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Japan Equities – Goro Takahashi

Goro Takahashi describes the key factors that influenced the Japanese market over the third quarter, particularly the main stock exchange’s ongoing initiative to improve listed companies’ financial indicators, and the areas he thinks investors should focus on into the turn of the year.

What factors have driven the recent performance of your asset class?

Japan has been one of the best performing equity markets in 2023, and one of the drivers of such strong performance is Japan Exchange Group (JPX) or JPX initiatives, in our view. As summarised in page two, JPX issued a request to listed companies on March 31st to improve their ROE in consideration of cost of capital in order to improve equity valuation, such as PBR (Price-to-Book-Ratio). We find this quite important and effective for Japanese listed companies to be valued appropriately, and also to gain more interest in the Japanese equity market in general.

The JPX initiatives have worked quite well, especially for companies with low ROE and low PBR, as summarised in page three. This chart categorised Tokyo Stock Price Index (TOPIX) names into four, based on ROE and PBR, and summarises company distribution, stock performance, and the fundamental outlook.

As you can see on the bottom left, there are 789 names or 21.4% of TOPIX market cap, with five-year average ROE below 8% and PBR below one time. The simple average return of those stocks in the first nine months in 2023 was 28%, the highest among four categories. At the same time, it is also interesting that expectations on fundamentals have not been materially improved. If you look at the consensus of ROE, it’s up only by 0.05%. Therefore, we need to see actual improvement of fundamentals of those companies in a sustainable manner in order to see sustainable, good stock performance.

What’s your outlook in the near and medium term?

On the other hand, high quality names with high ROE and high PBR in the top right, which is a key focus of GAM Japan Equities, have achieved only 11.1% simple average return, and a consensus ROE has settled down by 0.08%. This is partly because the continuous style rotation from quality growth to value, but we believe those companies have a high chance to achieve a higher ROE, superior balance sheet management, as well as sustainable growth on the back of their strong business model.

Is there one chart you’re currently monitoring closely?

In terms of the equity market outlook in Japan, the key driver from here will be inflation and wages, especially in terms of Bank of Japan (BOJ) or BOJ financial policy. As you can see in page four, the inflationary trend has continued in the past 24 months and nominal wage has also been up. However, we haven't seen a continuous rise in the real wage yet. And real wage growth was actually negative in July 2023.

In order for the BoJ to normalise its financial policy, whether with yield curve control or negative interest rates, we need to confirm sustainable upward trend of CPI and a real wage and wage negotiation, or "shunto", early next year will be the key in this regard.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is not an indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.

No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Past results are not necessarily indicative of future results. Investors could lose some or all of their investments.

A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time. The CPI is calculated by using a representative basket of goods and services. Tokyo Stock Price Index (TOPIX) is a market benchmark with functionality as an investable index, covering an extensive proportion of the Japanese stock market. TOPIX is a free-float adjusted market capitalization-weighted index. TOPIX shows the measure of current market capitalization assuming that market capitalization as of the base date (January 4, 1968) is 100 points. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.

This presentation contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Goro Takahashi

Investment Director

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