Since I last wrote, not a huge amount has changed. European infection rates of COVID-19 have been gradually increasing, leading to further travel embargoes being announced here in the UK. This week has seen a pullback in highly valued tech stocks, an area which we reduced our exposure to last month, and we remain vigilant and ready if this turns into a buying opportunity for the longer-term investor.
We increased our portfolios exposure to Japanese equities in the summer, partly due to the value on offer, strong portfolio diversification characteristics and access to a defensive currency in the Yen. It is therefore appropriate that I make comment on the recent news that having recently become the longest serving Prime Minister in Japan, Shinzo Abe announced that he would be stepping down from his position, due to ill health.
His resignation ends an eight-year term during which he established political stability, enhanced international presence and introduced a new brand of constructive economic and social reform, ‘Abenomics’. After decades of deflation and disappointing stock market returns, the Nikkei 225 – Japan’s main index – returned 125%* over this tenure, and reached levels not seen since the early 1990s. (*Source: FE Analytics, total returns in sterling, 17 December 2012 to 31 August 2020)
Whilst this news is disappointing, it does not yet derail the reasons for investing in Japan. During his leadership, Abe put in place several structures which will last beyond his administration and he implemented reform which is, in our view, irreversible. This includes a new corporate governance code, a new stewardship code, the opening up of labour markets, improved infrastructure to support female employment participation, a close and affective working relationship between the central bank and government and a more supportive environment for overseas investment.
His LDP party is likely to remain dominant in Japan, with the various opposition groups lacking support to challenge it. We expect the political backdrop to remain relatively stable with or without Abe at the helm, and we do not think a change in leader would have any material impact on the long term growth prospects of the funds that we own or indeed the stock market as a whole.
In other market related news, the US Federal Reserve (Fed) Chairman, Jerome Powell, has stated that the central bank will tolerate higher future inflation and lower unemployment to a much greater extent than it has done in the past without having to raise interest rates. For those that do not obsess over the words of central bankers, (I really do not blame you!), this may not seem a big deal. But to those of us that do and make our livings trying to be successful investors, this is a big development. The six-year period in which the Fed kept rates at 0.25% in the last decade might seem like a blip in the coming cycle if higher than expected inflation does not arrive to force the Fed’s hand.
Simply put, the Fed will now target an average inflation rate of 2.0% over time allowing it to tolerate periods when inflation is above 2.0% to compensate for periods when it has been below. That means it will not simply tighten monetary policy when its economists forecast an increase in inflation to 2%. It will need to see inflation above 2% and for some time before rates are raised. This means rates will remain low for even longer.
In such an environment, higher price inflation and low interest rates would suggest that companies with pricing power, global supply chains and strong franchises can become a key factor in equity performance. Reassuringly, we have quite a few of these strategies in the portfolios, and many more waiting in the wings to be deployed if the need requires.
After a short break, it is good to be back in the swing of things. I will now keep you updated on a weekly basis with not just market news, but also on how the company is progressing and on matters closer to home. As always, I hope that this update finds you well and should you require any further information, please do not hesitate to be in touch.