While the problems for the Japanese economy are certainly not over, the world could be surprised by a quicker-than-expected recovery, says Scott McGlashan, the senior manager of the JO Hambro Capital Management Japan fund.
When selecting holdings for his £140m fund, which is invested across 23 different sectors, he looks for stocks that are particularly undervalued. McGlashan and Ruth Nash, alternate manager on the fund, focus on valuation, cash flows and price-to-book ratio per share.
“We pay attention to dividends too. We like to buy stocks that have either good yield or are likely to increase dividends,” he says.
The fund, which seeks to achieve long-term capital growth, operates on a bottom-up strategy and aims to invest in companies that are typically under-researched and therefore under-priced. It typically holds between 40-60 stocks.
McGlashan holds above-index positions in securities houses and real estate investment trusts (Reits), creating an overweight in financials although being underweight in banks and insurers.
“Reits are attractive. They are very cheap in terms of the yield they offer and because the [Japanese] government is taking measures to support the sector,” he says. Property prices have been weak recently, and the government is making an effort to help the sector recover.
Traditionally defensive stocks such as utilities, telecommunications and pharmaceuticals are currently not part of the fund. “It wouldn’t make a lot of sense because we expect the market to go up,” says McGlashan.
Therefore, the fund has no exposure to utilities and very little exposure to telecommunications and pharmaceuticals. A lot of companies within these sectors are also highly dependent on American consumption, which he does not expect to pick up any time soon.
It is overweight in industrials, technology and basic materials.
Japan’s corporate sector is financially strong and generates high levels of free cash flow, he says, and companies are even using cash rather than shares to pay for mergers and acquisitions (M&A).
The accelerating number of M&As is something he is keeping a close eye on, as he is also growing domestic investor support for stockmarkets.
The Japanese, he says, see enormous value in their own market and have been buying in the market for the first time in almost two decades. The yen is underpinned, public sector debt is largely domestically funded, and the country has no balance of payment problems.
Even the latest economic data from Japan, particularly higher industrial production rates, are fuelling his hopes that the Japanese economy is not only bottoming out but picking up again.
High savings rates and an ageing population still hamper domestic demand growth. However, while its economy is likely to remain highly export-dependent, Japan has been moving away from the American and European market.
“The economic model is unlikely to change dramatically, but integration with the rest of Asian countries is growing,” he says. In recent years, Japan has focused on Asia.
“We’re reasonably confident that a recovery is going on. We will see profits going up again,” he says. “I’ve been looking at Japan since 1983 and I’ve never seen so many opportunities.”