Japan also has two other positive elements to note. Firstly, most companies have large amounts of cash and small amounts of debt, making them somewhat resilient to the loss of revenue from the pandemic. Secondly, as a consequence, the likely dividend return from Japanese equities looks less threatened and more robust than other more leveraged developed economies. Unlike most other countries, the Japanese market has not re-rated up over the last decade. Even before the COVID collapse in markets, there had been no increase in multiples, or valuations, and as a result, Japan remains a cheap market with large amounts of cash.
It becomes clear that Japan is in a comparatively strong position and a far less perilous one than the deflation vultures perceive. Consumers and corporates continue to boast enviable cash coffers, and banks are well capitalised offering ample dry powder in times of market stress. Once the outbreak slows down, or the Holy Grail in the form of a vaccine is achieved, a large part of the lost output should be recovered. Notwithstanding the fact that a fund will be a suitable investment for an individual as circumstances and objectives are very different, one fund that I feel should benefit from this recovery in manufacturing and capital expenditure will be the Pictet Japanese Equity Selection Fund, a large to mid-cap Japanese equity portfolio managed by Sam Perry, which we recently added to our preferred fund list. The experienced Pictet team, predominately based in Tokyo, has deep understanding of the Japanese equity market through multiple business cycles and a robust screening process of Japanese companies and management. The fund has outperformed the Topix by over 5% since the start of the year and the focus is very much on companies with clear long-term growth drivers that also have the financial strength to withstand the current period of uncertainly and extremely low economic activity.
History has repeatedly proved that crises, shocks and pandemics can drive and accelerate the emergence of certain behaviours. In this context, more dynamic companies capable of flexibility and adaption tend to come to the fore providing valuable opportunities for companies in particular industries e.g. home working, cloud computing, online shopping and delivering, digital payment and communication. Another investment that might be worth looking for, again remembering that individual objectives and circumstances may mean this is not relevant, is Baillie Gifford Japan, run by Matt Brett and Praveen Kumar. It has exposure to a number of these companies optimising this ‘new environment’ and has seen its discount widen significantly. The Trust has moved to a 9% discount having traded at an average premium of 2% over the past 5 years.