Japan undervalued especially after sell off argue J.P. Morgan and L&G

9th July 2013

The recent sell-off in Japan has only served to underline the attractiveness of the market fundamentals, argue the managers of J.P. Morgan Asset Management’s two Japan investment trusts, JPMorgan Japanese IT and JPMorgan Japan Smaller Companies Trust.

Nicholas Weindling, who works across both portfolios, says: “This is not a six-month rally – the changes in Japan are long-term and structural in nature. Even though there may be volatility in the short term, we think that after many false dawns for the Japanese stock market, things really are different this time.”

Weindling says that he and his fellow managers, Shoichi Mizusawa and Naohiro Ozawa who co-run the smaller companies portfolio, have never before seen the current level of domestic policy support, not just from the government of Shinzo Abe and his finance minister, but also from the Bank of Japan and from Japanese companies.

“Abe has strong political capital, with better public support at this stage of his leadership than any of the recent incumbents, which should stand the LDP in good stead for the Upper House elections on 21 July. He has a strong agenda of fiscal stimulus, aggressive monetary policy and structural reform,” says Weindling.

“The Bank of Japan, which has historically been unable to address deflation, is now committed to achieving 2% inflation within two years, and its new policies have taken the market by surprise. Domestic reflation is already happening: retail sales are up, particularly in luxury sectors, and financial services employment and business travel are on the rise.”

The fund manager argues that many investors remain sceptical that Japan is changing, in spite of the fact that the country is highly geared to the improving trend in global trade as developed economies finally begin to shake off the hangover of the global financial crisis.

He says there is significant upside potential in a market that remains undervalued, trading at a discount to other major markets on both a price/earnings and price/book basis despite being the only major market where analysts are still upgrading earnings numbers.

Weindling says “The gap between perception and reality in Japan is a real source of opportunity for active managers, as the Japanese market is currently polarised between winners and losers more sharply than it has been in the past, and more sharply than is the case in other markets. With half of all Japanese companies covered by only one sell-side analyst or not covered at all, our on-the-ground presence means we should be better placed to take advantage of the emerging opportunities than some of our competitors.”

Tim Gardner and Alan Thein, co-managers of the Legal and General Multi Manager Income Trust, Legal and General Balanced Trust and Legal and General Multi Manager Growth Trust, are also bullish on Japan’s prospects.

In a note published this week, they say: “Japan’s equity market seems to have recovered some of its “mojo” in recent weeks. The sweeping victory in Tokyo’s late June election for the ruling coalition (i.e. the LDP-Komei alliance) has given the strongest indication to date that the coalition will indeed secure an outright majority in the all important Upper House parliamentary elections on 21st July, thus giving it control of both the Lower and Upper Houses of parliament. This has given a boost to investors’ belief that Prime Minister Shinzo Abe will be able to deliver meaningfully thereafter on the third arrow of his “Abenomics” agenda to provide a programme of structural reforms to boost growth.

“Momentum has been built and maintained since late last year and this is the most concerted and co-ordinated effort to pull Japan out of its economic funk in over two decades. Indeed, the latest data continues to show positive signs.  For example: economic growth forecasts for Japan are currently being raised, which is hardly surprising as the Japanese economy grew at the fastest pace among the G7 economies in Q1 2013 with an initial estimate of a 0.9% quarterly increase or 3.5% p.a. that was recently revised up to 4.1% p.a..

“Add to this that the Japanese equity market is not expensive, we remain comfortable with our high conviction position in Japanese equities across all three of our MM Trusts. Indeed, we have used the sell-off in late May and early June to add further to our holdings here.”



10 thoughts on “Japan undervalued especially after sell off argue J.P. Morgan and L&G”

  1. Anonymous says:

    Cracking article, need to re-read this to really get the full benefit, after a coffee.

    One thing that really annoys me is “debt excluding ‘temporary’ financial interventions”. The UK economy is so reliant on the banks is it right to exclude these? If so can we exclude all the “profits” the banks booked that turned out to be illusory? It’s a variant of double counting, marking one side of the ledger but not the other.

    How much longer will the markets take all this muddling of the figures to obfuscate the longer trend of decline?

    1. Anonymous says:

      Hi Progrock

      At the moment I think that the markets are just grateful to get any sort of yield and so everything is distorted. As to the banks I went to an ONS presentation today about the changes and the new term is “excluding public sector banks (PSNB ex)” but they do not need the plural as for it they are now only counting RBS. I did ask if there was a simple in/out criteria but in fact ESA10 rules have 10 of them.

      Unfortunately there are plenty of other problems as I pointed out to them. The accountancy for the Bank of England QE is bizarre at the debt level and we do not account for the ever expanding European Investment Bank balance sheet at all…

  2. Paul C says:

    Shaun, Are those Mars Bars different sizes?
    But seriously, this scam is everywhere in the marketplace misleading all buyers at retail and trade. It is I believe a cause of the success of Aldi and Lidl (transparent pricing is liked by consumers). If only we could have a low cost competitor to Government provision as well!

    1. Anonymous says:

      Hi Paul C

      I thought the same and checked it, and therefore I can confirm that the pack of four which I bought has standard size bars according to the Mars website at 51 grams. Wasn’t there a change a while back when it was reduced from 58 grams in an example of shrinkflation? In such a product a reduction in size is of course presented as being good for you…

      Oh and on googling the subject I gather that the size fell from 62.5 grams in 2008. Bad news for chocoholics…

  3. Mark G says:

    Thanks for another insightful blog Shaun. With regards your Mars Bar experience, this bizarre multitude of pricing amongst other things was one of the reasons I decided 2 years ago to abandon Tesco. Their petrol is always 2p per litre more expensive and from friends who work there, I “get” why their staff are so pressured.

    So by including petrol & food, they have lost my custom @ 2k per annum, my sisters household @ 6k per annum, and my mother @ 2k per annum. I have no doubt that this is replicated exponentially across the country. Sharp practice IMHO can only go on so long before people cotton on to the scam. M & S came back from the brink….. But their offer is precise and their pricing clear. I think people have shifted their allegiance and rightly so. Tesco is emblematic of the fudging and blurring of so many things that seem, from what you say in your blogs, to go right to the top. Up is the new down – thankfully people like you keep em on their toes.

    1. Anonymous says:

      Hi Mark G and thank you

      On the subject of the national accounts today’s release contained something I had suggested which is the Maastricht level of national debt on the main page. So I like to make positive suggestions as well as criticise.

      As to Tesco my experience as a shopper is that it is doing its best to self-destruct. It has for a while regularly sold larger products at a higher per unit price than smaller containers. Products I like just disappear and are replaced by inferior ones. Frankly it seems to have lost its way. But the acid test is the length of the queues. I used to have to and no I mostly do not.

      One of my earliest blogs was on the issue of what is the price of things? It has got worse and worse since as more and more things are hard to compare. Then we wonder why inflation is hard to measure!

  4. fortyofcroydon says:

    We are not going to ‘austere’ our way out of the debt. We will have to do more so that we can be taxed and then the government can pay off the debt (sic) out of the extra income rather than running a deficit. We need growth of 3% a year which, by the rule of 70, doubles the economy in 23 years. We are 4 years into it so there is another 19 to go. By then we need another London, another Birmingham, another Sheffield, etc.

    So a reset is inevitable within 19 years?

    I could switch to a popcorn diet and try to double my size. Got to do my bit

  5. Rods says:

    With all of these changes and the muddying of the water on how the UK financial statistics are calculated, they should move the national accounts over to something much more credible. Tesco accounting standards, what could possibly go wrong?

  6. baldand says:

    It is truly impressive how you are always on the job, Shaun, even when you are just waiting to pay for gas. The price for four bars is the one that looks badly out of line with the other two. As you said in one of your comments, in December the size of the Mars bars was reduced from 58 g. to 51 g.:


    The Daily Mail article says that the recommended unit selling price remained the same at 51p. The price for three bars has a unit price of 52p, the price for seven bars a unit price of 41p, a reasonable discount for a bulk purchase. The price for four bars, with a unit price of 25p, is way out of line.

    Incidentally, Mars bar prices have risen in Canada recently, by 8%, along with the prices of Hershey bars:


    The CPI for confectionery prices still really doesn’t seem to tally well with these price hikes. Since this CBC story was published there was a 2.3% increase in the CPI for confectioneries in July, but the 12-month rate of price change still showed a 0.6% price decline, reduced to a 0.3% price decline in August as an August 2013 monthly decrease exited the inflation rate.

    There used to be a big Hershey’s factory in Smith Falls, a town near here in the Ottawa Valley. Hershey’s shut it down a few years ago and the site is now used to produce medicinal marijuana. (I’m not kidding.)

  7. Anonymous says:

    Hi James

    They have a fast declining amount but still a little left. If nothing else they are the only actual record of some of these matters…

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