns to active investors. Vail – The outlook is quite bright. As we mentioned, Japan is geared to the global economy, and I don’t think there’s anybody who’s thinking that the global economy is not going to be pretty strong for the next 18 months. It might slow down a little bit, but it’s going to continue to recover by almost everybody’s expectation, so that’s good for Japan. We’ve been hearing it for 30 years, of course, but it’s increasingly true that domestic investors are getting more and more involved, and there’s a huge pile of cash on the sidelines. If you leave it in the bank at 0%, you’re not going to retire well – you have to take some equity market risk and get dividend yield and capital gains in order to have a proper retirement. Domestic investors are heavily underweight and they have a very good argument to get more involved in the market; at the same time, foreigners are heavily underweight, and if they don’t want to make the same mistake about overweighting Europe as in the past, that could cause a very large influx of funds into the market here. Then, of course, you had a lot of cash on the sidelines within corporations where buybacks can continue to be very strong. I don’t see many reasons to be pessimistic over the next 18-24 months. Of course, if there’s some sort of taper tantrum in the States, that could hurt, but I don’t believe Japan would have the same sort of taper tantrum that the US would. There is a historical pessimism related to the Japanese stock market that’s hard to overcome. It’s been a tremendous stock market over the last five to ten years and yet valuations are still very reasonable, so there are a lot more arguments to invest in Japanese equities than there are in US equities, to be honest, at this point. Ciganer – I’m a bit more pessimistic than you with regards to equity allocation by domestic investors and cash redeployment and that’s because of the demographic profile. Obviously, if you’re well into your retirement, you are not going to put a lot of your cash in equities, but I don’t think that’s a big issue because there are plenty of other buyers of Japanese equities out there, foreign investors and corporates themselves. Vail – Yes, obviously retired people should have less equities than younger ones, but even in the States, a lot of older folks have 80% of their money in equities. It’s not unwise to invest in stocks if you still have ten or 15 years left, in fact it is unwise to be in cash because you can run out. A lot of people are facing that in Japan, they ran out of their savings because they received no interest income and they ran out their nest egg. That’s why a lot of these regional economies have all these empty houses all over the place – people didn’t invest enough in equity, even in their older years. © 2021 funds global asia

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