Many investors have been put off Japan in recent decades due to years of stagnant economic growth, an aging population and low levels of labour productivity. But the economic shock following the coronavirus outbreak has highlighted the importance of balance sheet strength, and Japanese companies look well placed to endure shortfalls in revenues this year. According to analysts at broker CLSA, 56 per cent of companies included in the Topix index have net cash, in contrast to just 20 per cent of companies included in the FTSE All-Share index and 15 per cent of those in the S&P 500.
Good performance record
Competitive ongoing charge
Risk of economic slowdown
Japanese equities also look cheap, especially when compared with US equities. For example, MSCI Japan index was on a price/earnings ratio of 15.19 times for the 12 months to the end of May, compared with 19.25 times for the MSCI World and 22.43 times for MSCI USA indices.
Japanese Smaller Companies was the best performing Investment Association (IA) sector last month and Japan was the third best, according to Ben Yearsley, director at Shore Financial Planning. He credits the recent strength of Japan funds to “the solidity of Japanese balance sheets at a time when liquidity and solvency are crucial”.
A good way to get exposure to Japan could be T. Rowe Price Japanese Equity (GB00BF0S8W61), which has a good record of beating the Topix index under its current manager, Archibald Ciganer, as the performance of older share classes (rather than the sterling share class shown below) show. Mr Ciganer is fluent in Japanese, lives in Tokyo and has more than 15 years’ experience of researching Japanese equities.
He invests in companies of all sizes, but has a bias to smaller companies where he aims to invest in long-term growth opportunities before many other investors. Twenty five per cent of the fund is in companies with a market capitalisation of under $3bn (£2.41bn), compared with 16.5 per cent of those in the Topix Index. Mr Ciganer also likes to invest in companies that are undergoing corporate change, which should help drive long-term growth.
The fund is significantly overweight the technology and services sectors because Mr Ciganer thinks these areas have good growth potential and are often undervalued by the market. He aims to invest in high-quality companies that he thinks have been overly discounted. The fund is also overweight healthcare companies, which have been a positive contributor to performance this year. And Mr Ciganer said at the end of May that he is interested in companies with exposure to emerging markets and inbound tourism, which are facing near-term challenges, but are attractive in the long run.
T. Rowe Price Japanese Equity also has a relatively low ongoing charge of 0.62 per cent.
Many Japanese companies are reliant on exports, which makes Japan more exposed to the global economic cycle than many other parts of the world. This means that disruptions in supply chains and a drop in international demand for Japanese goods could be particularly damaging.
However, a large stimulus package representing roughly 40 per cent of Japan’s annual gross domestic product has boosted sentiment and supported its stock market. And although Japan faces structural economic headwinds and will suffer from any lack of international demand, it still has many well run and well capitalised companies that are currently available at what looks like a low price. T. Rowe Price Japanese Equity, meanwhile, is an active fund that can invest in companies of various sizes across different market sectors, so has great scope to avoid more challenged areas and focus on those that are doing better. And, so far, its manager has a good record of picking the right companies.
So if you want to tap into potential growth over the long term for what looks like a good price, T. Rowe Price Japanese Equity still looks like a good way to do this. Buy. MM
|T. Rowe Price Japanese Equity (GB00BF0S8W61)|
|IA Sector||Japan||Sharpe ratio||0.76|
|Fund type||Oeic||Standard deviation||14.63%|
|Fund Size||£244m||Ongoing charge||0.62%|
|No of holdings*||57||Yield||0.93%|
|Set-up date*||31 December 1995||More details||troweprice.com|
|Manager start date**||27 December 2013|
|Source: Morningstar 23 June 2020, *T. Rowe Price, **Trustnet.|
|Fund/benchmark||1-year total return||3-year cumulative total return|
|T. Rowe Price Japanese Equity Fund||20.54%||35.13%|
|IA Japan sector average||9.24%||14.77%|
|Source: FE Analytics, 22 June 2020|
|Top 10 holdings (%)|
|Nippon Telegraph and Telephone||3.50%|
|Source: T. Rowe Price as at 31 May 2020|
|Top 10 sector exposures (%)|
|IT, services & others||40.20%|
|Electrical appliances & instruments||13.30%|
|Raw materials & chemicals||7.20%|
|Auto & transport equipment||3.30%|
|Construction & materials||1.50%|
|Source: T. Rowe Price as at 31 May 2020|