Veteran investor Warren Buffett has been raising his stake in Japan. Is it a turning point for investors’ least favourite market?
- The Topix index hit a 33-year high at the end of May
- Japan may finally have put the lid on three years of deflation
- New corporate governance rules are boosting returns
As Warren Buffett takes an interest in the Japanese markets, investors are taking note. The Sage of Omaha has been in Japan, with the aim of topping up his Japan holdings. He says prices are “ridiculously” low, with companies paying higher dividends and buying back shares.
His interest has coincided with a surge in the Japanese market, with the Topix index hitting a 33-year high at the end of May. The average return for funds in the IA Japan sector is 5.8%, putting it just behind Europe, but ahead of most other major sectors.
A number of factors have come together to boost Japanese markets. The first is that Japan may finally have put the lid on three decades of deflation. While inflation is generally bad for an economy, in Japan it could stimulate consumer spending and corporate investment.
Employees are starting to demand higher wages. Annual nominal wages in Japan have risen just 4% from 1990 to 2019, compared with 145% in the US, according to the Economist. However, recent wage data shows companies granting pay rises to workers. This should help fuel consumer spending.
There are other factors that give Japan some appeal. James Rosenwald, chief investment officer of the Nippon Active Value Fund, says: “Japan has the cheapest stocks on a cash flow and income basis in the developed world, and its interest rates are the lowest in the world. Equities, through their dividends and share buybacks, provide the largest carry trade in the world. The example is Warren Buffett’s borrowing in yen and investing in equities which offer a return on equity of more than 10%. The positive carry is positively amazing.”
It helps that Japan has been persistently unpopular with international asset allocators, deterred by its lost decades of stagnant growth and deflation. This means it doesn’t take much to move the needle on share prices.
Corporate governance is also improving, with a reduction in cross-holdings, rise in dividends and buybacks and improving transparency. Previously anaemic return on equity levels have been improving as a result. This is an ongoing process, with the Tokyo Stock Exchange recently issuing a request to Japanese companies trading below 1x book value to make tangible plans to boost share prices through improved capital allocation. Companies have responded by announcing dividend increases and share buybacks.
Investors have been told ‘this time it’s different’ in Japan many times, and shareholder returns have often disappointed. However, when Warren Buffett takes an interest, it has to be worth a second look.
