Name: Eastworld Spotlight: Japan’s stock market recovery is real
Uploaded: 2021-03-05
Duration: 14 min 52 s
Description: Arcus Investment’s Peter Tasker on the Nikkei 225’s long, strange return to 30,000

Arcus Investment’s Peter Tasker on the Nikkei 225’s long, strange return to 30,000

Eastworld Spotlight: Japan’s stock market recovery is real

International

mhm. The Nikkei 2 to 5 is the benchmark index Japanese stock prices, and last month it rose above the 30,000 point threshold for the first time since 1990. Now many analysts are saying that it might even top its all time intraday high of 38,957 0.40 for a level that it last reached on December 29th of 1989. That was way back at the height of Japan's bubble economy. We're joined today by Peter Tasker and author of Veterans Equity Analyst, one of the smartest and most experienced observers of the Japanese economy that we know he joins us from Tokyo. Peter. It's been a long, strange trip back to 30,000. What is behind the Nikkei's recent rally? Well, indeed, You know, it was there, uh, in December 1989 so I remember all that all that time? Um, the market has changed. Japan's changed, the world's changed, but it has been one of the biggest and deepest bear markets that we've ever seen anywhere in the world. It's It's been much longer and deeper than after the Wall Street crash in 1929. Here we are. We're celebrating the 30,000, but as you rightly said, um, it's a while to go still another 30% or so to get back to the all time high. Uh, you know, we were. That's a long time ago, but definitely it's a very positive sign. Cheering sign of what's going on in Japan. Maybe help to just say a little bit about what the Nikkei 2 to 5 actually is because it's a little bit confusing to some people. How it's how it's composed and and calculated. Yeah, that's right. It's a an index. It's a bit like the Dow Jones index in the U. S. And it's an It's an average of absolute stock prices without references to the number of stocks in issue. So that does lead to some significant anomalies. Companies that have got a very high stock price, um, will have a very high waiting in the Nikkei index, even if they are not the largest companies by market target because they don't have that many stocks out. So, for example, the two biggest stocks in the Nikkei 2 to 5 a Softbank and fast retailing, which is which owns the unit clothes brand clothing brand, and those two stocks make up 20% of the Nikkei index. So if they do well, that's going to push up the market, the Nikkei index. So it is fair to say that the Nikkei has moved a long way ahead of the rest of the market because of the composition and a great success of those two companies in particular which have really blown the doors off the the. The other thing that's changed quite a bit is the the composition of the investors, uh, in Japanese equities as well that are sort of driving the movements of these. I wonder if you could say a little bit about that. What we've seen more recently, when I say recently over the past couple of Jaquet, is the gradual development of an investment culture amongst individual investors. So there are now what you might call sort of somewhat not hugely wealthy, but people with quite a bit of capital to invest in the market. And you've got a more professional class of professional investors, particularly we've now got the G P F, which is the government pension fund in Japan. It's always been there, but it got snaked up and professionalized, Um, during the last Abe administration and it became a much more active organization. Um, and, uh, they have about 50% of the book their portfolio, which is 100 100 trillion yen. It's a huge, huge portfolios. Biggest, biggest pension fund in the world by some reckonings. Um, so, uh, they have 50% of their of their allocation to equities and half of our overseas equities, and half of it is domestic equities. And you've got more. Recently, there's another thing that's been going on is that companies buying back their own shares quite quite a large amount. They become significant investors now in the market. So this is actually a pretty good thing for Japan because many of the companies in Japan have been over capitalist. They've got too much cash at hand. So, um, actually returning that cash to shareholders who are highly likely to reinvest it in other starts, Uh, it's a good thing. So these are all progressive trends that have been a long time coming, but have started to accelerate really over the last five or six years be interesting. And what about foreign participation in the Japanese market. Is that increased? Um, well, when we had the initial flurry in 2000 and 13 and 40 of abenomics, as it was called, which was the kind of new macroeconomic policy of Shinzo Abbott, who, uh, who was the prime minister at that time? That that was very popular with, uh, overseas investors And a lot of money went into Japan in that two or three year period. And then people kind of gradually took money out. Other things were going on in the world market in Japan have done quite well, so they took money out. And in fact, by 2000 and 20 they took out all the money that went in during that sort of excitement about other armies. So, yes, last year, unusually, uh, the Japanese market went up in a year in which foreigners were disinvesting quite aggressively. So we have got at the moment a market which is driven holy by, um, domestic Japanese investors. If the foreigners come in as well, um, that's going to probably be a beer forced to take the market higher. You've you've written about, you know, the thesis behind which this rally has happened. I wonder if you could maybe stay a little bit about that. I think what we really think seeing being recognized now is the culmination of the culmination of a process of Japanese companies becoming more commercial, more profitable, more concerned about shareholders. Um and, um, a balance sheet management. Um, margins. Everything has improved tremendously, really? Over time. How much credit do you give abenomics? Well, I think that that was a kind of catalyst. Uh, the previous, um, some governments had not tackled the big problems of inflation and stagnation. Um, and as a result of that, when a bear walked into the, uh, the prime minister's Office in at the end of 2000 and 12, Japanese nominal GDP was the same as it was in 1992 so that we know growth in nominal GDP for getting onto 20 years. That means essentially no growth in company revenues. Uh, no growth in salaries, you know, that's that's not a good place to be in. So he jumps started the process. Uh, and Japanese companies, uh, we're there, too. You know, there have been changes in place already, which then accelerated, but he jump started the process and some of the things like the reform of GPS, which I mentioned before. We haven't mentioned the role of the central bank in this story yet. But obviously one of the main arrows of abenomics was this ultra loose monetary policy keeping interest rates very low. Um, and of course, the BOJ has also become a very significant investor in the market. Uh, itself. Can you maybe enlighten us a little bit as to how that works? Yeah. Yeah, that's right. Well, this is obviously a very controversial area. The BOJ is the biggest investor in the market. It's like it's bigger than the G P I. F. Because of this, the GPS generally reduces holding when the market goes up. The BOJ doesn't So it's it's holdings that it it bought all through the last 10 years, have gone up and up and up. So what's embarrassing? I think they were worried that they might lose money on the stock market. What's embarrassing is they've made so much money. So it's like, What are we going to do with this? You know, they got huge profits on there's not holdings and, uh, yeah, So this is This is a sort of a dilemma. Now that they will now feel okay, That's mission accomplished. Basically, we've, as they call it, we reduced the risk premium on the market and people think it's safe to come and by the market now because it's obviously very buoyant. But what are we gonna do with all the stocks we got? So they're going to have to come up with some neat formula for exiting the equities that they've got without disturbing the market, because it's such a large amount now that if they said, you know, we're gonna sell all of our holdings tomorrow the market attack because it's simply can't take it's about 8% of market cap. You can't you can't basically just supposedly like that. So help us to kind of take all this and put it together. I mean, with all these different factors, uh, weighing and Buoying stock prices, do you think that this rally has further to run or is it already looking like we're getting back into bubble territory? I think in the case of Japan and many of the markets in the world, then actually, not all that expensive on the basis that we reopened the economies and we get back to this roughly the same level of corporate profit profitability that we had before. Um, I think the markets many of the markets in Asia included are not all are expensive. So you think that that reopening is a is a plus for for shock crisis, that it's a kind of a demand shock as everybody returns to consumption? Well, I think the the likelihood is that we're going to see some very high numbers for GDP growth across the world going coming through this year. Uh, you know, you know, levels as we saw the ones that you know the bad numbers last year they were just, you know, off the charts. And I think we're going to be off the charts on the upside at this time. Um, so yes, that's that's going That's generally going to be a positive background for corporate earnings. I think what I would say, though, is that what are the central bank's going to do that That's a crucial point because, as we know, there was This sort of massive tsunami of money has hit markets, and it also hit households. And this is different than what we saw in the global financial crisis, which is now that you've got people who got very high levels of savings, which they weren't really, it's not plan savings. It's compulsory savings because you can't spend the money in the way you wanted to. So, um, this this suggests that there could be a pullback by central banks. At some point, the money tap goes off, and that could be a bit of a reality check for investors. Um, and maybe putting upward pressure on interest rates, as we've seen to some extent already in this last couple of weeks. Okay, So are you, uh, all in all looking for the Nikkei two at some point break its all time high record? Or do you think that, uh, that is something that is a long, distant prospect? Well, it's about 30% from here. Um, So, um, it's not gonna you know who knows. Never say never. But, you know, it will take several years. Um um, but several years of decent games kind of average gains. We'll see it, uh, accomplished this decade for sure. Peter, we'll have to leave it there. um, really appreciate this kind of look into, uh, the Japanese economy, and it's remarkable comeback. Uh, and we'll we'll wait to see if your prediction comes to pass. Thank you. It's great to talk.