Portfolio manager Shuntaro Takeuchi says Japanese equities, for so long a market of false dawns, may now be stirring up investment opportunities that finally present Japan as a long-term growth market.
- Japanese equities have generated attractive performance year-to-date, largely due to earnings-per-share (EPS) growth on the back of profit-margin improvements and better corporate governance.
- We believe this is only the start of a powerful corporate earnings growth story given the financial health of Japanese corporates.
- Three categories of “quality companies, responsive to different points in the investment cycle, can offer investors exposure to potential corporate profit growth.
What is driving Japan's equity returns? Year to date, the MSCI Japan Index has returned nearly 15% and at the time of writing this article, the Nikkei 225 hit its highest level since New Year’s Eve, 1989.1 Since its peak 33 years ago, investors have endured an economy that has struggled in the aftermath of an historic price bubble and rooted stagflation. Today, some market commentators say this rally of 2023 may just be the start of a new era for Japanese equities. I would argue that this ‘new era’ emerged a decade ago.
Before the global financial crisis in 2009, Japan was a classic cyclical market that would lose money during every downturn. In the last decade, however, the dynamic has meaningfully changed. It’s been a story of consistent margin and corporate governance improvements unfolding. And more recently we have seen a further acceleration of shareholder return as a result of steady increases in stock buybacks and dividends over the years. Consequently, investors, among them Warren Buffett, are once again taking notice, and inflows into Japanese equities have been positive year-to-date.2