PARTNER INSIGHT: Japanese equity valuations remain attractively valued relative to the rest of the world. As shareholder friendly reform gathers pace, where are the opportunities for active managers in Japan over 2018?
Japan has proven to be an interesting hunting ground for investment opportunities in the Fidelity Global Special Situations Fund. Contrary to popular perceptions, in like-for-like currency terms, Japanese equities have outpaced the MSCI AC World index over the last five years.
However, there are reasons to expect the market to outperform from here. Currently, despite businesses witnessing new highs in terms of corporate profitability, the market in Japan remains well below levels seen in the late 1980s. In fact, a meaningful part of the market trades at a market value below book value and, across the market as a whole, companies have near zero debt - this is very unusual in an international context.
At the same time, valuations versus the rest of the world are near record lows, while corporate reform and increased shareholder focus continue to move in the right direction. Not only are businesses more focused on return on equity, there is a distinct change in how companies are approaching governance, with board members now needing to justify cross shareholding patterns and cash holdings on the balance sheet.
However, Japan's recent solid economic growth (tracking towards 2% in real terms in 2017) is not just the result of trade-related demand but reflects a real (some would say surprising) improvement in domestic demand conditions. In this context, we will be following developments around expected Japanese tax reform very closely in the coming period.
Whilst the market as a whole appears cheaply rated against other developed regions, there has been a notable polarisation in performance over the past year in favour of growth stocks
Click here to read the full article in the Spotlight Global Equities guide, and learn why there is a good chance that the Japanese equity market market will finally "break higher" in 2018.