The Japanese equity markets may have shuddered the week before last when Japan’s new prime minister, Fumio Kishida, mentioned in a speech that the nation could expect a “new capitalism” that would support the middle class, but investors had nothing to fear, as Kishida’s walk back swiftly followed a few days later.
“Investors reacted based on the speech. I get it,” said Daisuke Nomoto, global head of Japanese equities at Columbia Threadneedle Investments, a Boston-based asset manager with $593 billion in assets under management. At the heart of Kishida’s comment was the perceived unfair tax rate differential between the rich and the poor, and wealth redistribution played an important role in his platform.
“But based on the following action from him, I think the plan [of wealth redistribution] is put on hold for now,” he said. “That’s a good thing about Kishida. He seems very flexible. If there’s a good reaction, let’s go for it. If there’s a negative reaction, let’s take a step back and re-analyze the situation.”
Market drama inspired by Kishida aside, it’s really the upcoming election in Japan’s House of Representatives that’s the key to prosperity in the country’s equity markets, Nomoto said, and it’s expected that the current coalition between the Liberal Democratic Party of Japan and the Kōmei Party will continue to hold a majority and provide the stability investors look for. “Based on historical analysis of the last 14 elections, the equity markets reflect elections in a positive way,” he said. “So there is a good chance the markets will perform well before and after the election.”
Sectors Nomoto views favorably for now are IT, including machine vision and data technologies, and industrial, including machinery, automation and business services. “Innovation is a big focus for us. So are strong management teams and healthy balance sheets,” he said.
“We have to make a clear distinction between investing in the Japanese economy and investing in Japanese companies. We’re looking for great companies that happen to be listed in Japan, not investing in the Japanese economy. So finding innovative companies with attractive valuations is the way to go, and we believe there are tons of opportunities to exploit that in the Japanese equity markets.”
Attractive Qualities
There are four primary forces that should make Japanese equities desirable for international investors going forward, Nomoto said. First, a rising vaccine rate now puts Japan on equal if not better footing than other countries, including the United States.
Second, valuations for Japanese companies remain inexpensive, especially considering the financial health of these companies. “Net cash is two times higher than in the U.S. equity markets,” he said. “Companies both listed and unlisted are hoarding approximately 200 trillion yen on their balance sheets, which is about 40% of the nation's GDP. They have huge amounts of cash ready to be put to work.”