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Issue 33
Autumn 2013
Adapt to survive
Negotiating an evolving
fixed income market
ALSO IN THIS ISSUE
Death by a thousand cuts an economic overview
PLUS
Emerging markets: the best
time to invest is when you
least feel like doing so
02
Welcome to the Autumn 2013 edition
of Investment Matters, our magazine
for advisers and investors in the
Aberdeen OEICs.
Aberdeen Asset Management PLC is a global
investment group managing £202 billion of assets
as at 31 August 2013. Founded in 1983, through
management buyout, we focus solely on our core
skill: asset management. This means that we stand
or fall on whether we can genuinely add value to
client wealth over the long term.
Having succeeded in weathering the Global
Financial Crisis, our still fragile global
economy now charts a course forward
in what remains a turbulent and trying
environment.
The good news is that most major regions
have now finally emerged from recession.
With these challenges in mind, in this edition
of Investment Matters Mike Turner, Head of
Global Strategy and Asset Allocation, looks at
the outlook for markets as well as the global
economy.
Oliver Boulind, Head of Global Credit, looks
at why fixed income still has a crucial role
to play in investors’ portfolios. Ian Cowie,
columnist at the Sunday Times, takes a close
look at the emerging market story which
has come under close scrutiny over the past
few months.
We then take this theme a little further
by providing in-house views from both the
Today, our clients access our investment expertise
across three main asset classes: equities, fixed
income and property as well as through tailored
solutions. We have over 2,000 employees across
32 offices, including investment hubs in Edinburgh,
Hong Kong, London, Philadelphia, Singapore, Tokyo,
Sydney and Stockholm. Our headquarters are in
Aberdeen, Scotland.
equity and bond side of the emerging market
equation. And with the football season now
in full flow Jeremy Whitley, Head of PanEuropean Equities, compares the art of active
investing in Europe to football management.
Finally, with Abenomics still fuelling a
buoyant Japanese economy, our Head of
Japanese Equities Kwok Chern-Yeh sends us a
postcard distilling his view from Tokyo.
The investment and economic landscape
may be tricky but in any environment there
are always attractive opportunities for those
willing to look hard enough. We hope that
you enjoy reading the articles included within
and that they provide useful insights in your
quest for healthy investment returns.
Martin Gilbert
CEO, Aberdeen Asset Management
We recommend that you seek Financial Advice
prior to making an investment decision. Before
making an investment, retail investors should
read the risk warnings detailed in the Aberdeen UK
OEIC Range Key Investor Information documents
(KIID) which can be obtained at www.aberdeenasset.co.uk or by phoning our Customer Services
Department on 0845 300 2890. Investors unsure
about the suitability of any investment should take
professional advice. Please visit our UK website at
www.aberdeen-asset.co.uk
The value of investments and the income from them can go down as well as up and you may get back less than the amount invested.
Contents
economic &
Market OVERview
Mike Turner provides an update on the
macro environment
adapt to survive
Oliver Boulind on surviving
fixed income markets
04
06
Emerging markets: the best
time to invest is when you
least feel like doing so
Ian Cowie
Despite slowing growth
rates the potential for
Lionel
Christiano
expansion
remains
Messi
Ronaldo
Devan Kaloo
and Brett Diment
Argentina
03
Portugal
selecting a footbalL squad
is like good investing
Jeremy Whitley, Head of UK and
EuropeanTransfer
Equities
value
Transfer value
08
Gareth
09
Bale
Wales
Transfer value
£88m
Sergio
Busquets
Juan
Mata
Cesc
Fàbregas
Transfer value
Transfer value
Transfer value
Spain
£39.5m
Spain
£39.5m
Andres
Iniesta
Falcao
Edison
Cavani
Neymar
Spain
Colombia
Transfer value
Transfer value
Uruguay
Brazil
£85m
Transfer value
12
Thomas
Robin
Müller van Persie
Spain
Germany
Holland
£39.5m
Transfer value
Transfer value
£57m
£39.5m
10
08
Wayne
Rooney
Hulk
England
Brazil
Transfer value
Transfer value
Transfer value
Transfer value
Eden
Hazard
Luis
Suárez
Frank
Ribery
Mesut
Özil
David
Silva
Transfer value
Transfer value
Transfer value
Transfer value
Transfer value
Mario
Götze
Germany
10
£105m
A postcard from Japan
Kwok Chern-Yeh
04
12
£53m
£39.5m
£48.5m
Belgium
£37m
£44m
Uruguay
£39.5m
France
£37m06 £37m
£39.5m
Germany
£37m
£39.5m
Spain
£35m
04 Economic & Market Overview
Death by a thousand cuts
Mike Turner, Head of Global Strategy & Asset Allocation and
lead fund manager of the Aberdeen Multi-Asset Fund
The reaction of markets this summer to
the Federal Reserve’s comments on future
monetary policy, particularly the tapering
of bond purchases, has been perplexing
for investors. So far this year, US and UK
government bond holders have absorbed
negative returns and increased volatility.
The 10-year US Treasury yield may well have
hit its low in July last year. Since then yields
have risen by over 100 basis points and from
here will probably grind slowly higher as
the Federal Reserve gently reigns in its asset
purchase programme in the months ahead.
The speed and quantity of the reduction
in accommodative monetary policy is
uncertain but the direction is not. Indeed,
after a 30 year trend of lower bond yields
we appear to be at an important turning
point for the asset class. In the debate about
whether this represents a ‘great rotation’ out
of bonds, the fate of fixed income investors
could be ‘death by a thousand cuts’ as
gradually bond yields rise and prices fall as
they adjust to the changing monetary and
economic conditions.
Mixed economic messages
Over the summer months we received
mixed signals on the economic health of
developed markets. Starting with the US,
statistics covering industrial surveys and
manufacturing orders remain positive
yet consumer confidence, housing starts
and building permits have all come in
below consensus. Higher long-term bond
yields have negatively affected mortgage
applications, raising concerns over the
housing market. The Federal Reserve’s recent
downgrade of its growth forecasts, from
2.6% to 2.3% for 2013 and from 3-3.5% to
2.9-3.1% for 2014, also point towards some
loss of momentum. In the UK a stronger
pattern has emerged and Europe has
recovered to a more stable position but is
showing only limited evidence of recovery.
While in Japan, “Abenomics” has resulted
in sharp upgrades to near term economic
forecasts.
If the gradual reduction of US monetary
stimulus can be achieved in a slow and
staged manner then improving business
and consumer confidence will have an
opportunity to feed through to increased
business investment and consumption.
Normalisation of monetary policy is not
without risks however, as the flow of funds
from emerging economies back to the US
dollar and dollar assets over the summer
demonstrated. Likewise, the impact of higher
long-term Treasury yields on US mortgage
applications, housing demand and spending
poses a threat to the domestic US economy
and its consumers.
Markets will test forward guidance adding
volatility to bond prices but we believe
the overall direction for yields is upwards.
Based on our central scenario, over the
next 3-12 months, we expect equities to
outperform bonds and for the recent positive
correlation in returns to reverse. Equity
valuations in developed market equities are
not compelling and are sitting around the
long-term averages. However, dividend yields
and dividend growth in a low interest rate
environment support their attraction for
investors relative to fixed income and cash.
There is a lot of retail cash savings still sitting
on the side lines earning next to nothing.
In emerging markets, after the recent
correction, both bonds and equities appear
attractively valued and indeed the recent
currency depreciation in some nations
could be viewed as an adjustment towards
fair value. Looking ahead, the markets will
continue to be highly sensitive to Federal
Reserve policy induced capital outflows and
growth in emerging economies is always
likely to be more volatile but it will generally
exceed that of the developed world. Both
demographics and the scope for productivity
growth remain positive in emerging markets
and we believe the fundamentals remain
attractive over a longer time horizon.
05
September Summary
• Globally, monetary policy
remains accommodating and
key policy interest rates to
remain low
• Bank credit provision
improving and merger and
acquisition activity picking up
in developed markets
• Earnings growth has slowed
but remains positive; dividends
growing
• Equities attractively valued
relative to bonds
06
Fixed income
Adapt to survive
negotiating an evolving
fixed income market
07
Oliver Boulind, Head of Global Credit
The 2007/08 global financial crisis marked
the start of what has been, and still is, a
very difficult period for investors. In a bid
to ignite growth and spur a recovery, major
central banks have flooded the world with
liquidity through unprecedented loose
monetary policies. Although these actions
have benefited economies, they have been
at the expense of distorting global financial
assets, arguably none more so than those
within the fixed income universe.
One clear example of such distorting
behaviour is the direct effect of the moneyprinting policy that is quantitative easing
(QE) which has supressed yields to all-time
lows. Now investors are worried what will
happen when the taps are switched off. This
has forced them to face the ‘great rotation’
debate head on in the interests of shielding
themselves against potentially rising interest
rates. None of this helps anxiety levels.
Therefore, as the bond market evolves,
investors must also – those who do not adapt
their portfolios are at significant risk.
Advocates of the ‘great rotation’ from
bonds into stocks would have you believe
that the answer is to sell down your bond
holdings in favour of equities. This approach
is, in our view, far too simplistic for a number
of reasons.
1.Demographics: the aging populations
of the developed world ensure a steady
stream of fixed income buyers seeking to
secure reliable retirement incomes. This is
true for the private investor whose defined
contribution pension pots and additional
savings are invested for income. Likewise,
in the institutional world, defined benefit
schemes view any rise in bond yields as an
opportunity to help plug the hole in their
funding deficits.
2. The rotation away from bonds is likely
to be far more gradual than many experts
and commentators acknowledge. Global
inflation is actually low by historical
standards and therefore the upward pressure
on official rates should not be as severe
as many fear. And so while there may be
a change to QE policy, we firmly believe
interest rates will remain ‘lower-for-longer’
– until the recovery becomes evidently
entrenched.
3. It ignores that many investors still
fundamentally need fixed income assets
and that much of the ‘rotation’ is going
on within the bond universe. The appetite
for income is insatiable and investors are
moving away from ‘traditional’ bonds – such
as UK gilts – toward higher yielding areas
of the bond market that offer the potential
for enhanced returns in this complex and
belligerent ‘lower-for-longer’ environment.
4. Standard risk-modelling tools
recommend fixed income as part of a
balanced client portfolio and will continue
to do so. While this implies an inherent
demand for the asset class, it also challenges
advisers and clients alike to think about the
best way of achieving fixed income exposure
now that supposed ‘easy money’ from bonds
has been made.
5. Diversification. The fact that bond returns
are typically negatively correlated to equities
means their inclusion within a portfolio
offers a useful balance. What is more, due
to the fixed level of income they pay, bonds
are generally less volatile than equities and
many other financial assets.
“...as the bond market
evolves, investors need
to as well”
Irrespective of the challenging backdrop,
all segments of the bond market continue to
have a role to play within portfolios. It is the
emphasis of each particular area that should
now come under greater scrutiny and requires
a re-think.
Investors will naturally need different
approaches to seeking out these more
diverse, but potentially more rewarding, areas
of the fixed income market. Some clients
and advisers have the time and expertise to
revise portfolios themselves. However, it may
make sense for less confident investors to
outsource such decisions by using a strategic
fixed income solution.
Regardless of how it is achieved, the key
point is that investors need to add a degree
of flexibility into their fixed income portfolios.
Further, they need to be bold enough to
break away from conventional fixed income
solutions, recognising that what worked in
the past will not necessarily work in
the future.
08
Emerging Markets
Emerging markets:
the best time to invest
is when you least feel
like doing so
Ian Cowie, Sunday Times columnist
09
Reports of the death of the emerging
markets income and growth story proved
greatly exaggerated earlier this year.
Currencies, bond and share prices in
developing countries bounced strongly after
America’s Federal Reserve surprised stock
markets in September by saying it would
continue quantitative easing (QE), injecting
liquidity into the economy by means of US
Treasury bond purchases.
Before then, widespread and mistaken
expectations that tapering – or reduced
QE – was imminent had weighed heavily
on emerging market bond and equity
valuations. When investors in developed
countries expected higher yields on domestic
bonds and rising returns from domestic
equities, there seemed less reason to accept
the greater volatility and risk inherent in
emerging markets.
No wonder Federal Reserve hints in May,
that tapering might start soon, had led
emerging markets bond and equity funds to
suffer net outflows of an estimated $20bn
and $26.5bn respectively in the three months
to the end of August.
Against that dismal backdrop, one widelyrespected financial newspaper’s headline
reported: “Emerging market growth story
dies”. Then, just a few weeks before the
Federal Reserve surprised stock markets by
sustaining QE, the same newspaper’s headline
had advised: “Too soon to buy unloved
emerging markets”.
Let’s spare their blushes by not naming
the pink-faced doom-mongers. Perhaps the
kindest thing that can be said is that this
cautionary tale of consensus-view analysis
demonstrates the truth of Warren Buffett’s
observation that there are only two types of
experts when it comes to predicting stock
markets; those who don’t know and those
who don’t know they don’t know.
Fortunately, the past is a matter of fact.
At the time of writing in the final week of
September, the Morgan Stanley Countries
Index (MSCI) Emerging Markets index has
risen by more than nine per cent in the
month to date. That pushed this benchmark
back into positive territory by one per cent
over the last year, although it remains one per
cent lower than its level three years ago. Over
the past five and 10 year periods, the MSCI
Emerging Markets has delivered total returns
of 4.1 and 10.3% respectively.
Those figures give some flavour of how
this sector fell into and out of fashion during
the last decade. More importantly for
medium to long-term investors today, do
emerging markets offer reasonable value at
current prices?
One traditional measure of value is to
express equity prices as a multiple of earnings
per share. Statisticians ThomsonReuters
reckon that the Russian stock market is
trading around six times earnings, while the
average price/earnings (P/E) ratio in China is
less than eight. By contrast, Britain’s FTSE 100
trades around 15 while the American market
soars away on a P/E ratio of 19.
But it is important to emphasise that
emerging markets’ specific circumstances
vary widely – even within the well-known
grouping of the BRIC economies of Brazil,
Russia, India and China. For example,
ThomsonReuters calculate that Brazil’s P/E is
16 and India’s nearly 15; both about twice as
expensive as Russia and China.
Bearing in mind those valuation differences,
it is interesting to note that the International
Monetary Fund predicts developed
economies will grow by an average of 1.2%,
while emerging markets will average 5.3%
growth this year.
Rising national economic output does not
necessarily translate into higher returns for
bond or equity investors but the long term
trends are noteworthy. When the MSCI
Emerging Markets index was first formulated
in 1988, it included just 10 countries and
less than one per cent of the world’s stock
markets by value.
Today it covers 21 markets and about 13%
of global stock markets’ capitalisation. Even
that dramatic increase may not reflect the
full potential of the underlying economies in
which emerging market investors can buy a
stake. According to the Economist Intelligence
Unit, emerging markets will generate 62% of
global growth between 2012 and 2015.
Against all that, the credit crunch
destroyed dreams that emerging markets
could decouple from developed countries
and rely entirely on domestic consumption
to maintain growth. It demonstrated that
we share the same global economic system,
where exporters’ and importers’ fortunes
remain interdependent.
However, while it is no longer fashionable
to say so, many emerging markets continue
to enjoy competitive advantages over the
developed world. These include demographics
– their populations are often younger; socioeconomic trends – their middle classes are
growing rapidly, boosting consumer spending;
culture – they tend to be savers rather than
borrowers; and costs – their wages are lower.
These facts may prove far more important
to long-term investment returns than shortterm fluctuations in financial fashion. It is
often said that the best time to invest is
when you least feel like doing so, because
confidence and prices are likely to be low.
Even after this year’s partial recovery, that
may remain true of emerging markets. As
recent events have already demonstrated,
it’s far too early to write the developing
world’s obituary.
10
Emerging markets
Despite slowing growth rates the
potential for expansion remains
Devan Kaloo, Head of Global Emerging Markets and
Brett Diment, Head of Emerging Market and Sovereign Debt
While much has been said and written
about the slowing growth rates in the
emerging markets, we firmly believe that
the developing nations of the world will
continue to exceed the growth rates of
more established economies in the years
to come. Fundamentally, many emerging
markets’ growth slowed in real and nominal
terms at the start of this year, although
not all emerging economies’ growth rates
have fallen. In response to this we recently
canvassed the opinions of two senior
emerging market portfolio managers in
order to gain an expert opinion from both
the equity and fixed income perspectives
What are the broad issues confronting the
emerging markets?
Devan Kaloo: I believe there are three issues
confronting investors in emerging markets.
Firstly, China, where do we go from here?
The new Chinese leadership has identified
a basic problem with the Chinese economy,
they have to spend more and more to achieve
less and less growth. In short, capital is being
mispriced. Capital is being increasingly used
for less productive means. This is evidenced
by property bubbles and the excess capacity
seen in many industries.
Recent policy means have been an
attempt to re-price capital – which in the
long term is positive for China, but in the
short term could have adverse consequences
to China’s economic growth and health of the
banking system.
Secondly, what does the unwinding of
quantitative easing by the Federal Reserve
mean for emerging markets. Well, in the short
term it is negative for two reasons. One,
equity and more recently bond markets are
largely driven by foreign flows. If the plentiful
foreign capital flows which accompanied
quantitative easing the last 5 years were to
reverse, that will result in a further sell-off in
financial markets.
Two, there are real economic
consequences. Many emerging market
countries run current account deficits, if
foreign capital flows were to retrace, then
that puts downward pressure on currencies,
stoking inflation and putting pressure on
governments to raise interest rates, which will
result in slower economic growth.
Finally, profitability at emerging market
corporates has been declining. Emerging
countries are and have been slowing for a few
years now. Externally a slower China, weaker
commodity prices, while rising inflation
and tighter monetary policy has resulted
in pressure on corporate profitability. In
addition many corporate management teams
have been focused on growth, rather than
margins, and as a result are less concerned
about the bottom line. This is in contrast to
companies in the US and to lesser extent
Europe, who in the absence of top line growth
have focused on profit margins and in a
gradually improving environment have seen
overall profitability improve relative to their
emerging market counterparts.
current account deficits such as Turkey are
performing particularly poorly. Countries
such as Indonesia, which is a big commodity
exporter to China, Mexico and the Philippines,
which have account surpluses, are also
performing poorly. I believe that some of the
moves speak more towards a repositioning
of the underlying fundamentals of these
countries
On the other hand, emerging economies
have considerably lower debt levels. Prudent
fiscal management and economic prosperity
led many emerging market governments to
repay debt and reduce budget deficits. The
improved fiscal balances have resulted in
greater stability, making emerging economies
more resilient in the face of financial
turbulence and at the same time improving
their standing in the international financial
markets. In addition, the healthier backdrop
has led to an improved political and business
environment across many developing nations.
Meanwhile, debt in the developed world
has been rising for many years, which in turn
has created a debt overhang, limited fiscal
flexibility, lowered growth potential and
increased investor risk.
What is the current state of emerging
market debt?
Brett Diment: On the fixed income side,
I’d echo similar themes in emerging market
debt that Devan touched on for emerging
market equity. We’ve seen a fairly large
selloff in the debt markets over concerns
about US policy, Chinese growth rates,
concerns over unrest in countries such as
Turkey and Brazil, and other issues.
We went into the sell-off with levels
that were particularly high in some of the
world’s bond markets and some that were
actually quite stretched. The sell-off was
fairly indiscriminate. Countries with rising
What is the outlook for emerging equity
markets?
Devan Kaloo: We remain upbeat on
emerging markets over the longer term, but
there remains a real risk that conditions
remain tough in the short term. The
reasons for our relative optimism can be
explained with reference to the three issues
identified earlier.
The Chinese government, like politicians
everywhere, are unlikely to want to take the
pain of restructuring implied by addressing
the deep seated issues in the economy.
As a result any marked slowdown in the
Chinese economy will likely be met by further
Selecting a football squad
is like good investing... 11
stimulus – which for the moment they can
still afford. It is unlikely then that we shall see
a major slowdown in the Chinese economy.
Whether or not the Federal Reserve
decides to unwind quantitative easing now
or later, the impact is being felt in these
developing economies. But the adjustment
process to this changing environment is a
1 – 2 year event, not a 5 – 10 year process.
This is because the adjustment is fairly rapid
and there are no significant structural issues
within these economies. Economies will
slow, imports contract and exports increase
with the weaker currencies, closing current
account deficits and easing inflationary
pressure allowing domestic interest rates
to start coming down sooner rather than
later. Perhaps most importantly, the change
in direction of capital reminds emerging
market policymakers that they are in global
competition for capital – which should
provide the catalyst to push forward
with reform.
While at the corporate level we are already
beginning to see our management respond to
these tougher terms by focusing on margins,
reigning in expansion plans and ensuring they
have the balance strength to deal with any
issues. This is very encouraging and ultimately
is the most important reason to be positive
on emerging markets – the company’s
remain sound, well-managed and with
improving profitability this should lead,
eventually, to share price performance. Given
the recent poor performance there is also
value to be had.
What impact will a strengthening US
dollar have on emerging markets?
Brett Diment: I believe that in the short
term a stronger US dollar is likely to cause
capital flows out of emerging market
assets and into the US dollar and dollar
denominated assets. In this scenario, the
currencies of emerging economies with
current account deficits or large export
exposure to the US economy are likely to
fare particularly badly.
A long term appreciation of the US dollar
will however likely signal an improving
fundamental backdrop in the US. I would
highlight exporting economies as those which
are likely to benefit in this situation, such as
South Korea and Mexico.
...it requires more thought than simply following market values
Jeremy Whitley, Head of UK and European Equities
Lionel
Messi
Christiano
Ronaldo
Gareth
Bale
Andres
Iniesta
Falcao
Spain
Colombia
Transfer value
Transfer value
Transfer value
Transfer value
Transfer value
Sergio
Busquets
Juan
Mata
Cesc
Fàbregas
Transfer value
Transfer value
Transfer value
Argentina
£105m
Spain
£39.5m
Portugal
£88m
Spain
£39.5m
Wales
£85m
Spain
£39.5m
Edison
Cavani
Neymar
Uruguay
Brazil
Transfer value
Thomas
Robin
Müller van Persie
Germany
Holland
Transfer value
Transfer value
£57m
£39.5m
£53m
£39.5m
Wayne
Rooney
Hulk
England
Brazil
Transfer value
Transfer value
Transfer value
Transfer value
Eden
Hazard
Luis
Suárez
Frank
Ribery
Mesut
Özil
David
Silva
Transfer value
Transfer value
Transfer value
Transfer value
Transfer value
£48.5m
Belgium
£37m
£44m
Uruguay
£37m
£39.5m
France
£37m
£39.5m
Germany
£37m
Mario
Götze
Germany
£39.5m
Spain
£35m
Source: www.transfermarket.co.uk
If you were to select a football squad based
purely on the value of players you would
end up with a squad looking something
like this.
In theory, using player value would seem
a logical choice to give you the best possible
squad. However, the above list contains
11 strikers and nine midfielders but no
defenders or even a goalkeeper. Therefore,
not only would you have a very poorly
balanced team – all attack, no defence
and serious exposure to injury risk – but by
picking the best players, you are not picking
the ones with the most potential. Yet, if you
were to adopt a basic passive investment
strategy this is essentially the approach
that you would be taking – i.e. buying the
largest stocks by market weighting. For
example a FTSE World Europe Tracker Fund
is heavily skewed towards commodities and
the financial services, with over 40% of the
index made up of these kind of companies.
Conventional thinking says that investing
passively is inherently less risky. But this is
only true with the conventional approach
to risk; that is one which looks at tracking
error alone. I would argue that the debate
is not so much about active versus passive,
but about what good active management
looks like.
Not following a benchmark
Football has been dominated by one
nation and one team in the last few years
- Spain and Barcelona. Both teams have
revolutionized football with a ‘tika-taka’
approach which has become the benchmark
for all young footballers to follow. Newly
crowned champions of Europe, Bayern
Munich, have however taken a different
approach to this philosophy and decided not
to sporadically buy Spanish players in order
to replicate the hugely successful ‘tika-taka’
approach. Their new found success has been
attributed to their patient approach and
individual player selection, rather than their
attempt to replicate Barcelona and Spain.
We believe the similarities between this
approach and true active fund managers
are very similar. Active management is not
about activity, as is commonly thought, but
about not following a benchmark.
Simply put, if you want to beat the
benchmark, you must deviate from it.
Active investing, just like effective football
management, is hard work – there are no
short cuts. In their pursuit to outperform
passive benchmarks, portfolio managers
have explored any number of approaches
but fundamental to active management
is the principle that to outperform a
benchmark one needs to deviate from it.
Over the long term, share prices reflect
underlying business fundamentals rather
than the current value of companies. A
thoughtful and active approach is key to any
success and fortunately for Bayern Munich
fans and some investors, both are happy to
take this approach.
12
Kwok Chern-Yeh, Head of Japanese
Equities at Aberdeen Asset
Management
Prime Minister Shinzo Abe’s stimulatory
policies seem to be working and signs
of a recovery after years of stagnation
and deflation seem to be underway. The
weakening of the yen has also been positive
as Japanese goods have become more
competitive abroad. More importantly, large
companies in Japan reported an increase in
capital spending. Two of the three arrows
of Abenomics have been implemented, and
are showing some signs of worth, while the
majority victory in the upper-house elections
is a sign that voters are ready to back his
plans for economic reform. That said, Abe
must prise open protected industries to get
the third arrow off the ground. However,
we believe that investing in them is not like
making a bet on the economy.
121004050
A postcard from Japan
Mid-Se
ptember
marks
beginn
the
ing of t
h
e
‘k
oyo fro
in Japa
nt’
n and t
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e
s
t
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Digging further into the companies listed
on the stock market is what we are focussed
on, and despite the recent rally there is still
value to be found in Japan. The country
has one of the largest economies in the
world and is home to some of the most
recognisable companies, many of whom are
global leaders in their respective industries.
Corporate governance is improving with
many of the better-run companies beginning
to take on non-executive directors. Abe
has also promised to accelerate reforms
on governance standards, with tougher
regulations on insider trading, a review of
auditing firms and a more effective whistle
blowing system.
Japan’s small and medium sized companies
also offer a wealth of investment opportunity.
Many
are global
leaders, dominating niche markets
such as industrial robots, bicycle components
and medical diagnostic equipment. The
most progressive are sizeable entities,
with business operations overseas. With a
significant portion of revenue derived from
overseas markets. These companies have
been relatively insulated from the moribund
domestic economy for much of the past
two decades.
Importantly companies now operate in a
different environment and assumptions have
changed. While there are some businesses
and industries that are more expensive than
others, we believe that we can still find value
in the Japanese stock market.