JPMorgan Japanese announced its annual results for the 12 months to 30 September. NAV total return was 8%, underperforming the benchmark TOPIX index by 6.7%. Share price total return was 6.4% with the discount widening to around 8%.
Commenting on the underperformance, chairman Christopher Samuel noted:
“After the earlier periods of underperformance, this year’s numbers are indeed disappointing. As reported in the half year report, the company’s performance over the first six months of the 2023 financial year was in line with its benchmark, the Tokyo Stock Exchange (TOPIX) Index. However, relative performance over the full year has not been so positive; returns kept up with the market for most of the second half but we had a very challenging end to our financial year meaning we lagged the market in the second half of the year and so for the full year. By way of illustration, c 4.6% of the year’s NAV underperformance of 6.7% came in September, the final month of our financial year.”
Regarding the outlook, investment managers Nicholas Weindling and Miyako Urabe added the following:
“Recent developments in the Japanese economy and corporate sector have reinforced our optimism about the market’s medium to long term prospects. Economic activity is strengthening and encouraging wage trends will be supported by the structurally tight labour market. Wage growth should help end Japan’s long period of damaging and seemingly intractable deflation and have a positive impact on consumption and the overall economy. The BoJ will welcome these developments, so, unlike in other major markets, investors need not be overly concerned about aggressive monetary tightening. As discussed above, Japan is also undergoing a major technological transformation as businesses and government increase their efforts to digitise and automate their operations. This will lay the base for significant growth and productivity gains over the medium term and provide a supportive environment for the dynamic, quality businesses in which we invest.
“In addition, while we continue to face some headwinds, and we cannot say how long these will last, the spread between value and growth has narrowed and is no longer at extreme levels.
“However, for us, the improvements in corporate governance are the most important reason to be excited about the outlook for Japanese equities. This trend is looking increasingly structural in nature, and we are seeing signs that the trend is accelerating. If we are correct, there is potential for the whole market, including the Company’s portfolio holdings, to move to a higher valuation.
“The value of the local currency is another key consideration for foreign investors, and there is cause for some optimism on this front too. The Economist’s Big Mac Index suggests it is 43% undervalued and the table below provides further illustrations of disparities between prices in the UK and Japan. Although we do not know when the yen’s weakness will unwind, any reversal should be beneficial for GBP-denominated investors.
“The Japanese market offers many exciting investment opportunities for those prepared to seek them out. The market is deep, broad and liquid, with over 3,000 listed stocks. Yet it is under-researched by buy and sell side analysts – over 50% of the stocks have no sell-side coverage, versus the US market where 50% of companies are scrutinised by 20 or more sell-side analysts. In addition, most sell-side analysts who do cover Japan focus on the short term. For example, only two sell-side analysts publish 5-year forecasts for Toyota. This is a great environment for well-resourced, locally based teams such as JPMorgan’s to identify interesting companies that are overlooked by other managers.
“And although the stock market has reached multi-decade highs, valuations are still compelling when compared to other markets. The Japanese market is still trading at 14x earnings (on a forward PE basis) and at 1.4x book value (trailing PB) – valuations which still appear to reflect past perceptions of the market, rather than the opportunities that lie ahead.
“For all these reasons, we believe our optimism about the Japanese market is well-founded, and we are confident about the long-term prospects of our portfolio holdings. But we are not complacent. We will continue our search for companies capable of thriving regardless of the near-term macroeconomic environment. Most importantly, we remain convinced that our investment approach will ensure the Company continues to deliver outright gains and outperformance for shareholders over the long term.”
JFJ Strong outlook for JPMorgan Japanese but despite underperformance