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April 2013
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A combination of economic reforms by the current Japanese government under Prime Minister Shinzo Abe, low equity valuations and new company business models could provide the catalyst for the long-struggling economy’s recovery, Bell Asset Management chief executive Ned Bell said.
“There is a change of government almost annually in Japan, but [the Abe government] have recognised that in the last five years the Koreans have killed them in terms of the export industry and that is a huge part of the Japanese economy,” Bell said.
"I think [this government is] the real deal and I actually think it will work this time.
“There are some upper house elections in July this year and it looks like Abe will win quite comfortably there, and that looks like the go-button for what he has been saying to get really implemented.
“Now old hands will probably not buy Japanese equities. They will say: ‘I’ve called the Japanese turnaround eight times and it never happened.'
“Well, I’ll probably be wrong [too], but I’m putting it out there. “My point is that that scenario is just not factored in and so there is a potential upside.”
The Melbourne-based global equity manager has historically been negative on Japanese equities.
“I have been covering Japanese stocks for 17 years. It was the first market I was given when I worked at Loomis Sayles and my frustration with Japanese companies has always been that they are not even trying to make money,” Bell said.
“We have been very underweight Japanese equities, [and] we picked up actually a lot of alpha by being underweight Japan for four or five years.”
But he questioned whether that would be the case in the future.
“We thought maybe we should take some risk off the table and put some money in Japan,” he said.
“So I went up to Japan before the recent rally and before the recent Abe government came in, just to get myself up to speed with some of these companies, and I came away thinking that from a valuation point of view this is actually very inexpensive, so we added about 5 per cent in Japanese equities to the portfolio in August last year.
"It has done very well. We have added to that Japanese position more recently.”
Japanese economic growth has been sluggish in the past 20 years, with only one year achieving a moderate gross domestic product (GDP) growth rate of a 2.5 per cent.
The forecast for GDP growth in the new financial year, the 12 months to March 2014, was around 2.6 per cent to 2.7 per cent, Bell said.
“That will be the second time in 20 years that it is going to grow by that much,” he said.
He pointed out the government’s requirement for pension funds to lift their equities exposure was likely to boost the equity market.
“The Japanese pension system has 12 per cent into equities, which is extremely low and [Prime Minister] Abe has told them they need to lift their weighting in equities,” he said.
“How they achieve their higher goal is probably still up in the air, but Japan is a different place, when the prime minister says you have to lift your weighting to equities, they do it.”
Japanese companies are also exporting more to Asian countries than in the past, tapping into the Asian growth story, while the business models of listed companies have also changed.
“We are doing quite a bit of research on four or five new names. These are all different stocks; they are not the same companies as five years ago,” Bell said.
“We own a company called Sanrio, which produces Hello Kitty. It is like Disney, it is a licensing company and they get a 10 per cent clip on every T-shirt, coffee mug with a picture of a little cat on it.
“That is a terrific business and very profitable, [but] nobody had heard of Sanrio 10 years ago.”
He said opportunities also existed in healthcare, particularly in generic drug production, which was still in its infancy in Japan.
“Japan is a watch-this-space,” he said.
A combination of economic reforms by the current Japanese government under Prime Minister Shinzo Abe, low equity valuations and new company business models could provide the catalyst for the long-struggling economy’s recovery, Bell Asset Management chief executive Ned Bell said.
“There is a change of government almost annually in Japan, but [the Abe government] have recognised that in the last five years the Koreans have killed them in terms of the export industry and that is a huge part of the Japanese economy,” Bell said.
"I think [this government is] the real deal and I actually think it will work this time.
“There are some upper house elections in July this year and it looks like Abe will win quite comfortably there, and that looks like the go-button for what he has been saying to get really implemented.
“Now old hands will probably not buy Japanese equities. They will say: ‘I’ve called the Japanese turnaround eight times and it never happened.'
“Well, I’ll probably be wrong [too], but I’m putting it out there. “My point is that that scenario is just not factored in and so there is a potential upside.”
The Melbourne-based global equity manager has historically been negative on Japanese equities.
“I have been covering Japanese stocks for 17 years. It was the first market I was given when I worked at Loomis Sayles and my frustration with Japanese companies has always been that they are not even trying to make money,” Bell said.
“We have been very underweight Japanese equities, [and] we picked up actually a lot of alpha by being underweight Japan for four or five years.”
But he questioned whether that would be the case in the future.
“We thought maybe we should take some risk off the table and put some money in Japan,” he said.
“So I went up to Japan before the recent rally and before the recent Abe government came in, just to get myself up to speed with some of these companies, and I came away thinking that from a valuation point of view this is actually very inexpensive, so we added about 5 per cent in Japanese equities to the portfolio in August last year.
"It has done very well. We have added to that Japanese position more recently.”
Japanese economic growth has been sluggish in the past 20 years, with only one year achieving a moderate gross domestic product (GDP) growth rate of a 2.5 per cent.
The forecast for GDP growth in the new financial year, the 12 months to March 2014, was around 2.6 per cent to 2.7 per cent, Bell said.
“That will be the second time in 20 years that it is going to grow by that much,” he said.
He pointed out the government’s requirement for pension funds to lift their equities exposure was likely to boost the equity market.
“The Japanese pension system has 12 per cent into equities, which is extremely low and [Prime Minister] Abe has told them they need to lift their weighting in equities,” he said.
“How they achieve their higher goal is probably still up in the air, but Japan is a different place, when the prime minister says you have to lift your weighting to equities, they do it.”
Japanese companies are also exporting more to Asian countries than in the past, tapping into the Asian growth story, while the business models of listed companies have also changed.
“We are doing quite a bit of research on four or five new names. These are all different stocks; they are not the same companies as five years ago,” Bell said.
“We own a company called Sanrio, which produces Hello Kitty. It is like Disney, it is a licensing company and they get a 10 per cent clip on every T-shirt, coffee mug with a picture of a little cat on it.
“That is a terrific business and very profitable, [but] nobody had heard of Sanrio 10 years ago.”
He said opportunities also existed in healthcare, particularly in generic drug production, which was still in its infancy in Japan.
“Japan is a watch-this-space,” he said.
