Confidence in Japan is “steadily recovering” as the Nikkei 225 index nears an 18-year high, according to the Morant Wright fund management team.
The Japanese equity market has been one of the top performers so far this year as investors have increasingly bought into the reforms introduced by prime minister Shinzo Abe.
The management team behind the CF Morant Wright Nippon Yield fund said economic indicators suggested “business investment is increasing and the strong labour market has started to translate into better growth in wages”.
But the managers said the biggest tailwind for the market recently had been the increased utilisation of cash by Japanese companies, which have historically been loath to spend money or return it to shareholders.
The Morant Wright team – consisting of Stephen Morant, Ian Wright, Richard Phillips, Tom Mermagen, Andrew Millward and Denis Clough – has set up the Nippon Yield fund to benefit from this trend.
“In our view, the strongest factor underpinning the case for investment in Japanese stocks is the clear trend towards better utilisation of capital and higher shareholder returns,” the managers said.
They added that this trend “should in particular benefit our portfolio of cash-rich companies”, which “on average have nearly half their market cap in net cash and investments”.
The trend towards returning cash to shareholders has been encouraged by the Japanese government, which was keen to see the hoarded cash put to some use in an effort to stimulate the economy.
The government’s efforts led to a large number of companies announcing dividend increases and share buybacks in this year’s first-quarter earnings season.
The Morant Wright team pointed to research from Nomura, which “calculated that companies in aggregate returned a record ¥12.8trn (£66.4bn) to shareholders, an increase of 24 per cent on the previous year”.
A further increase of 14 per cent is expected this fiscal year, according to the Nomura report, with both large and small companies getting in on the act.
For instance, department store operator H2O Retailing announced it would raise its dividend for the first time in 48 years.
As a fund focused on investing in dividend-paying companies, the Morant Wright Nippon Yield fund was positioned to take advantage of this trend and the managers thought it could drive market returns further.
The team also pointed to the number of investment accounts being opened by Japanese investors as further signs that the country was adopting a more positive outlook towards its equity markets, following years in which many Japanese people held only government bonds.
“Confidence is also apparent in the steady demand for Nisas [Nippon individual savings accounts], which totalled 8.8m at the end of March,” the Morant Wright team said.
“Nisa money has been invested 66 per cent in investment trusts and 32 per cent in equities, which has partly helped to increase the value of trusts to a record level.”
