POSTED BY ANGUS GEDDES
The Nikkei has however broken up through 20,000 this week, and I continue to believe that the world’s third largest economy is looking at a ‘new era.’ We have added to our Japanese holdings this week in the Fat Prophets Global Contrarian Fund (ASX:FPC) and the Global and Asian Managed Account portfolios.
With economic growth strong and historically low unemployment, wage growth is on the horizon for the first time in decades. Companies are reporting the difficulty of securing and hiring workers which leads me to believe that the deflation that has wracked havoc on the economy could be at last relegated to the past. Japan is having its longest growth stretch (five consecutive quarters) in a decade, despite the yen strengthening against the US dollar.
This is also while the unemployment rate at around 2.8% is at the lowest level since 1994. Whilst wage growth is yet to emerge, I think it is only a matter of time. We have highlighted our bullish view on Japan on this week’s fatWrap cover.
As I have noted Corporate Japan is sharply different from a decade ago. Companies are now focused on lifting shareholder returns and improving corporate governance. Dividends per share growth is now outpacing earnings per share growth which will (as Morgan Stanley points out) make Japanese stocks attractive to foreign investors.
Yet foreign investors, fund managers and financial institutions hold very little exposure to Japan and remain very underweight the world’s third largest economy. This sets the stage for the Japanese stock market to now follow the path of least resistance – which I believe is up.
We are overweight Japan, and own the major Japanese Banks within the Fat Prophets Global Contrarian Fund (FPC:ASX) as well as the Global Opportunities and Asia Managed accounts with names such as Mitsubishi UFJ, Sumitomo Mitsui, Mizuho and regional player Bank of Kyoto.
We also added amongst other names this week, electronics and gaming manufacturer Sony to the Global Contrarian Fund and the Asia and Global Managed accounts. The weakening of the yen will be a boon for the stock as will a rebounding domestic economy. Sony had completed a major inflection point on the charts, and also trades at a big discount to its five-year average price-earnings multiple.
QBE Insurance recovered some poise after the plunge on Wednesday, with the shares recovering by 1.5%. The profit downgrade on emerging market claims was certainly disappointing, and has caused some jitters about what else is out there, but I think the market treatment was harsh. Other key business regions seem to be performing well, premium income is growing, as is investment income, which will rise much more as the yield curve inevitably steepens, albeit this may now be pushed back until 2018. Technically, the decisive upward break that I have been waiting for has proven elusive. However Wednesday’s climactic selloff is inconclusive and does nothing to change the big picture, other than delay the inevitable. QBE is streamlining (and slim lining) and will be a major beneficiary of an upward adjustment in long term interest rates.
We should hear over the next week whether the private equity suitors are prepared to put their pen where their mouths are with respect to a formal bid for Fairfax. It may though take a strong jab to get shareholders over the line, if comments from Alex Waislitz, chairman of Thorney Investment Group, are anything to go by.
He believes that Fairfax is worth $4 billion (versus the current market cap of $2.8 billion) and in a note to clients strongly encouraged the company “not to give up on its own announced plans to spin off Domain,“. If Alex is right (and I have thought the same about Fairfax for some time) then the stock could be worth $1.71.
He went on that “After all, private equity never seeks to take control of a company unless it can see a potential exit upside of at least 20 per cent within a few years. If Fairfax can demonstrate that it is the best candidate to realise that additional upside, then all existing [Fairfax] shareholders would get the benefit of any future value uplift rather than just the successful private equity bidder.”
Mr Waislitz certainly makes a good point, and this point of view may be used to push for a higher price. Although as they say a bird in the hand is worth more than two in the bush!