Japan | Feature
would improve their cash returns and appoint independent directors. So there has been a realisation that share- holders should be valued, but it appears that change is moving slowing as, accord- ing to Markham, in Japan change does not happen overnight. “It is a conservative country with a small ‘c’. “Having said that, some of the best-known companies in the market have been upping their dividends,” Markham says. “That is the part of the story that we think is under appreciated by markets.”
RETURN TO OWNER Dividend growth in the world’s third larg- est economy has outperformed the global average in the past five years, although it is coming from a low base. Cash returned to shareholders was 70% higher than it was in 2014, compared to a 25% improvement for the rest of the world, asset manager Janus Henderson says. This strong performance continued into the first three months of this year, with shareholders receiving 8.7% more from the cash piles held by companies listed in Japan sharing $5.5bn, on an underlying basis. Every Japanese company held or raised their cash returns in what proved to be a record quarter for the country. Dividends have gone higher than share prices. They are still not on par with those in Europe or the UK, but it is another one of those topics where Japan used to be an outlier. “You would expect that trend towards increased dividend payments to continue,” Kreckel says.
“Dividends have been rising steadily over the past few years and there is no reason to expect that to change,” he adds. “The economy is moving in the right direc- tion, perhaps not as quickly as a lot of peo- ple would like, but the direction of travel under Abenomics has been positive from an international investor’s perspective,” Kreckel says. “Corporate governance is the star of the show.
“The new Stewardship Code seems to have born some fruits,” he adds. These fruits appear to be share buybacks, which he says in the year to date are at twice the rate they
were 12 months ago. “Every month so far has been above the comparison for 2018.” There has been a cultural tendency in Japan for directors to be conservative with their balance sheets, which is why it is not unusual to see a company with 20% to 30% of its market cap in cash. This is now changing as directors are being urged to do something with their cash to reverse the drag on return on investment and mar- gins as well as investment in its competi- tive position rather than just leave it sitting in the bank earning next to nothing as interest rates are -0.1%. Japanese-listed companies also using their cash to fund buybacks is a good sign. A company buying their own shares typically signals that management believe that they are undervalued. They have been buying, on average, between 5% and 7.5% of the company. “This is a good sign,” Kwong says.
“Earnings guidance has been disappoint- ing, but companies have been trying to boost confidence for investors from the bottom up,” he adds. Markham says that it is frustrating that the full long-term implications of these improvements have not been priced in. “That is something that we would expect to see as investors realise that it will continue to be a trend, which we believe that it will be.
“That is something that is gradually being address by corporates but will never be reversed completely,” he adds. “One should not expect that to happen.” The next change that investors would wel- come is more of a relationship between management and share prices. Those lead- ing Japanese corporates are light on stock options and do not own a great deal of e quity, so the company share price does not hit them in the pocket if it is trading at a discount.
COLD WAR If it’s the economy that will make investors take notice of Japanese companies, then the ongoing trade war between the US and China is not helping to inspire confidence.
“The Japanese stock market is cyclical in its nature and more cyclically exposed to China than others,” Kreckel says. “So whenever doubts appear around China’s growth rate the Topix Index is sensitive to that. We have seen that in the past few weeks. So that is something that is difficult to get around and is one of several reasons why Japanese equities have been lagging over the past few months. “There is no get- ting around that if you are long on Japa- nese equities they are sensitive to China- US trade war news-flow,” he adds. It is not just about trade, but also the grow- ing number of Chinese tourists that visit Japan each year is vulnerable, too. “There is a perception, a not incorrect perception, that the Chinese see Japanese manufac- tured goods as being of high quality and aspirational in nature,” Markham says. “So you often see large groups of Chinese tour- ists visiting Japan and doing lots of shopping.” But this may not be an issue for Japanese companies as they have a footprint that stretches across Asia, particularly in Thai- land, and the US.
“In terms of manufacturing they are not relying on only one country, that is why the tariff should not affect them too much,” Kwong says. “You could argue that they should benefit from the diversification. “Japan has already diversified its footprint so it is not going to be hurt by the tariffs,” he adds. “Some companies will benefit, but the risk will not hit Japan directly.” Other events coming up include the gov- ernment planning to hike VAT in October, but Kwong is not too concerned. “The impact should be moderate. We are not too worried about it. The market has already factored it in.”
Despite the lack of investment catalysts, the outlook for long-term investment looks promising. “For now, Japanese companies are not subject to a lot of risk from the trade war, they are doing buybacks and selective sectors have good earnings out- look,” Kwong says. Like Japan, Hoketsu will be hoping for an improvement in 2020. In the 1964 Olym- pics he finished in fortieth place.
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