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Japan Stock Market then and now: Similar but not identical

Japan Stock Market then and now: Similar but not identical
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The Japanese stock market is mostly neglected by investors. But there are several reasons why it is attractive. We spoke with Ernst Glanzmann, investment manager at GAM Investments.

AsiaFundManagers.com: Why has the Japanese economy never recovered from the extreme setback of the late 1980s?

Ernst Glanzmann: Unfortunately, the general public’s view of Japan’s economic development in recent decades has become somewhat distorted. Certainly, the rapid development of the boom years could not continue to the same extent after 1989, but in fact, Japan’s real economic growth was only significantly interrupted during the global financial crisis of 2007-2008. By the beginning of 2009, gross national income had already recovered and found its way back to positive development.

Since then, the Japanese economy has grown by 1.6% a year – a remarkable figure for such a highly-developed nation. During this period, domestic companies have developed strongly. The profits of companies listed on the Japanese stock exchange have risen by an average of around 13% over the last 10 years, which is well above the average value for companies in the rest of the world (+4%).

AsiaFundManagers.com: The Japanese equity market has recovered since Prime Minister Abe took office. How sustainable is this development?

Ernst Glanzmann: Shinzo Abe’s economic policy (Abenomics) is often reduced to an extremely loose monetary policy. However, Abenomics also includes extensive reform programs, e.g. in the labor market and visa regulations, all of which are aimed at further opening Japan’s economy and making it more globally competitive. In addition, there are important initiatives on the part of entrepreneurs to trim their companies for expansion abroad. This general trend has been going on for over five years now, and the far-reaching reforms and restructurings are likely to make it a longer-term development.

AsiaFundManagers.com: Japanese government bonds have been yielding zero for years. Why should this be interesting for Western investors?

Ernst Glanzmann: When investing in bonds, there are basically two key factors to consider: the expected yield to maturity (including coupon) and the potential temporary capital gains. Even in an unattractive yield environment like the one we have been experiencing in Japan for some time, investors can achieve capital gains by speculating on falling interest rates that will slide even deeper into the negative. This can be attractive, especially for short-term investors. Of course, this is not an option for our strategy, which focuses exclusively on equities and is very long-term.

AsiaFundManagers.com: Why do Japanese investors hold Japanese bonds so irrationally?

Ernst Glanzmann: I wouldn’t necessarily call this irrational. In this context, it is important to note that the majority of domestic investors holding Japanese government bonds are institutional investors, i.e. pension funds, insurance companies, banks and, since the financial crisis, especially the Japanese central bank, which currently owns over 40% of government bonds. The Bank of Japan’s holding of its own government bonds is an important part of Abenomics’ stimulus measures. For the other institutional investors, their allocations to Japanese government bonds probably correspond to the risk/return profile of the respective portfolios, otherwise they would not hold them.

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AsiaFundManagers.com: What are the advantages of the Japanese equity market?

Ernst Glanzmann: Japanese equities are structurally very attractively valued; the price-earnings ratio (P/E ratio) over the last 12 months is about 13x for the overall market.  This is significantly lower than the average P/E for the rest of the world (18x). P/E data for Japanese stocks have been available since 1973. Historically, valuations are currently at a low. We expect the average profit growth of local companies to increase at least in step with the rest of the world in the foreseeable future.

As already mentioned, many Japanese companies are in an expansion phase and are now active worldwide. Furthermore, they are benefiting from ongoing improvements in work processes thanks to new technologies such as artificial intelligence and the introduction of the 5G standard in the mobile network – both areas in which Japan is leading.

AsiaFundManagers.com: Which sectors should investors keep an eye on?

Ernst Glanzmann: Japan continues to occupy a leading position in innovations in robot technology. It is even suspected that the development of robots could help overcome the nation’s difficult demographic situation. However, the country’s dependence on technology exports has decreased significantly over the past three decades. In times of a heated debate about the extraordinary price inflation of the so-called FAANG shares in the US, the Japanese stock market shows a significant “underweight” of technology companies and banks compared to global benchmarks.

Currently, the Japanese equity market has a much more balanced focus on manufacturing and consumer-related sectors, such as industrial goods and services, automobiles, personal care and household products, and telecommunications. Although we remain strongly convinced of our selected technology positions, the fact that the broad market is increasingly less dependent on technology and service sectors (which may be affected by global regulation) can only be seen as positive.

AsiaFundManagers.com: Thank you for the interview!

 

Ernst Glanzmann about the japanese stock market
Ernst Glanzmann, Investment ManagerErnst Glanzmann about the japanese stock market
Ernst Glanzmann
Investment Manager
GAM Investments

Ernst Glanzmann is Lead Manager of the GAM Japan Stock Fund and the GAM Star Japan Equity fund. Prior to joining GAM Group in November 2000, he worked as a Japanese equity analyst at Julius Baer and Clariden Leu (since integrated into Credit Suisse) for ten years, and also worked at Zürcher Kantonalbank. Ernst Glanzmann completed a three-year banking apprenticeship at Bernerland Bank AG. He holds a Federal Certificate of Capacity in Banking from the Business School in Huttwil, Switzerland.