Together with UBS Global Wealth Management and Chikara Investments, Tokyo-based Alexander Hart at Japan’s Sumitomo Mitsui DS Asset Management, discuss the Japanese election results and investment opportunities in the country.

Japan's election outcome has shaken the ruling coalition, which has been reduced to a minority for the first time since 2009, Mark Haefele, chief investment officer at UBS Global Wealth Management, said this week.

The yen weakened and Japanese equities rallied on Monday after voters nationwide delivered what prime minister Shigeru Ishiba described as an “exceptionally harsh judgement” on the country’s ruling coalition government.

The 27 October vote saw the LDP-Komeito alliance reduced to 215 lower house seats, falling from 279 prior to the vote and below the 233 threshold needed for a parliamentary majority. On Monday, the Nikkei 225 rose 1.8 per cent, with exporters and weak-yen beneficiaries outperforming. The election result kick-starts a 30-day period in which the Liberal Democratic Party (LDP) will compete with its main rival Constitutional Democratic Party of Japan (CDP) to bring together a new working coalition. Ishiba, whose tenure began less than a month ago, has rejected calls to step down. Public support for the LDP had eroded prior to the election on revelations of alleged improper campaign contribution use, cost-of-living concerns, and the party’s connections to a fringe religious group.

For investors, Haefele believes that the domestic vote outcome adds to uncertainty ahead of the US presidential election in November, which also poses two-way risk to both Japanese stocks and its currency.

Haefele highlighted how the yen has weakened by around 8 per cent in the past month and the Bank of Japan (BoJ) will likely still tighten rates this year, but policy further out is less clear. “We expect more near-term cross-asset volatility until there is a new Japanese government and the US election is settled,” Haefele said. “As for Japanese equities, we continue to recommend a neutral allocation in globally diversified portfolios of around 5 per cent. From a bottom-up view, we balance both exporter and domestic stocks, with a tilt toward the latter.” 

Richard Aston at specialist investment management firm Chikara Investments doubts that the election result will have lasting meaningful consequences for Japanese equities. “The ongoing corporate reforms, focus on return on equity and shareholder return are more important than any minor short-term adjustments to the political agenda. From an economic standpoint, the shift from deflation to inflation and its consequences (both positive and negative) are key to Japan’s outlook,” Aston said in a note. In his opinion, there seems to be little disagreement between the political parties on this point and they even share a common goal of normalising monetary policy. He believes investors would do well to increase shareholder returns in Japan.  

Alexander Hart at Japan’s Sumitomo Mitsui DS Asset Management (SMDAM) also highlighted investment opportunities in the region this month, saying that many firms are still undervalued and there are some good quality businesses to be found. Middle-class consumers have been increasing, he said, and the improvement in corporate governance has been a huge positive for Japan; there is still pressure for it to improve. He believes that Japan’s market is more established and attractive relative to the Chinese market, doubting whether the latest stimulus measures in China will be enough to revive the market. 

Japan Equity High Conviction
Hart discussed with this news service the firm’s Japan Equity High Conviction fund which is open to EMEA and Asian investors looking to invest into a UCITS vehicle, and outlined his top stock picks.

The fund, which has outperformed the index over a three-year period, aims to achieve capital growth over the medium-to-long term by investing in equities or equities-related securities issued by Japanese companies. It is limited to a maximum of 30 holdings and aims to generate excess returns in any market environment by using a bottom-up, fundamentals based investment approach. An ESG risk filter is also applied and it is categorised under the EU’s Sustainable Finance Disclosure Regulation (SFDR) as Article 8. The target return is the reference benchmark +5 per cent.

The fund has heavy exposure to electrical appliances and precision instruments as well as IT, raw materials and chemicals and is neutral in healthcare. “We were overweight in semi-conductors and autos but we have reduced that now,” Hart added.

Top stock picks
“We invest in firms that surprise to the upside,” he told this news service in an interview. A top 10 holding is Tokyo-headquartered multinational Hitachi which has private equity behind it. Hart said it has performed strongly and he expects it to continue to do so. Other top holdings are Japan’s Mitsubishi UFJ Financial Group, Mitsubishi Heavy Industries, Mitsubishi Corp as well as insurance group Tokio Marine Holdings. They also include Japan’s information and communications tech multinational Fujitsu, pharmaceutical firm Daiichi Sankyo, Tokyo-based multinational Softbank Group Corp and Japan’s construction firm Kajima Corp.

Other wealth managers, such as Rupert Kimber at Geneva-based specialist fund manager Quaero Capital and Stefan Sommerville at Orbis Investments, also see investment opportunities in the country. See more commentary here and here.