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A rising sun

16 October 2017

Richard Aston, Portfolio Manager of CC Japan Income & Growth Trust, explores the opportunities presented by Japan.

The CC Japan Income & Growth Trust has been designed to identify exciting investment opportunities as the consensus behaviour in Japan evolves to a more consistent trend more easily comparable to those historically associated with Western developed markets.

The Trust invests in companies that can complement expansive business strategies with the need of their shareholders to be rewarded with appropriate annual distributions that reflect the underlying growth, but also recognise the value to investors of the sustainability of dividends and share buy backs.

Opportunities at all sizes

The opportunities are many and reflect the fact that Japan has a large number of internationally renowned industry leaders, as well as prominent participants in the growth of other parts of Asia and dominant domestic players across a wide range of industries.

These opportunities are not confined to large cap companies alone, with attractive candidates identified in the mid and small cap areas where management incentives are often more closely aligned with those of minority shareholders.

Corporate governance

Although it has gained more attention under the umbrella of Abenomics, corporate governance in Japan has been making steady and meaningful improvements for over 10 years.  Most notable over this timeframe has been the greater focus on returns to shareholders via increasingly attractive policies of dividend distribution and share buybacks. At a time when investors globally have been challenged to find sources of income this is a timely evolution.   

Despite the exciting trends to date, there is scope for considerable improvement going forward.  Recent data highlights the high levels of cash accumulated on corporate balance sheets and the historically high operating cashflow generation, both which support the potential for even greater distributions to long-neglected shareholders who have been rewarded with double digit dividend growth in recent years, as well as record levels of share buybacks.

Developments for investors

The current outlook for Japan is favourable with signs that domestic economy is in recovery and that corporate earnings trends are healthy.  However, this may not always be the case.   As history shows the Japanese economy’s dependence on manufacturing can exaggerate the cyclical swings in demand.

When this does occur the high levels of retained cash, high aggregate dividend cover and most importantly the improved understanding of the responsibilities of company management towards shareholders should mean that investors are not penalised during the downturn.

These are exciting developments for investors in Japan and should ease some of the concerns of those who have considered the country too unpredictable in the past.  

Recent tensions

Japan’s geographic proximity to North Korea makes it more than just an interested observer in the escalating tensions between the rogue Asian state and the United States.  Increasingly aggressive rhetoric from both sides appears to have raised the risk of conflict and has certainly affected investment flows in the region.

Japan, however, has many strained relationships throughout Asia and the current international spat is an extension of these difficulties.   As is the case in recent weeks heightened tensions have frequently had a detrimental but, ultimately, only a short term impact on the equity market and with hindsight this has created a number of investment opportunities.

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