Is it time to invest in Japan? How investors can tap into the country’s recovery under a new PM and its ‘cheap’ stock market

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  • Fumio Kishida Prime Minister of Japan. Yoshihide will replace Suga on Monday as
  • The country’s economy is fighting an ongoing battle to recover from Kovid-19.
  • Analysts say Japan looks ‘cheap’ against global market
  • UK investors can enter the country through funds, ETFs and investment trusts

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Japan has a new prime minister after the ruling Liberal Democratic Party’s leadership was secured by Fumio Kishida, who has replaced Yoshihide Suga, who will be tasked with reviving an economy badly damaged by the COVID-19 pandemic.

Japan’s stock market has had a year of ups and downs to add to the many-year soap opera, but some investors believe it looks cheaper than its global counterparts such as the US, and potentially Provides a lucrative opportunity in the long term.

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Recent figures suggest that Japanese GDP grew faster than expected in the second quarter of 2021, but slow progress on COVID-19 vaccinations and ongoing pandemic restrictions mean the country’s economic recovery remains fragile.

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Japanese stocks have had a mixed year, but analysts believe the market still looks cheap

The Japanese stock markets have had a tumultuous year.

Buoyed by the Bank of Japan’s pandemic-induced monetary stimulus and asset purchase programs, the Nikkei 225 hit the 30,000 mark in February, the index’s highest level in 30 years.

But a series of Covid-related setbacks reduced gains for the index, which are down 6 per cent year-on-year.

Data from index provider MSCI shows that Japanese stock markets have performed reasonably but not as well in previous years, delivering an average annual return of 7.6 percent over five years, compared to the world average of 11.9 percent. .

To put that in context, the UK managed only 0.6 per cent on the same basis, while the US and China gave 15.4 per cent and 7 per cent, respectively.

Former Foreign Minister Fumio Kishida Prime Minister of Japan.  Yoshihide will replace Suga on Monday as

Former Foreign Minister Fumio Kishida Prime Minister of Japan. Yoshihide will replace Suga on Monday as

It is important to investors backing Japan that its corporations have gone through a steady process of reform in recent years, hiring independent directors and placing a greater emphasis on providing value to shareholders.

There is a desire to make the country a more shareholder-friendly place and Japan was one of the best dividend performers globally until 2020, when companies around the world were forced to cut investors’ salaries.

Ben Conway, head of fund management at Hawksmoor, says the arrival of a new PM is unlikely to change the long-term outlook for the Japanese market.

He added: ‘Japan is certainly still cheaper than other markets. We don’t attach too much importance to the political situation because we think the reasons to invest in Japan: cheap valuations and obvious reforms in corporate governance, won’t be affected by a new prime minister – or not.’

Is Japan’s stock market cheap?

The gap between the Japanese and US stock markets has been widened substantially on valuations using the cape ratio.

The gap between the Japanese and US stock markets has been widened substantially on valuations using the cape ratio.

Japan’s stock market is often said to be cheap, but investors should watch that claim carefully.

Duncan Lamont of Schroder’s warns that no global stock market really looks cheap right now, but says: ‘In terms of relative value, Japan offers the better value, but it has been a perennial underperformer, therefore is not without risk. Same goes for UK.

This is in contrast to the US, which looks particularly expensive across a variety of metrics. Yet US stocks have been in that position for some time and have continued to deliver high returns.

Of course the gap between Japan and the US has widened substantially in terms of valuations using the popular cyclically adjusted price-to-earnings ratio.

Schröders’ analysis shows that while the US is trading well above the long-term average in the Cape, the forward and backward price-to-earnings, price-to-book and dividend yield measures.

Japan is relatively cheap speaking that the US but is only trading in line with its long-term average.

How the major markets stack up on the valuation of different measures

How the major markets stack up on the valuation of different measures

The potential value in Japan has gone unnoticed in the UK, with individual investors investing a total of £223 million in the Japan fund from the beginning of the year to the end of July, according to investment association data.

But the average IA Japan fund has given only 18.7 per cent, 48.8 per cent, and 134.9 per cent returns in one, five, and 10 years, respectively.

This reflects the poor performance of these active funds compared to the Nikkei 225’s 27.9 per cent one-year return, 74.7 per cent five-year return and 238.5 per cent 10-year return.

“Primary opportunities remain in investing with managers who can access the cheapest parts of the Japanese market, as well as those willing to engage with corporate management to unlock value,” says Conway.

‘It is also inherent with investing with managers who can take advantage of high valuation spreads within the market’.

he highlighted Jupiter Japan Incomehandjob polar capital japan price And M&G Japan Small Companies As a good example of money set to profit from the price on offer in Japanese stocks.

Ajay Vaid, investment research analyst at Square Mile Investment Consulting & Research, also selected Jupiter Japan Earnings as a fund for investors ‘looking for capital growth along with growing earnings’.

He adds: ‘It typically focuses on identifying large and medium-sized businesses that are financially stable, with high quality and committed management teams, and have net cash on their balance sheets.

‘As an income-oriented strategy, it aims to own businesses that can increase their earnings and cash flow to enable them to pay increasing dividends.’

Vaid also highlighted the ‘highly respected fund management team’ behind it Bailey Gifford Japanese, which seeks ‘attractively valued growth companies of all sizes’…

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