Japan: the lesser known rally

Title: Japan: the lesser known rally

00:00:17:14 - 00:07:22:10
Hello it's Friday, the 29th of August. Lots we could be talking about this week, we had Nvidia results, which are actually, you know, pretty good. not quite as good as expected. And the stock sold off a tiny amount. But we've really sort of already moved on from there. We had, the US president, continue his sort of, sniping at the US Federal Reserve. We've had tariffs, go up on India, ostensibly because their use of Russian energy, we've got new political crises in France. There's lots we could be talking about. But what I want to focus on really, is the Japanese stock market, which has performed probably better than you realise. Unless you've been looking for it, it really has gone up almost underneath the radar. 

If you cast your mind back to the Liberation Day selloff in April, lots of markets had a difficult few days. And Japan was certainly amongst those. Perhaps not a big surprise. Japan's stock market is famously, export reliant, and indeed has a sort of high correlation, with the weakening of the yen generally, because it's presumed that a weaker yen makes those exports more attractive and therefore better for the stock market. But, this is really focused on the fact that there was a lack of knowledge and lack of understanding of how impactful these tariffs would be on the stock market, On these exporters and Japan sold off, pretty severely, amongst the worse out there over that few days. The rally, though, has been substantial. So on the way back out, if you sort of move a couple of days forward and plot the performance of these markets from the trough, UK and Germany are up around 20, 22%, in sterling terms. And I've done, you know, well, as I'm sure you know, we certainly referred to that previously in these videos. Japan up almost half again up 29% over the same time period. So you know, again, in sterling terms adjusted for currency, it's actually had a decent run out from the bottom and it hadn't sold off that much more and so year to date, performance is really sort of, very competitive. Because it did it fell a bit more, but not a lot more. And the rally’s been very strong. So Japanese stock market’s done very well, over this period. And it's probably not something, unless you've been really looking for it, you'd have noticed.

There's a number of different factors, really, surrounding the Japanese stock market that have led to this decent performance. Firstly, there's that sort of technical element that sell off that happened at the start of the year and that sort of rebound back from there is some of the fears, most of the fears, frankly, around tariffs dissipated. But there's a more fundamental, bigger picture really. Which is why we turned positive, on the Japanese stock market two years ago. Firstly, you had decent valuations a couple of years ago, Japan really sort of being pretty unloved for many a year, in a similar vein to the UK, Europe, and emerging markets and a lot of these, economies really sort of left in the wake of the US as it's hoovered up all these assets in the US exceptionalism trade. So trading at  decent valuations and also at the same time you've had a number of structural reforms stretching back about a decade or so now in Japan, aimed at generating better returns for investors. So focusing on corporate efficiency, focusing on corporate governance, trying to get those valuations up. And you can argue that, finally, in the last couple of years, we're sort of seeing the fruits of that labour come through. Another thing to bear in mind in terms of Japan, it has moved into an inflationary environment from a deflationary couple of decades. And, one of the reasons why that's important is in Japan, lots of people with lots of cash sat doing very little, frankly, in an environment where inflation is back and it is meaningfully back in Japan, not sort of race away, but it's certainly back compared to how it was, you can envisage you know, retail investors in Japan realising the cash sat in the bank in a deflationary environment, it's not that bad of an investment decision in an inflationary environment it's pretty poor investment decision because you're losing you know, relative returns compared to what you could be getting in the stock market. So you start to see, drip feed of that come in. Another factor is this recent non US trade. It's not only sort of domestic flows. You're seeing in Japan as international flows as well. Even looking in the UK the Investment Association flows data you can see over the last few months to the latest available data, a reduction in the net flows into the US and an increase in net flows into places like the European Union and Japan. So, you know there's a number of different factors that have led to this Japanese performance but it's very welcome because we turned over weight Japan, a couple of years ago.

So what that means for us in the LionTrust multi-asset team is firstly, of course, it's a welcome boost to returns. We score Japan a four out of five on our relative weightings scoring tactically. So, we have a positive view. And that positive view will be rewarded in terms of this relative outperformance. But what we also need to, of course, to be mindful of when we go through our tactical process on an ongoing basis and a forward looking basis, most importantly, is to continue to be mindful of the valuation in Japan and to, you know, make sure that the long term investment case still stacks up. On the valuation side looking at price earnings, for example, on a 12 month forward basis, it's creeping up into, unattractive territory. It's in the sort of 20s, you know, having been in low teens, only a couple of years ago. Price to book, though, is still only two times. So, you know, on that measure, not particularly expensive. So you can sort of, argue the toss either way really, in terms of valuation, and also you've got other factors like sentiment, technicals, and of course, you know, global flows to take account of so valuation in of itself is not the sole determinant of whether a market's attractive or not. We continue to look at it and it's one of the sort of topics of debate in our quarterly tactical asset allocation rounds. And as of today, we are still constructive on Japan. We remain, scoring four out of five and we remain overweight in our Japanese exposure, ultimately, the benefit there, of course, is diversification, a lower reliance on the US stock market, which, having done well over last decades with this exceptionism trade. There are, you know, question marks growing over whether that's sustainable, and whether it's sensible to be a diversified, differentiated, and actively different in terms of your portfolio allocation which we look to be, in, multi-asset funds and portfolios. That's it for me. Have a good weekend to get there and we'll see you next time.