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The Japanese equity opportunities investors are overlooking

The Japanese equity opportunities investors are overlooking

Banks trading at a significant discount to the market, while offering a higher dividend yield than equity and bond markets are ones to watch.

That is the view of Eastspring Investments’ Dean Cashman, who runs the Eastspring Investments – Japan Dynamic fund.

Speaking to Citywire Selector, Cashman, who currently has 24.3% of the fund exposed to financials, said the Japanese banking sector was simply too good of a price opportunity to miss out on.

'In 2016, market beliefs were becoming entrenched around the basic premise that central bank easy money and low-interest rate policies were largely ineffective and that the current ‘low inflation, low growth’ regime was a permanent ‘new normal’.

'The mad chase for yield and a preference for the low volatility of returns led the market to significantly and vastly overpay for companies which appeared to be safe, defensive, or offered shorter-term earnings certainty.'

Cashman said the market therefore avoided a wide range of companies on the thematic belief that any company with cyclical earnings was too risky, making the stocks extremely cheap.

Major bank holdings for the fund currently consist of Mitsubishi UFJ Financial Group (5.5%) and Sumitomo Mitsui Financial Group (5.2%), both of which sit in the top ten holdings of the portfolio.

'Our major bank holdings are well capitalised with strong balance sheet health. Since the Lehman crisis, major banks have diversified earnings streams away from the domestic interest rate environment.

'The bulk of earnings for our major bank holdings are not heavily impacted by domestic interest rate levels, as implied by the market,' he added.

'Less than 30% of total revenue comes from domestic net interest income for Mitsubishi UFJ Financial Group. The market has overstated the likely impact of negative interest rate policy on bank earnings and this is more than reflected in share prices.'

Cashman said significant valuation upside potential more than compensates for the risks associated with an uncertain future, and the time it may take for the market to realise their underappreciated fundamental value.

Rising focus

Elsewhere, Cashman said the main opportunity in the Japanese market is in the unlocking of value for shareholders.

'Increased domestic ownership of equities has sparked a rising focus on governance from domestic investors in order to increase shareholder returns.

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

Cashman said there are many companies showing strong financial health, while many companies' restructuring efforts have started to accelerate.

'With over half of TOPIX non-financial stocks trading on net cash, arguably, for many companies, balance sheet health is too strong and points to a level of inefficiency.

'Companies are now in a position to focus on improved capital efficiency, generate significant cash flow, and pursue sensible expansion strategies,’ Cashman added.

The Eastspring Investments – Japan Dynamic fund returned 43.52% in Japanese yen terms, over the three years to the end of January 2017. This compares with a 32.53% rise by its Citywire-assigned benchmark, the Topix TR, over the same time period.

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