Richard Kaye, manager of the Comgest Growth Japan fund, covers a range of topics relevant to investors today, beginning with insights into ongoing reforms at the Tokyo Stock Exchange, emphasising the need for genuine change driven from within companies.
The discussion then shifts to the inflation outlook for 2024, the irregularity of the yen’s situation and what these two things mean for foreign investors. Richard explains why the fund has roughly 20% in semiconductors and concludes with reflections on the Nikkei’s success, foreseeing continued momentum into 2024.
Why you should listen to the interview: Richard is an interesting, articulate and insightful speaker with over 30 years of experience in Japanese markets. This interviews delivers a nuanced and possibly even contrarian view of the reforms being promoted by the TSE, as well as looking at the untapped potential within the Japanese semiconductor sector.
Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, tune in to the ‘Investing on the go’ podcast. This interview was recorded on 17 January 2024.
What’s interesting in this interview:
Governance reforms – top down or bottom up?
“The Tokyo Stock Exchange has been working for a number of years now to improve governance: things like the stewardship code, the governance code and new categorisations within the exchange, with the higher categorisations rewarding shareholder-friendly companies. And then, most recently, the threats to de-categorise or even to de-list companies, which, for example, have consistently low price to book ratios because of their low return on equity. Those are various moves that the exchange has taken over a number of years. And I don’t think anybody could argue that’s a “bad thing” – we all favour improved shareholder engagement.
“I take a slightly different view, however, from the consensus on this.
“I think that it’s difficult for an exchange to drive fundamental change. Markets do that anyway, that’s what markets are meant to do! They price down companies which don’t agree with shareholders. And of course that’s happened in the Tokyo markets, which happens in any stock market. We therefore think that you need to look for real change, which is probably driven from inside a company itself. Examples like Hitachi or Toyota Industries which is a great company making components for Toyota car company and has changed the way that it governs itself. Those are examples of real change driven by the company itself, not really by top-down elements.”
Does the weak yen signify a point of entry for foreign investors?
“Unequivocally, yes. In fact, if there’s one thing I want everyone to take from this interview is that the yen’s situation is highly irregular. And it relates to three things.
“One is about inflation and monetary policy, and specifically the sovereign yield gap – the difference between Japan government bond yields and primary US government bond yields. That difference has narrowed significantly in recent months and that’s why the yen has actually stopped falling and even started to go back a bit. It’s a very important point I think for folks who are not yen-based investors, whether they’re sterling or other currency-based investors.
“The second thing is that the weak yen obviously is a what the Americans call a ‘no-brainer’ reason to buy export stocks like car companies in Japan. But as soon as the yen goes the other way, those trades get difficult. Conversely, there’s a very strong statistical correlation between a strong yen and small caps in Japan, and we have over a 30% small cap weighting in our Japan fund for that reason. We think that the yen weakness will actually abate and reverse, and that’ll be terribly good for small caps whose stock-specific story is often very strong.
“The other thing to say about the yen is a lot of people assume the weak yen is good for Japan because they can export more televisions and cars and things. That’s actually wrong because Japan imports an awful lot of stuff, from oil to salmon, believe it or not. And the weak yen has actually been a negative for the Japanese economy. Policy makers will fight against it.
“So, for all those reasons, I expect a bit of a sea change in the yen, I think that’s an important point for people to note. And of course people who are denominated in sterling for their returns, they can probably expect quite a nice lift.”
Will Asia’s best-performing market in 2023 be able to maintain its momentum in 2024?
“Yes, I see the momentum and I think it’s perfectly plausible that the Nikkei goes back above its all-time highs. Remember that Japan is the only market among the developed markets in the world that hasn’t gone back to its all-time highs. We had the Lehman Crisis, which knocked down FTSE or S&P, but then they all came back again. Nikkei never came back after the 1990 crash, and now it’s coming back. It’s a huge moment here in Japan and for retail investors, all because of this focus on the Nikkei’s recovery.
“What’s driving it partly is simply the volume of money. We have one of the largest investor bases in the world in Japan itself, and most of that money is still in cash, in post office savings banks as a matter of fact. And that money is coming in. It’s coming partly through just people putting their own money into tax-efficient stock accounts, but also from institutional investors.
“And remember, this is not what they call a bubble market in Japan, it’s only 13-14 times on earnings. A lot of great companies with sustainable growth, as we mentioned at the start, improving governance and capital returns, yes, I think it’s a story that we don’t see in any other major markets that we can enjoy in Japan right now.”
Conclusion: A short but compelling interview which is easily worth the time spent for a listen. Richard’s wealth of experience speaks volumes and if you want the genuine low-down on a subtly changing market that’s about to blossom – as well as insights in to Japan’s semiconductor industry – then this is 10 minutes well spent.
