Page 12 - DIY Investor Magazine | Issue 39
P. 12

   Nov 2023 12
DIY Investor Magazine ·
Japanese shares had a stellar first half of 2023 but momentum has since halted. We look at the factors that might drive further gains from here and the implications for investors in Schroder Japan Trust plc – fund manager Masaki Taketsume
  Japanese shares had a strong first half of this year, hitting 33-year highs. That upward momentum then stalled over the summer as investors debated the next moves for US interest rates and the chances of a global recession. But we believe the resurgence of Japanese equities has much further to go.
Earlier this year, we discussed the multiple reasons behind the Japanese market’s strong performance in the first half of the year. Some of these reasons were short-term ones, like Japan’s delayed re-opening after the pandemic. But others look set to be sustained for over a much longer time frame.
Foremost among these is the Tokyo Stock Exchange’s (TSE) call for companies to focus on enhancing their corporate value, as well as the return of inflation and wage growth. On these fronts, we see progress that looks likely to play out over many years, not months, with positive implications for investors in Japan-focused equity funds such as Schroder Japan Trust.
Investors in Japan have been waiting a long time for improvements in corporate governance. But change is now coming and was given further impetus earlier this year by the TSE’s call for listed companies to focus on achieving sustainable growth and enhancing corporate value.
This call was particularly directed at companies with a price- to-book (P/B) ratio of below one (meaning that the market is valuing the company at less than its assets are worth).
These companies were asked to develop and disclose a plan for improvement, then to implement it and track its progress.
As the chart below clearly illustrates, there is a greater proportion of businesses with a P/B of less than one in Japan than in Europe and the US. This reflects the extent of the undervaluation that persists in the Japanese stocks and the opportunity that therefore exists for funds such as Schroder Japan Trust, should the drive to improve P/B ratios be successful.
There are encouraging signs that the TSE’s call is being heeded. As of mid-July, 31% of companies on the Prime Market had made a disclosure of initiatives they plan to take. Larger companies have so far been the most proactive. Smaller companies – who are perhaps less well-resourced – have made slower progress with disclosure.
We are encouraged by this progress but it is, of course, early days. We think there is more to come as the TSE nudges Japanese companies’ management. We can call it peer pressure, but this is going to be highly effective.

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