Europe Keeps Faith in Abe as Pension Funds Add Stocks
European pension funds are buying Japanese shares even as the Topix index trails all major peers amid optimism Prime Minister Shinzo Abe will make good on reforms to boost growth, said Sumitomo Mitsui Trust Bank Ltd.
Pension managers are adding to holdings on expectations Abe will cut corporate taxes and take steps to spur higher wages, according to Masashi Oda, chief investment officer for Japan’s biggest trust bank by assets under management. Sumitomo Mitsui Trust’s European pension-fund clients have increased their Japan equity investments via the bank by 150 percent from a year ago, lured initially by low valuations, and are still buying as the market slips, he said.
“Pension funds are telling us the outlook for the economy has become clearer, and there’s very low risk of stocks dropping substantially from here,” Oda said in an interview in Tokyo on Oct. 23. Corporate and public pension assets account for 94 percent of the $456 billion overseen by the bank, he said. “The government will announce a cut in corporate taxes in December, and once pension funds can confirm that corporate profits are going to improve and wages are going to rise, they’ll increase their allocations even more.”
Foreign investors poured $106 billion into Japanese equities this year as Abe’s policies drove the Topix to the biggest gain among 24 developed markets, according to data compiled by Bloomberg. The gauge has kept its lead even after lagging behind all its peers so far this month, closing the month little changed. While the measure has advanced 39 percent in 2013, it trades at 1.24 times book value, compared with 2.6 for the Standard and Poor’s 500 Index and 1.8 for the Stoxx Europe 600 Index on Oct. 30, data compiled by Bloomberg show.
“Globally, Japan is set to post the biggest profit increases,” Oda said. “The price-to-book ratio is still near the bottom, and we still have the potential for profits to grow. There’s bound to be more upside.”
Earnings per share for companies on the Topix index are estimated to gain 32 percent in the next 12 months, compared with an 11 percent advance for the S&P 500, according to Bloomberg data. The price-to-book ratio for the Topix is about 40 percent below its recent peak in January 2006. The gauge fell 0.9 percent to 1,194.26 today in Tokyo.
Most of the increases in Japanese stock investment in the past year came from U.K. and Swedish pension funds, Oda said. Funds from these countries probably now have a neutral weighting on Japan’s equities, up from underweight a year ago, he said.
Oda said he expects European funds to boost their holdings from December, when the government announces the details of a 5 trillion yen stimulus package aimed to offset the potential dent in consumption as a result of a sales tax increase next April. The levy is set to climb to 8 percent from 5 percent. A Cabinet Office statement shows the cushioning measures will include public-works spending and tax breaks for companies.
Under proposed tax changes, the government would give out credits for companies that raise wages to soften the blow from the increased sales levy. Abe also said on Oct. 24 he wants the ruling Liberal Democratic Party tax panel to discuss the effective corporate tax rate.
Japanese businesses pay taxes of 35.6 percent, according to the finance ministry. The levies are the highest after the U.S. among Organization for Economic Cooperation and Development nations.
While confidence in the quarter through September among Japan’s large manufacturers rose to the highest since the early stages of the global credit crisis in 2007, the benefits of Abenomics have yet to trickle down to the public. Regular wages excluding overtime and bonuses fell 0.3 percent in September from a year earlier, a 16th straight drop, government data showed today. Total cash earnings rose 0.1 percent.
Gains in corporate earnings will lead to increased capital spending and higher wages, Hiromasa Yonekura, the head of Japan’s most powerful business lobby group, Keidanren, told reporters after a meeting with government, labor and business leaders, Kyodo news said on Oct. 17. His comments may suggest the group would like a lower tax on business in return for raising salaries at member companies.
“There needs to be a balance between the sales tax and corporate tax,” Oda said. “Otherwise wages won’t increase and the economy won’t improve. Abe will be looking at the stock market as one barometer of support for him and he’ll work to create more positives for it. Our foreign pension clients tell us they feel Japan is one of the safest places to invest.”
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