While such reforms are always to be applauded, what investors want to know is how this translates into investable opportunities?
“The instance of companies defying the sceptics by transforming business practices and governance standards is growing,” says Ciganer. “This should help to deliver profit growth and generate shareholder returns. The volume of shareholder buybacks is increasing, while M&A activity is slowly emerging. Where implemented effectively, we expect transformational actions to be rewarded through higher valuations.”
On the subject of valuations, Ciganer maintains the valuation case for Japan still holds and that Japanese corporate growth is likely to exceed its global peers.
David Osfield, co-manager of the Amity International Fund run by Edentree Investment Management, notes that while the pace of change has been slow in a global context, some companies have brought in international executives to provide alternative perspectives and global best practice.
“All other things being equal, these kinds of measures should lead to an improving return on equity and the potential for a re-rating towards other Asian peers is substantial,” he says.
“Identifying companies that are making credible steps towards best practice is likely to be positive from an equity perspective, particularly if the company has not been valued as a potential leader in corporate governance.”
With macroeconomic data improving and unemployment falling, Ciganer says his fund is positioned to benefit from labour shortages through its investment in staffing and work-related companies.
“We also remain upbeat regarding many stocks central to Japan’s evolution, including those in the IT and machinery sectors,” he says.
Louise Dudley, a global equities portfolio manager at Hermes Investment Management, says that focusing on ESG factors may boost returns for investors looking at Japan.
“In a study the Hermes global equity team conducted, we found that well-governed companies tended to outperform governed companies by an average of 30bps per month, over a period of five years,” she says.
“Capturing this consistent source of value can enhance the returns of equity strategies. Japanese equities present an opportunity to buy into this positive change story.”
Dudley does however caution that Japan remains a conservative society and that companies will need the support of government to push through effective reform.
“Progress is slow but moving incrementally forward,” she adds.
