China’s technology sector, once a discretionary purchase within a regional portfolio, now deserves scrutiny. (more…)

Japanese equity, which has been a consistent allocation within our client portfolios since 2011, now stands at a twenty percent weight. Within this allocation, the precise expression has changed over time.

Our approved list provides us with the necessary toolkit to alter allocations in response to changing drivers of the Japanese stock market.

At present, half of our Japanese allocation is to the Lyxor JPX Nikkei 400 tracker.

This ETF is assembled of companies, predominantly large caps, which score favourably on a shareholder value creation ranking. The Japanese equity market is attractively valued and we anticipate further improvement in return on equity (ROE), which currently averages nine percent across the corporate universe.

With his triumvirate of ‘arrows’, Japanese Prime Minister Abe introduced measures to reform corporate governance and refocus corporate attention to the shareholder. These aim to prompt companies to allocate capital more efficiently and target returns on equity above the cost of capital, or to return cash to investors in form of higher dividends and share buybacks.

To encourage companies to adhere to these principles, the Japanese Exchange Group (JPX, world’s third largest bourse operating the Tokyo Exchange amongst others) and Nikkei have jointly created the JPX Nikkei 400 Index. This index explicitly selects companies which focus on the efficient use of capital, specifically referring to ROE, as well as those promoting good corporate governance.

It excludes companies which have been listed for less than three years, have liabilities in excess of assets during any of the past three fiscal years, those which had an operating deficit in all of the past three fiscal years and those which are designated for delisting.

Eligible companies are scored and ranked according to the following criteria:

  1. 3 year average ROE
  2. 3 year cumulative operating profit
  3. Market capitalisation on the base date for selection

Point one and two are each given a weighting of 40% and market cap is only weighted with 20%. In contrast, the TOPIX is a market cap weighted index and the Nikkei 225 is a price weighted index.

To encourage adoption of corporate governance standards, scoring based on qualitative factors is also applied and focuses on the following three items:

  1. Appointment of independent directors (with the requirement of at least 2)
  2. Adoption or scheduled adoption of International Financial Reporting Standards (IFRS)
  3. Disclosure of English earnings information via TDnet (company announcement distributions service in English)

Whilst these features are common in companies listed in the US or Europe, to the majority of Japanese companies, these are rather uncommon features to date, even for some large multinationals.

The 400 highest scoring companies are selected for the index, subject to buffering rules to minimise turnover. Constituents are reviewed once a year in August and companies can be dropped if they no longer comply with the criteria. This is consequential in a country with a shame culture, such as Japan. The index has already been dubbed the ‘Shame Index’.

To compliment this broad exposure, we are invested in two mid to small cap specialists: Polar Capital Japan and Michinori Japan Equity.

James Salter, manager of the Polar Capital Japan fund runs an all cap strategy, but typically with a mid to small cap bias. James’ experience in the Japanese equity market is long standing and he has managed the fund since inception in 2001.

To direct his research efforts, the manager first analyses strategic macro trends, both in a domestic and global context, to establish broad sectoral consequences. The bottom up stock analysis is done with a bias to value and growth characteristics.

Allocations are typically geared towards exporters, financials and cyclicals (or defensives depending on the prevailing environment). Domestic exposure is typically low.

Michinori’s fund manager, Sean Lenihan, has spent the better part of his career focusing on the local Japanese small cap market. He is based in Japan and his language fluency gives him an edge over international fund managers as many of his holdings’ management teams are not equipped to deal with international investors and few of the small cap holdings are covered by analysts.

The manager builds his portfolio entirely from a bottom up basis. He believes the Japanese equity universe offers the value investor companies with strong balance sheets, earnings growth and shareholder focus which provide higher ROE characteristics than the overall market, irrespective of macro influences.

In the recent restructuring of positions, we have split part of our active allocation between the existing Polar Capital Japan fund and the less well known Michinori Japan Equity fund. The reasoning behind this shift is Michinori’s strong domestic exposure versus both the large cap index we hold and the Polar Capital Japan fund.

To give a flavour of the portfolio, 73.5% of the revenues of Michinori’s underlying holdings are domestically derived and those that are international have very little revenue exposure to either China or the emerging markets in general. Investments are focused in companies with good visibility on the outlook for increasing expenditure by customers.

42% of the portfolio is invested in companies with a market cap of below £1.5bn. Noteworthy is the 11% of holdings of companies below £350m. Polar’s small cap exposure currently focuses on the £350m to £1.5bn range.

Commonality between our large cap index tracker, Michinori and Polar is as little as 11% and 12% respectively, as would be expected. However, the overlap between Polar and Michinori is not large either. Less than 10 names are shared in both portfolios. The latter fund has an industrial bias, a higher exposure to technology stocks and puts less weight on financials and materials on a relative basis.

Our allocations across all investments are geared toward companies with sustainable ROE growth and shareholder friendly management. We have modest exposure to consumer staples, healthcare, materials and utilities.

Portfolio construction is also a point of differentiation between the two active managers. Due to the difference in assets under management (Polar Capital Japan manages US$2.8bn and Michinori less than US$150mn), position sizes in the latter are much larger and the portfolio is much more concentrated. Sean Lenihan tends to hold around 35 positions, top ten names make up close to 50% of the portfolio. Polar holds 70 to 100 holdings depending on the prevailing opportunity set.

Having successfully managed the portfolio since 2001, Polar Capital has soft closed the strategy to retain its agility to invest across the entire market cap range. Michinori intends to close the strategy at around £600m to retain its small cap bias.

For the unconstrained global investor, Australia is a prospective hunting ground for profit. Any comprehensive analysis of the main trade and capital trends at work in the world find their conflux in Australia’s capital markets. Predicated on China’s fixed asset investment boom over the past quarter century, Australia’s economy has been substantially driven by demand for its ores and minerals. It relates uneasily, it seems at times, on account of deep cultural differences, to the rest of Asia, in particular Indonesia.

Australia is an affluent, urbanised society. It is, above all, a consumerised population that is, in economic jargon, fully financially included. It has an independent central bank and currency.

On account of these features, backed by disciplined capital markets and secure laws, Australia’s equities, government bonds and currency have been a destination for macro investors of all stripes, including hedge funds.

We measure recent opportunities by looking at 12 month rolling returns of its currency, benchmark bond and main equity index.

12M Rolling Returns - Australian Equity, Bond & Currency

Source: Morningstar/Bloomberg

When the currency is weakening, returns from key asset classes are crimped, as can be seen in the below chart.

12M Rolling Returns - Astralian Equity, Bond & Currency

Source: Morningstar/Bloomberg

The tricky thing with macro investing, prosecuted via Australian instruments, is the various counter influences at work. We list these as follows:

– Shorting the AUD is intrinsically expensive on account of the yield differential between AUD and its obvious corollaries. For example, the yield differential between AUD and USD, based on 1Y rates has averaged 304bps over the past 5 years.

– Outright investments in the sovereign bond market have delivered returns in AUD based on the general fall in rates accompanied by some flattening of the curve. However, for a non-domestic investor, these gains have been crimped by AUD weakness. Longer range, strategic investments in the bonds require the adoption of significant currency risk. Against them are lined up the yield hunters and persistently positive capital flows of new immigrants from China and elsewhere.

– Many macro commentators have long predicted the demise of the economy as they surmised that that falling commodity prices would spur some form of recession that could include a property down cycle. This has tempted some funds to go short Australian equities and the banking sector, in particular, has been targeted. To their frustration, the Australian equity market has remained peachy, supported by Australia’s superannuation schemes (government mandated pensions), with the banks especially valued for their income stream.

– To cap these, the various identified trends have been subject to reversal. In particular the currency which fell 20.1% between July 2014 and April 2015 has strengthened by 6.7% from 2nd April 2015 to the time of writing.

Cerno Capital’s core strategy ran a short Australian dollar position profitably until it was closed on 16th February 2015. We currently hold no specific exposures to Australia directly.

Last year, the Japanese Government Pension Investment Fund (GPIF) announced its intention (more…)

There is a sea change in corporate behaviour in Japan that is leading to a focus on capital efficiency, (more…)

After decades of subdued growth, Japanese equity markets rallied in 2013 following Abe’s election and announcement of his triumvirate of measures. The three arrows, as his policy approach is called, consist of monetary measures, fiscal measures as well as growth oriented structural measures. The first two of these have been implemented early on and were well received by investors. Japan outperformed other developed markets returning +55% in 2013 compared to +34% for the US and +21% for Europe. However, Japanese equity returns this year have been held back by scepticism over the potential success of Abe’s third arrow. The TOPIX index is flat on the year at the time of writing, compared to +8.6% and +5.5% for the US and Europe indices respectively.

Structural measures envisioned as part of the third arrow aim to improve companies’ capital efficiency to promote economic growth. The main provisions of this program are to encourage companies to allocate their cash more efficiently and to promote corporate governance. Japanese companies have been notorious for hoarding their cash over the last few decades, a habit which gained new life following the Global Financial Crisis. In the reflationary environment that the government wishes to create, cash becomes an unprofitable asset.

Within developed, capitalist countries, companies have to manage the expectations of a range of stakeholders, namely: customers, suppliers, employees, shareholders, bondholders and lending banks. In some societies, a diffuse range of societal responsibilities are at play. Japan, being essentially a consensus culture, is one such society.

The itinerant Western investor, business schooled to respect economic value creation and growth above all other things, has tended to notice Japanese attributes that are inimical to the unbridled creation of economic value. In particular, the societal responsibility to employ people is taken very seriously and lay-offs are cataclysmic events for Japanese companies.

Asset turns in Japan are comparable with Europe and the US, however the twin effects of overstaffing and cash hoarding combined with endemically lower margins has meant that corporate Japan has lagged in terms of return on equity (ROE) or return on capital employed (ROCE) measures.

Table 1: Return on Equity as of 6 October 2014 – Japan, US, Europe

 

TOPIX

Nikkei 225

S&P500

MSCI EUROPE

Return on Equity

8.2

8.0

15.0

11.1

Source: Bloomberg, Cerno Capital

With an ROE of only 8.2% for the Japanese equity market, compared to 15% and 11% for the US and the European markets respectively, returns for equity shareholders in Japan are lagging behind and have done so for the past twenty years as the graph below demonstrates.

Graph 1: Historical Returns on Equity – US, Europe, Japan

Historical Returns on Equity – US, Europe, Japan

Source: Bloomberg, Cerno Capital

ROE is a function of companies’ profit margins, leverage used as well as asset turnover. Asset turnover measures with what efficiency assets are being deployed. We can infer that Japanese companies’ focus has not been on increasing shareholder value, but rather that they haven’t been in control of their costs and capital has been allocated inefficiently; the focus has been on pleasing employees, suppliers and customers. The latter two very much so due to the significant cross shareholding between firms which is typical for the Japanese equity market. This has led to a lack of risk taking of corporates and short termism, i.e. focusing on quarterly earnings rather than having a long term strategic plan in place that will deliver sustainable shareholder returns over time. It has also made companies reluctant to engage in business restructuring and to divest unprofitable parts of their businesses. These inefficient investments along with the enormous cash holdings have depressed firms’ ROEs.

Abe’s structural reform aims to refocus corporates’ attention to the shareholder. He is looking to prompt companies to allocate capital more efficiently and target returns on equity above their cost of capital, or to return cash to investors in form of higher dividends and share buybacks.

Dividend yields have been low in Japan, even compared to the US.

Table 2: Dividend Yields as of 6 October 2014 – Japan, US, Europe

 

TOPIX

Nikkei 225

S&P500

MSCI EUROPE

Dividend Yield

1.8

1.5

1.9

3.6

Source: Bloomberg, Cerno Capital

One regulation already implemented aims to change the cross holding ownership. The below graph shows that for the first time the ownership of firms and banks is below that of the equity ownership of investment management firms, individuals and foreign investors.

Graph 2: Transition of Shareholder Composition in Japan %

Transition of Share holder Composition in Japan

Source: TSE Shareowner Survey 2013, Cerno Capital

However, not all measures can be implemented via regulations. Corporate governance and stewardship codes are only principle based guidelines, which companies can subscribe to, or not.

To encourage companies to adhere to these principles, the Japanese Exchange Group (JPX, world’s third largest bourse operating the Tokyo Exchange amongst others) and Nikkei have jointly created a new index, called the JPX Nikkei 400 Index, which launched at the beginning of this year. This new index explicitly selects companies which focus on the efficient use of capital, specifically referring to ROE, as well as those promoting good corporate governance.

The index excludes companies that have been listed for less than three years, have liabilities in excess of assets during any of the past three fiscal years, those which had an operating deficit in all of the past three fiscal years and those which are designated for delisting.

Eligible companies are scored and ranked according to the following criteria:

  1. 3 year average ROE
  2. 3 year cumulative operating profit
  3. Market capitalisation on the base date for selection

Point one and two are each given a weighting of 40% and market cap is only weighted with 20%. In contrast, the TOPIX is a market cap weighted index and the Nikkei 225 a price weighted index.

To encourage adoption of corporate governance standards, scoring based on qualitative factors is also applied and focuses on the following three items:

  1. Appointment of independent directors (with the requirement of at least 2)
  2. Adoption or scheduled adoption of International Financial Reporting Standards (IFRS)
  3. Disclosure of English earnings information via TDnet (company announcement distributions service in English)

One would expect the above three from companies listed in the US or Europe as minimum standards, however to the majority of Japanese companies, these are rather uncommon features to date. The scoring of these criteria is determined so that around 10 names are different from those if only quantitative criteria were applied.

The overall 400 highest scoring companies are selected for the index, subject to buffering rules to minimise turnover.

Constituents are reviewed once a year in August. This year’s first review saw 31 in and 31 out, with Sony being one of the companies dropped. This is consequential in a shame culture, such as Japan’s, and the index was already dubbed the ‘Shame Index’.

Public endorsement for the adoption of this index was given by Japan’s Government Pension Investment Fund (GPIF) which currently manages around US$1.2trillion. Historically, the GPIF is very conservatively positioned but is expected to slowly shift more money towards a higher equity allocation. It has identified the JPX Nikkei 400 as one of its equity benchmark indices. Given the size of the GPIF and its influence on other pension funds, this should be regarded as significant support for Abe’s structural reform program.

What does this mean for investors? First of all, we can expect that better ratings and higher share prices as a result of inclusion will induce companies to modify their behaviour and spark competition to grow ROEs and an alignment with global governance standards. This in effect should contribute to asset price inflation, with the hope that is matched by wage growth to contribute to Abe’s 2% inflation target.

Critics argue that this index is little more than another smart beta offering and investors buying high ROE stocks will be disproportionately exposed to cyclical companies at the top of their cycles. They argue that by simply buying the index, not enough attention is given to the consideration of value versus quality.

Clearly, companies included in the index will tend to have higher ROEs. This is demonstrated in the below table 3 which lists the average of the most recent (August 2014) inclusions and exclusions of the index. However, we otherwise do not concede to this argument. We consider the growth in ROE to be the most critical factor and expect that via improvements in capital efficiency, Japanese ROEs will continue to improve and align with other developed markets. As they are starting from a low base, a plausible strategy is to invest in both index constituents as well as those expected to join the index.

Table 3: JPX Nikkei 400 – Inclusions & Exclusions August 2014

 

ROE

3 Year Av. ROE

5 Year ROE Growth

Inclusions (Av.)

15.4

9.3

25.1

Exclusions (Av.)

3.4

6.8

-4.9

Table 4 below illustrates that the combined ROE of the new index, the JPX Nikkei 400, is only marginally higher than that of the TOPIX and Nikkei 225 and well below that of the S&P500 and the MSCI Europe.

Table 4: Valuations as of 6October 2014 – Japan, US, Europe

 

JPX Nikkei 400

TOPIX

Nikkei 225

S&P500

MSCI EUROPE

Return on Equity

9.3

8.2

8.0

15.0

11.1

Dividend Yield

1.8

1.8

1.5

1.9

3.6

P/B

1.4

1.3

1.6

2.8

1.9

Source: Bloomberg, Cerno Capital

To date, two ETF providers have launched an ETF on the JPX Nikkei 400 for European domiciled investors. One of these is an improved investment for clients of Cerno Capital.

We have substantial balances at work in Japan and the advent of JPX Nikkei 400 trackers provide the opportunity to structure low cost exposure around the main themes at work in that market.

If you would like to find out more about how we access the Japan opportunity, please contact Hannah Sharman (hannah@cernocapital.com).

“It is not unnatural that, perhaps, in this matter of being misunderstood, Japan has more reason to complain than any other nation in modern times”. These words were written in 1900 in a book titled Misunderstood Japan.

After stellar returns for investors last year, the Japanese stock market has been much less exciting this year. The numbers on the external accounts have been poor and this has prompted questions about the Japanese recovery. We have retained our allocation to Japanese equities which remains our largest single country allocation. We believe that the deflationary pall has lifted and that improved capital efficiency of companies will deliver higher profits and so significant returns to shareholders. The move out of deflation and to higher profits is only just beginning, meaning that the rerating of valuations in the market is at a relatively early stage.

Figure 1. Share buyback Programs

Share buy back chartSource: Goldman Sachs. As at 8th September 2014.

One of the key features of improved corporate profitability is shown by the introduction of the JPX Nikkei 400 index. This is an index of the most profitable companies. Sony and Panasonic have been excluded, a shaming omission perhaps. This plays into the ‘shame culture’ in Japan and those companies not ‘part of the club’ are expected to take action to change this. Another key feature of the trend towards improved profitability is that corporates are paying out more in dividends and using cash on their balance sheets to buy back shares. Figure 1 above shows this trend clearly. Currently, Japanese corporates have Yen70tr net cash on their balance sheets, this is approximately 25% of the total stock market capitalisation. Buy backs of this kind will, of course, further increase return on equity (ROE) and profitability.

Figure 2. Table showing global equity valuations

EPS Growth P/E Ratio P/B Ratio EV/EBITDA ROE DVD Yield P/CF
Name FY15E FY16E FY15E FY16E FY15E FY15E FY15E FY15E FY15E
Japan 16% 14% 14.0 12.3 1.3 7.7 9.3 2.2 8.5
US 8% 8% 17.2 16.0 2.7 9.8 16.0 1.9 10.8
Europe 6% 12% 15.4 13.8 1.8 7.6 11.3 3.3 12.4
Asia ex. Japan 9% 13% 13.1 12.2 1.6 7.1 12.4 3.1 10.7

Source: Goldman Sachs. As at 12th September 2014.

It is interesting that despite the recent slow-down in economic growth, earnings growth in Japanese has continued to be strong. Table 2 above shows how Japanese company valuations compare very favourably with other global equity markets. ROE is currently rising and on the way to 11%. It was recently predicted at a lunch held in our office by Hugh Sloane of Sloane Robinson that Japanese profits will surprise on the upside and that an ROE of 15% is very achievable, furthermore in 5 years’ time Japanese ROE will be above that of the US. The point that US corporate profitability is at an all time high and Japanese profitably is rising from a low base is well made. The chart below, figure 3, shows how all major profit drivers are moving in the right direction. Du Pont analysis shows that so far the only underlying measure that has significantly turned up is net profit margins; asset turnover and leverage are only just starting to move. It would be unlikely not to get further improvement in asset turnover once deflation has formally ended, as it removes any incentive to hoard cash.

Figure 3. Evidence of improved profitability

Evidence of improved profitability chartSource: Mizuho Securities. As at April 2014.

The other major leg in the argument is that that the monetary expansion that has doubled the size of the monetary base is bringing about an asset reflation. Property rental prices are now starting to rise, see figure 4. There are negative real interest rates currently in Japan, this is confirmed by the break even yields on inflation linked bonds. Wage growth is still sluggish, but total compensation is up for the first time in decades. The Bank of Japan is explicitly targeting a 2% inflation rate, which is a significant change from past policy.

Figure 4. Evidence of rising rents

Evidence of reflation chartSource: Barclays Research. As at 1st September 2014

The risks to all the above are that Abenomics may fail to stop deflation. While we see this as an unlikely outcome, the poor economic numbers following the sales tax increase may continue and the trend in other developed markets currently is for less inflation not more. The marginal buyer of the stock market has been the foreigner, the hope is that with the end of deflation, domestic investors will turn bullish, change their preference for liquidity and will incrementally buy more equities. This is much less likely without an end to deflation.

Japan continues to be misunderstood. When we think about the opportunity in Japan, some knowledge of Japanese history and character is useful. The Japanese domestic investment sector is of great significance. It continues to slumber for now and when it is awakened it will likely have a pronounced effect on equity market direction and tone. We suggest the opportunity is barely plumbed and target at least 40% of our equity market exposure towards Japan presently. If you would like to find out more about how we access the Japan opportunity, please contact Hannah Sharman (hannah@cernocapital.com).“It is not unnatural that, perhaps, in this matter of being misunderstood, Japan has more reason to complain than any other nation in modern times”. These words were written in 1900 in a book titled Misunderstood Japan.

After stellar returns for investors last year, the Japanese stock market has been much less exciting this year. The numbers on the external accounts have been poor and this has prompted questions about the Japanese recovery. We have retained and our allocation to Japanese equities which remains our largest single country allocation. We believe that the deflationary pall has lifted and that improved capital efficiency of companies will deliver higher profits and so significant returns to shareholders. The move out of deflation and to higher profits is only just beginning, meaning that the rerating of valuations in the market is at a relatively early stage.

Figure 1. Share buyback Programs

Share buy back chartSource: Goldman Sachs. As at 8th September 2014.

One of the key features of improved corporate profitability is shown by the introduction of the JPX Nikkei 400 index. This is an index of the most profitable companies. Sony and Panasonic have been excluded, a shaming omission perhaps. This plays into the ‘shame culture’ in Japan and those companies not ‘part of the club’ are expected to take action to change this. Another key feature of the trend towards improved profitability is that corporates are paying out more in dividends and using cash on their balance sheets to buy back shares. Figure 1 above shows this trend clearly. Currently, Japanese corporates have Yen70tr net cash on their balance sheets, this is approximately 25% of the total stock market capitalisation. Buy backs of this kind will, of course, further increase return on equity (ROE) and profitability.

Figure 2. Table showing global equity valuations

EPS Growth P/E Ratio P/B Ratio EV/EBITDA ROE DVD Yield P/CF
Name FY15E FY16E FY15E FY16E FY15E FY15E FY15E FY15E FY15E
Japan 16% 14% 14.0 12.3 1.3 7.7 9.3 2.2 8.5
US 8% 8% 17.2 16.0 2.7 9.8 16.0 1.9 10.8
Europe 6% 12% 15.4 13.8 1.8 7.6 11.3 3.3 12.4
Asia ex. Japan 9% 13% 13.1 12.2 1.6 7.1 12.4 3.1 10.7

Source: Goldman Sachs. As at 12th September 2014.

It is interesting that despite the recent slow-down in economic growth, earnings growth in Japanese has continued to be strong. Table 2 above shows how Japanese company valuations compare very favourably with other global equity markets. ROE is currently rising and on the way to 11%. It was recently predicted at a lunch held in our office by Hugh Sloane of Sloane Robinson that Japanese profits will surprise on the upside and that an ROE of 15% is very achievable, furthermore in 5 years’ time Japanese ROE will be above that of the US. The point that US corporate profitability is at an all time high and Japanese profitably is rising from a low base is well made. The chart below, figure 3, shows how all major profit drivers are moving in the right direction. Du Pont analysis shows that so far the only underlying measure that has significantly turned up is net profit margins; asset turnover and leverage are only just starting to move. It would be unlikely not to get further improvement in asset turnover once deflation has formally ended, as it removes any incentive to hoard cash.

Figure 3. Evidence of improved profitability

Evidence of improved profitability chartSource: Mizuho Securities. As at April 2014.

The other major leg in the argument is that that the monetary expansion that has doubled the size of the monetary base is bringing about an asset reflation. Property rental prices are now starting to rise, see figure 4. There are negative real interest rates currently in Japan, this is confirmed by the break even yields on inflation linked bonds. Wage growth is still sluggish, but total compensation is up for the first time in decades. The Bank of Japan is explicitly targeting a 2% inflation rate, which is a significant change from past policy.

Figure 4. Evidence of rising rents

Evidence of reflation chartSource: Barclays Research. As at 1st September 2014

The risks to all the above are that Abenomics may fail to stop deflation. While we see this as an unlikely outcome, the poor economic numbers following the sales tax increase may continue and the trend in other developed markets currently is for less inflation not more. The marginal buyer of the stock market has been the foreigner, the hope is that with the end of deflation, domestic investors will turn bullish, change their preference for liquidity and will incrementally buy more equities. This is much less likely without an end to deflation.

Japan continues to be misunderstood. When we think about the opportunity in Japan, some knowledge of Japanese history and character is useful. The Japanese domestic investment sector is of great significance. It continues to slumber for now and when it is awakened it will likely have a pronounced effect on equity market direction and tone. We suggest the opportunity is barely plumbed and target at least 40% of our equity market exposure towards Japan presently. If you would like to find out more about how we access the Japan opportunity, please contact Hannah Sharman (hannah@cernocapital.com).

Japan has been the stand out equity market of 2013, rising 50% in Yen terms during 2013. We explain the reasons for our continued interest in this equity market despite these gains having already been recorded.

• Valuations on the Japanese market remain attractive. Although the market is up approximately 50% YTD, earnings per share have increased by 36%, so in price earnings terms the market is not much more expensive than at the beginning of the year. The PE ratio has actually declined from 18.0x to 16.8x. When looking at asset values the price to book ratio in Japan is 1.27, which has risen from 0.9x a year ago. This compares very favourably to the US equity market that trades at 2.6x price to book.

• As the world continues to heal after the stresses of 2008, we can expect a normalisation of US interest rates to equate to higher US bond yields. We expect this will drive the US dollar higher against the Japanese Yen over the medium term. A weaker Yen is likely to be bullish for the Japanese stock market, with its high degree of earnings from exports overseas.

• Japan is one of the few economies in the world that would welcome higher inflation and indeed inflation is a mark of success of their policies. While the rest of the world has to deal with the headwinds of higher inflation and probably interest rates, Japan will benefit from the reflationary effects of unlocking savings after years of falling prices.

• Japan has little choice but to stick with its current plans. The fiscal position in Japan has deteriorated to a point at which something needs to be done. Gross and net debt is currently 210% and 140% respectively, significantly worse than its OECD partners. Up until now Japan has not had to rely on foreigners to buy it debt, it appears that this may now be changing.

• In 2000 China had an economy one-fifth the size of Japan, now China’s economy is more than 60% bigger than Japan’s. The fear of being further eclipsed by China is giving Japan a reason to act now. The rivalry between the two nations is well documented and many in Japan think this is their last chance to act in order to be able to hold their own against their now larger and powerful neighbour.

 

 

 

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Additionally, the information on this website is provided “as is” and “as available”. CERNO CAPITAL is under no obligation to update the information to reflect changes after the publication date. It is presented without warranty of any kind, either express or implied, including without limitation of any warranties concerning the availability, reliability, accuracy, completeness, timeliness or sequencing of the site or the content, products or services available on or via the website. Also, the information offered does not carry a guarantee of accuracy, completeness or timeliness for any particular purpose and neither expressly or impliedly carries warranties or implied warranties regarding its merchantability and fitness for a particular purpose.

CERNO CAPITAL reserves the right to change the information displayed on the website or this legal notice at any time. They will not be responsible for any loss or damage that could result from interception by third parties of any information available on this website. In no event shall CERNO CAPITAL be liable for any indirect, incidental, special, punitive or consequential damages (including, without limitation, damages for loss of data, business or profits) arising out of or in connection with this legal notice, the website, the inability to use the site or any products, services or content purchased, obtained or stored in or from the site, whether based on contract, tort, strict liability or otherwise, even if CERNO CAPITAL has been advised of the possibility of such damages, and notwithstanding the failure of the essential purpose of any remedy without limiting the foregoing provisions of this paragraph, these limitations also apply to any third party claims against you.

This Legal Notice is governed by English Law and the English courts shall have exclusive jurisdiction over any matter arising out of this Legal Notice or from your accessing of the website. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction.

The information contained herein does not constitute an offer to sell or the solicitation of any offer to buy or sell securities and or any derivatives and may not be reproduced, further distributed or published by any recipient without prior permission from CERNO CAPITAL.

By accessing and using the CERNO CAPITAL’s website you acknowledge that you have reviewed this Legal Notice and understand and agree to the terms and conditions contained herein.
This website has been published by CERNO CAPITAL which is authorised and regulated in the UK by the Financial Conduct Authority.

CERNO CAPITAL is a registered limited liability partnership in England and Wales (Incorporation Number OC326579), registered office: 34 Sackville Street, London, W1S 3ED.
By clicking on the “Submit” button you are stating that you are eligible to access this site and that you agree to be bound by all terms and conditions set out above, and you acknowledge that all the above information has been brought to your attention. The information contained in this website is offered to you conditional on your acceptance without modification of the terms, conditions and notices contained herein. If you do not agree with these, please do not access this website.

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The Endowment Fund (hereafter “the Fund”) is an Unregulated Collective Investment Scheme (“UCIS”) for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (the ‘Act’) and as a consequence its promotion in the UK is restricted by law.

Interests in the Fund will be offered for sale only pursuant to the prospectus (offering memorandum) of the Fund and investment into the Fund may be made solely on the basis of the information contained therein.

Access to information about the Fund is intended solely for distribution to professional clients, eligible counterparties and those persons to whom the promotion of UCIS is permitted under the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 and COBS 4.12 of the Financial Conduct Authority’s Handbook. Investors may not have the benefit of the Financial Services Compensation Scheme and other protections afforded by the Act or any of the rules and regulations made there under. If you are unsure on whether you are eligible to access this section of the website, please contact our compliance officer.

There is not an active secondary market for shares in the fund. As such the only method of obtaining a return of capital may be via redemption. There may be notice periods, redemption penalties or other impediments to liquidity. In addition, some of the underlying investments contain gate clauses that prevent more than a certain percentage of investors redeeming at any one time.

By submitting your email address below you are stating that you are eligible to access this website and that you agree to be bound by all terms and conditions set out above, and you acknowledge that all the above information has been brought to your attention. The information contained in this website is offered to you conditional on your acceptance without modification of the terms, conditions and notices contained herein. If you do not agree with these, please do not access this web site.

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Thank you for requesting access to our Funds pages.

We will shortly mail you a password to the email address you supplied. Should this not reach your inbox within the next 5 minutes (be sure to check your junkmail) please contact us for further assistance via our contact page.感谢您请求访问我们的基金网页。

我们会尽快将密码发送至您提供的电子邮件地址。如果 在此5 分钟后仍未收到我们的邮件(请一定要检查您的 垃圾邮件),请通过联系方式的页面联系我们并寻求进 一步帮助。