Growth Up, Yen Down

Simon Edelsten, co-manager of the Artemis Global Select fund, comments on Japan’s growth figures for the fourth quarter of 2013

“Equities globally have staged a dramatic recovery since the financial crisis.  Since its 2009 lows the world index has risen 130% and many stocks trade on earnings multiples between 15 and 20.  On these valuations, for stocks to deliver high returns investors need to see revenue growth as well as improving margins.   

“Over the eighteen months since Mr Abe won a landslide election victory, the yen has fallen by a third.  This has made many world-leading Japanese businesses highly competitive, especially against European businesses facing a strong euro.  But, interestingly, the Japanese trade data do not show an export surge.  Indeed, the recent GDP figures disappointed markets by showing slow exports, though showed a robust domestic recovery which few had forecast. In a notable change in attitude, many Japanese exporters are not rushing to win market share and are instead enjoying higher profit margins.

“The last few weeks have seen nine month results for most large Japanese stocks. In Europe and the USA analysts have generally been reducing forecasts over the last few months.   In contrast, earnings forecasts in Japan had been raised ahead of the recent results and have been raised again following the new data.  Some of the figures are dramatic - one of our holdings, Yamaha musical instruments, made ¥19bn in the first nine months of the year against ¥4.5bn last year, again a combination of sales growth and margin improvements. 

“The Japanese equity market ended last year as the world's best performing market.  We feel this was justified given the fundamental improvements seen.  The market has retreated a little recently, concerned about slowing emerging market demand and an imminent increase in local sales taxes.  While these factors may produce some short-term headwinds in certain stocks, we continue to regard the longer-term opportunity as outstanding.  

“The most important driver of future returns may not be not Abenomics, but a greater focus on shareholder returns from many management teams.  Japan has many world-leading businesses, but few with world-leading financial results.  When investing in Japan you get a lot of company for your money - strong products, innovation, high global market shares. What has been lacking is profitability.  As this continues to improve we believe the markets have much further to rise and investors have many years of strong returns ahead.”

 

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