Portfolio Manager Call Recap: 2022 Outlook on Japanese Equities

Portfolio Manager Masa Takeda of the Hennessy Japan Fund shared his perspective on Japan’s market and economy. He discusses the weaker yen, how Japan's return on earnings could improve, valuations, and current opportunities among globally-oriented Japanese companies.

December 2021
  • Masakazu Takeda
    Masakazu Takeda, CFA, CMA
    Portfolio Manager

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Top Takeaways

  1. Regardless of the leadership in Japan, growth remains a key target as demonstrated by the recent approximately $500 billion stimulus amounting to more than 10% of GDP.
  2. We believe a weaker yen should benefit exporters and reflects the economic differences between the U.S. and Japan. Many holdings in the Hennessy Japan Fund are global exporters with foreign currency exposure.
  3. As of December 2021, valuations remain compelling compared to the U.S. and Europe as Japan traded at 14× earnings and 1.2× on a price-to-book basis. We anticipate a re-rating of these multiples given the focus on corporate governance reforms and capital efficiency awareness.
  4. The second revision of the Corporate Governance Code effective April 2022 will require companies to increase the number of independent board members, promote management diversity, and improve environmental issues.
  5. Return on earnings could improve due to the Stewardship Code that encourages institutional investors to engage in constructive dialogue with listed companies on capital efficiency improvements. Institutional investors are a driving force helping Japan’s ROE move from 10% to the low to mid-teens.
  6. From 2012 to 2022, the TOPIX earnings per share is anticipated to grow 10.3% on an average annual basis.
  7. Supply chain disruptions, rising commodity prices, chip shortages, and labor inflation have affected many Japanese companies’ earnings, yet we believe many of the Japan Fund’s holdings have held up well.
  8. The Japan Fund is composed of high-quality companies whose competitive strengths are rooted in manufacturing excellence and businesses whose compelling economics reside in intangible assets. They should weather the global inflationary headwind over time.
  9. While we are looking for financially sound companies, environmental, social, and governance (ESG) activities may, at times, be a consideration. A few examples of ESG-positive holdings include Nidec, a brushless direct current motors producer, Shimano, a global bicycle components manufacturer, and Sony, a consumer electronics company.

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