Earlier this year, I articulated my thesis in this publication discussing how the developed markets would outperform the developing markets for the foreseeable future. I have grown to believe that Japan is in the nascent stage of a massive multiyear bull run – the likes we haven’t seen since the US market climbed from the painful declines of 2008-2009. For starters, the press on Japan is negative, investors are ignorant and economists are still obsessing over poor demographics and massive debt balances -- all of which I believe are widely known and reflected in the heavily discounted valuations of Japanese companies.
For many years, particularly the decade of 2000-2010, Japan clearly remained a vicious value trap for investors. Foreign activists and deep value investors were perpetually attracted to the abundant cash balances and LBO-like characteristics of hundreds of stocks only to be thwarted in their realization of value by the hostile intransient managements and unfriendly shareholder regulatory environment. Since 2012, the Abe government (unlike former Prime Minister Koizumi in the early 2000s) has managed to implement overwhelming positive change, while perception remains uninspired at best.
While most professional investors are aware of Prime Minister Abe’s “three arrow” plan to revive Japan, and certainly recognize his success in creating massive liquidity through aggressive monetary policy actions (such as the familiar quantitative easing program), they remain less cognizant of his fiscal successes (i.e. reducing corporate tax rates) and have no realization of his structural reforms. The structural reforms, I believe, have transitioned the market rally or series of rallies into a developing secular bull – or a “bullseye” in Abe’s terminology!
There have been many solutions that Abe has promised and delivered on already in his short tenure, such as increasing female participation in the workforce. In solving the demographic quagmire, perhaps the most profound change relates to the innovative and accelerated use of robotics to supplement the declining human work force. This has gone hand in hand with an effort to stimulate consumption by utilizing a two pronged approach of enhancing the incomes of fellow Japanese with wage and dividend growth, while increasing their wealth with higher stock prices.
Abe is rebalancing Japan’s public pension plan (the world’s largest at $1.1 trillion) and setting a precedent for other pension and trust funds in Japan towards the equity market, while deemphasizing low yielding debt. As a herd-like mentality often ensues, the result will be an exponential increase in demand for Japanese equities, as this is happening concurrently with his mandate for corporate Japan to institute long overdue governance, productivity, and shareholder friendly allocation policies to finally unlock decades-old value. Much of these changes to corporate Japan should result in embedded earnings growth and visibility, as companies cut costs and continue to improve returns on equity (ROE), which average “8.4% versus 4% two years ago” (but still well below average US corporate ROE at 15%).i Moreover, the energy importing nation of Japan benefits from a low energy price environment – another tailwind for profitability as input costs reduce dramatically. As Neil Newman and Alicia Walker of Gavekal recently said, “A new equity culture is emerging and it is likely to be the best thing that ever happened to investors in the Japanese market.” ii
The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates. This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness.
Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has over 30 years of experience in the financial industry. Ms. Rosenau was recently ranked #76 in Barron’s 2014 Top 100 Independent Advisors and ranked #15 in Barron's 2014 Top 100 Women Financial Advisors. She was also chosen for Barron's 2015 Top 1,200 Advisors list, ranking #45 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses.
i GaveKal. GK Plus Alpha. December 17, 2014.
ii GaveKal. Five Corners. March 25, 2015.