Corporate governance/changes in the corporate landscape/ shareholder activism are three factors, now well established, that should contribute to a fundamental change in market dynamics.
The Japanese market has outperformed the global market in local currency terms over the past 2 years (see chart below).
The fund manager of our Japanese equity fund Taiko Japan, Rupert Kimber, recently came back from a trip to Japan. Here are his notes.
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The restructuring of Japanese companies, which began a decade ago with the aim of improving profitability, cash flow and returns to shareholders, accelerated last year under the impetus of a wave of management buy-outs, hostile takeovers and interventions by activist shareholders. In 2023, for example, activist shareholders forced companies to make payments to their shareholders on sixty occasions.
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Japan has been the bete noire of many asset allocators’ portfolios for most of my 34 years managing money there, and investors continue to be underweighted from an asset allocation perspective. The throwaway line of ‘it is cheap, but the value cannot be realised’ is no longer true. Change is happening and as Mr Kikuchi the Mizuho Strategist noted, there were 5 activist proposals in 2015 and this had risen to 60 in 2022. The Tokyo Stock Exchange (TSE) clarified what was expected to be considered by Japanese companies, instead of insisting what should be published. Cost of capital, return on invested capital (ROIC), return on equity (ROE), and other appropriate measures came out during March. All these measures are designed to make investing in Japan more attractive.
For almost 35 years, Japan has been the victim of the collapse of one of the most gigantic double bubbles in history (real estate and equities), which explains the structural underperformance of the Japanese market for 3 decades (see chart below). The Japanese market now accounts for just over 6% of world stock market capitalisation, compared with over 50% at the peak of the great bubble at the end of 1989.
The situation in Japan illustrates the extent to which a country’s path towards net zero is subject to constraints.