Eric Lonergan, a macro fund manager at M&G Investments, believes that this translates into an implied real return of 7% in the medium term, based on the earnings yield. “Now that in the context of where global developed market assets are is, of course, a huge level of real return,” he says.
Alongside dividends, companies have also used their cash to improve shareholder value through buy-backs. In February, tyremaker Bridgestone took advantage of a depressed share price by spending ¥150bn on buying around 6.5% of its shares, which were then cancelled. This is a growing trend. In 2016, company boards, under pressure to deploy their huge cash reserves, took advantage of attractive valuations by spending ¥5trn on such schemes, up from ¥4trn in 2007.
Another way directors are using strong balance sheets to improve shareholder value is to visit the M&A market. One example is Softbank’s acquisition of Arm last year. “So rather than sit on that cash they are starting to put it to work in looking for higher growth, higher return investments or return it to shareholders,” Helen Driver, a fund manager in Aviva Investors’ Global Equities team, says.
Driver believes that governance reforms will continue to fuel dividend and buy-back growth.
“We see this continuing into 2017,” she adds. “This focus on returns for shareholders is very much an ongoing theme.”
Making a more efficient use of this capital not only takes the form of dividends and buy-backs, but also investing in the future growth of the business or boosting wages to encourage consumer spending.
Return on equity among Japanese companies is expected to continue growing, which means it could be an investment suitable for pension funds. “Long-term it [Japan] makes sense,” Cedric Le Berre, senior analyst at Union Bancaire Privée (UBP), says.
NEW MARKET
Japan has traditionally been a “tricky case” for European investors, Le Berre explains. He says that there was a time when it was considered a beta play or a “risk-on cherry on top of the global equity cake”.
This is no longer the case. A more structural case for investing in this market is emerging thanks to Abe’s reforms. Increasing return on equity to boost returns to attract elephants, such as pension funds, to equities has been at the heart of the strategy. To achieve this companies have been encouraged to improve capital efficiency and deploy their excess rather than continue to lock it away in the bank.
“It [reform] is a complete game changer,” Le Berre says. “It changes the profile of Japanese companies.”
As a result of this change in mindset, dividends and share buy-backs have been rising. This has convinced GPIF, the government’s ¥144.8trn (£1.05trn) pension fund, to increase its allocation to equities from below 10% to a target of 25%.
Abe’s reforms have made UBP bullish on Japan and so it has taken a long-term position in the market. UBP is now overweight Japanese equities after being neutral last year. “The discount at which Japanese equities has always traded against those in the US should narrow,” Le Berre says. “That is why we are positive about Japan for the future.”
For some the market for companies trading in Tokyo is compelling. JP Morgan Asset Management global head of multi-asset strategy, John Bilton, is bullish. “2017 could see Japanese stocks in the sweet spot as a combination of an upswing in global growth and capex coincides with better domestic momentum and a gradually softening yen.
“Japan has the best earnings momentum of any market just now and signs of improving corporate governance could add a further boost as the year unfolds,” he says.
