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Japan recession fails to dampen fundie optimism

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By Rhea Nath
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5 minute read

The country continues to be identified as a bright spot for fund managers in 2024, despite two consecutive quarters of negative growth.

Although economic growth in Japan has slowed to a technical recession, the Asian giant continues to be viewed as an attractive investment market.

Last week, a recession was officially declared in the country after the economy contracted at an annual rate of 0.4 per cent in October to December, following a contraction of 3.3 per cent in the previous quarter, according to official statistics.

Two consecutive quarters of contraction are considered to indicate a technical recession.

However, in a market update last week, AMP’s chief economist, Shane Oliver, observed that Japan is “often in and out of recession” and is likely to bounce back this quarter.

“Japanese December quarter GDP unexpectedly contracted for a second quarter in a row, also qualifying as a technical recession, with falls in both consumer and business spending,” he reported.

“Growth is likely to bounce back this quarter but the contraction is likely to slow the Bank of Japan’s progress towards rate hikes.”

According to Talaria’s co-chief investment officer, Chad Padowitz, an important aspect to keep in mind amid news of a Japanese technical recession is that the benchmark Nikkei 225 index still posted a robust gain of approximately 28 per cent in 2023.

“It does show you there are a lot of other things at play there than the technical GDP numbers. There are a lot of other big positives [in Japan],” he told InvestorDaily.

“It’s a large economy, maybe not as big as it was 20 years ago, but it’s a large economy, and home to some very well-run companies. It is a broadly stable economy that’s slightly getting some pricing power, which is new for it, and the corporate sector’s balance sheets are in very good shape, which is quite unique where in most cases in the world, it’s gone the other way around,” Mr Padowitz said.

He noted the notable improvement in corporate Japan, especially in terms of strong balance sheets and large cash reserves, which could prove advantageous for fund managers in the event of a yen strengthening amid a possible lift in rates this year.

Additionally, as an open economy with a presently weak yen due to the country’s ongoing deflation issues, Japanese exports have seen a resurgence. In 2023, Japanese exports hit a record high, according to figures released by the Ministry of Finance last month, growing 3 per cent to US$680 billion.

According to Mr Padowitz, Japan has offered an attractive alternative to an expensive US market.

“When we look globally, the US is an expensive market, not everywhere but to a large extent, and so, when we look for companies that give us the return profile we seek at the right price, we’re finding more Japanese equities that meet those hurdles,” he said.

The Talaria Global Equity Fund holds a 15 per cent regional allocation to Japan, behind only the US (34 per cent), Europe ex-UK (20 per cent), and cash holdings (20 per cent).

Previously, global investment company abrdn said the Asian market looked to outperform the US market, predicting that a “growth desynchronisation” could emerge between the two regions.

Japan and India were identified as two bright spots amid this growth desynchronisation, which looked to occur mid-2024, around the same time as the Fed is expected to pivot to rate cuts, driven largely by slowing growth and moderating inflation.

“There is stronger earnings resilience in Asia and the region’s earnings for 2024 are expected to grow at twice the rate of the US,” noted Rene Buehlmann, abrdn chief executive officer of investments.

“We believe that investors are likely to reward Asia for its robust earnings growth and lower downgrade risks, and we expect key markets such as Korea, Taiwan, India, and Japan to be the main performers in Asia.”

Looking specifically at Japan, Mr Buehlmann highlighted attractive top-down and bottom-up factors underpinning the equities market as Japanese companies prioritise profitability and capital return.

“The Tokyo Stock Exchange’s efforts to enhance corporate profitability and governance have accelerated corporate restructuring, dividend payouts, and stock buybacks, all contributing to a positive outlook,” he explained.

Analyst optimism

Last month, Fidelity International’s 2024 analyst survey, which included over 130 analysts around the world, found that Japan led the world on bullish sentiment.

“Japan leads the pack when it comes to expectations for capital expenditure, returns on capital, dividend increases, ability to pass on costs to consumers, and whether or not its companies will be in an expansionary phase of the business cycle by this time next year,” the report stated.

Moreover, they welcomed higher cost inflation, compared to other regions, and believe Japanese companies would be the most likely to pass on cost increases to customers.

The survey found 88 per cent of analysts are projecting an expansionary stage for their sectors in 12 months’ time, which was the highest across all regions. Globally, just 61 per cent of analysts foresaw an expansionary phase at the end of 2024.

The report noted: “In addition, Japanese companies appear to have the lowest need for capital, due partly to adequate cash positions. On average, our analysts in Japan think that only 2 per cent of the companies they cover will need to raise funds in the next 12 months, versus 45 per cent in China and 27 per cent in Europe.”