Japanese stocks increase in wake of political reforms
Following several years of stagnation, Japanese stocks have seen significant price increases in 2013. The new Prime Minister gets some of the credit for the stock price increases.
We have asked Daiwa - who is providing investment advice for Danske Invest on Japanese stocks - about their expectations for the future, and we have asked them to give an example of how they select the most attractive stocks.
Japanese stocks have, indeed, received much tailwind in 2013 following several years without any significant price increases. More economists and analysts are of the opinion that Japan’s new Prime Minister Shinzo Abe should be given a great deal of the credit for the optimistic sentiment among investors. In wake of his election victory in December last year, he launched a number of measures to kick-start the economy: Easy monetary policies, expansionary fiscal policies and a number of reforms.
Osamu Koide from Daiwa SB Investments has been investing in Japanese stocks for 25 years, and in February 2013 he took up the responsibility for the investments in the sub-fund, Danske Invest Japan. We have asked him about his expectations for Japanese stocks in the coming 12 months and about the companies in which he has the greatest confidence.
What are your expectations for 2013?
We maintain our optimistic view of the Japanese market and the sectors which benefit from domestic private spending. This is so because we take a positive stance towards the Japanese economy under the new government’s management. There is a great potential in wake of the weakening of the yen and the positive effects from ”Abenomics” (a term referring to the measures launched by Prime Minister Abe).
The Japanese economy is increasingly improving and stocks are rising dramatically. What about the Japanese population – do they also believe that the economy is about to turnaround?
It is still the case that the expectations for production are below the levels prior to the financial crisis. However, the soft data such as e.g. the sentiment among employees in cyclical jobs, i.e. taxi drivers, have improved continuously since the second half of 2012. The combination of stock price increases and the weakening of the yen – which are some of the results of Abenomics – has also fuelled the already positive development in corporate and consumer confidence.
Which risks are the Japanese market facing?
We believe that the greatest risk for the Japanese market is the political risk. Particularly if the popularity of the liberal democratic party (LDP) for one reason or another will drop. This could render it difficult to win the election in one of the political chambers, and it would thereby be more difficult to implement the growth planes described in Abenomics. If these plans are not carried out, this would among other things imply a falling yen. Right now, however, there is nothing to suggest that the population’s support to the prime minister will fall. So far the opinion polls have shown a surprisingly strong support to Abe’s government – some 70%.
Can you give an example of how you select companies for the portfolio?
We enjoy the benefit of being a part of the Japanese market, and therefore we have in-depth knowledge of the local companies. Our investment team has an ongoing dialogue with companies in Japan – also with the companies on which the market is not currently focusing. We therefore have access to obtaining information about important changes in a given company – changes that may turnaround the company’s development. A good example of this is Rohm – a producer of electronic components.
Up to the time when the IT-bubble burst at the beginning of the noughties, Rohm was a profitable company, but when it subsequently lost orders from the Japanese electronics industry and it did not succeed in receiving orders from foreign clients, the company’s earnings stagnated. Following a number of downward revisions, investors lost confidence in the company.
Even though many players regard Rohm as being ”boring” and without any potential, our research indicated that the company is facing new opportunities for making profits based on increased production of energy-saving components for e.g. motors for electronic vehicles. We made our first investment in Rohm on 31 May 2013, and since then the share has shown a fair stock price increase (as per 24 June). I believe this is a good example of how we are working on identifying companies in which other players have lost confidence but which still has a good potential.
