Dare to be different and reap the rewards

Dean Cashman

If you are willing to avoid the herd, let cheap share prices take you to opportunities, confirm that value exists, and be patient.

There are unexpected investment opportunities in Japan. On a stock-by-stock basis, there are high conviction names with strong valuation signals across much of the market.

There are names in major banks, insurance companies, consumer electronics and information technology, specialist materials and industrials, auto-related, as well as domestic names.

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The difference between the cheap stocks and the expensive stocks – know as valuation dispersion – remains wide in Japan, and this offers opportunities.

Since the introduction of Abe’s reflationary policies, we have observed a shift in broad market expectations of mild deflation to expectations for inflation in Japan.

A change in this economic imperative for domestic investors has increased their required returns amid even a mild inflationary environment.

As a result, domestic investors are making use of significant cash savings (households) and also selling Japanese government bonds (institutions) in order to buy more equities.

Increased ownership of equities has sparked a rising focus on governance from domestic investors in order to “unlock value”.

Investor engagement with companies is causing the latter to focus on improving capital efficiency, increasing dividends as well share buybacks to improve total returns.

More companies are returning value in the form of dividends and buybacks. There is a large scope for improvement but this change in corporate attitudes is setting a new tone for the Japanese corporate landscape.

The introduction of the new Corporate Governance Code may encourage a move toward higher pay-out ratios that started in 2014.

There is admittedly ample scope for pay-outs to improve. However this is an example of positive structural change we observe in corporate behaviour which is supportive for sustainability of returns.

More than 100 domestic and foreign institutional investors have signed up to the Japan stewardship code.

This represents investor commitment to active shareholder engagement and a pursuit of best practice in governance behaviour for companies.

Whilst the much of the market obsesses over recent news flow on sector or global macroeconomic cycle forecasts, valuation driven investors should let cheap share prices identify opportunities.

The future is inherently uncertain, and we ensure that there is a significant margin of safety in the valuation for every company we invest into.

This helps to mitigate the downside risk in stocks compared to other expensively valued stocks in the market.

The game plan for this year is the same one we’ve been successfully using for more than 10 years.

As a contrarian investor, daring to be different can be painful sometimes, but it offers the greatest rewards.

Dean Cashman is head of Japan equities at Eastspring Investments.