☀️☕️ Actively Japanese

📊 Also: Go small or go home; O Canada! O India!; Uh-Oh, China! 🎓️ Actively Activist

Happy Thursday!

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📝 Focus

• Actively Japanese

📊 In the Markets

• Go small or go home

• O Canada! O India!

• Uh-Oh, China!

📖 MoneyFitt Explains

🎓️ Actively Activist

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📝 Focus

Actively Japanese

Japan’s Topix stock market index recently hit its highest point since August 1990, with a large amount of foreign buying helping it reach 33-year highs. There are numerous reasons for this. Among them is Warren Buffet raising his stakes in Japan’s top five general trading houses. Another could be the increased risk with equities in some other parts of the world. But most interestingly, it could also be from the increasing involvement of activist investors in Japan.

..... ▷ For many years, Japan’s stock market has been a ‘value trap’. This means that shares are trading at seemingly low prices compared to other markets and yet still somehow fail to deliver superior performance. For reference, Japan trades at a Book Value of 1.2x with a trailing Price/Earnings Ratio of 12x, while the US trades at 4x and 21x. Japanese companies also typically have higher cash levels than companies in other markets. This could be prudent cash management in uncertain times or simply an inefficient or “lazy” balance sheet, which can lead to lower returns and persistently lower valuations.

..... ▷ This is where activist investors🎓 can come in. Activist investors typically run specialised funds that buy minority stakes that are significant enough for them to have a voice to gather support from other shareholders and influence how the companies are run or even to replace management. Activist investors used to be controversial, but the CEO of the Tokyo Stock Exchange said in February 2022 that firms should be more open to their opinions and open a dialogue with them. This applies especially to Japan, as many publicly-listed firms may be stubborn in their strategic business directions.

A 7-Eleven in Fujikawaguchiko, Japan
- Image credit: Ruby Khoesial via Unsplash

..... ▷ An example is the parent company of the popular 7-Eleven ‘conbini’ (convenience store) chain. Activist investor ValueAct Capital spent several years building up a 4.4% stake in retail giant Seven & i Holdings in its effort to push for strategic changes in the conglomerate. ValueAct believes that Seven & i should focus on its profitable 7-Eleven stores, potentially spinning them off entirely to close the “conglomerate discount” and drop unprofitable assets like its department stores Sogo and Seibu.

..... ▷ Though management recently won a shareholder vote on ValueAct’s proposal to replace them, Seven & i is also closing roughly one in every four legacy Ito-Yokado general merchandise stores in Japan to improve its overall returns. This is a challenging decision in view of the history of the company. Founded in 1920 as Ito-Yokado, the company only changed its name following the 1990 acquisition of Southland, the American company that started the 7-Eleven chain (and which Ito-Yokado had been operating in Japan since 1974) to reflect its key business. It acquired Sogo and Seibu during the mid-2000s, but they suffered from the rise in online shopping and contributed to a decade of stagnant growth and feeble returns. Succumbing to ValueAct’s pressure, Seven & i announced plans to sell the department stores to US-based investment fund Fortress at the end of 2022.

..... ▷ Another famous activist investor looking to shake up Japanese corporate culture is Elliott Management, which owns a significant stake in Toshiba and is pushing it to unlock underlying value.

..... ▷ These activist investors' admittedly only occasional wins have given foreign investors hope that Japanese equities will no longer be a ‘value trap’ and can generate better returns in the coming years. On a macro level, corporate management better focused on returns and profitability with or without the direct hand of an activist investor is a good sign for both Japan’s stock market and "Japan Inc." as a whole.

Writer: Alexis Kong, NUS Business School, 2024

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📊 In the Markets

Go small or go home: US markets closed down on Wednesday as investors continued to lock in profits (i.e. sell holdings which have done well and made them money) in mega-cap tech stocks after a strong rally in the biggest names powered the large-cap S&P 500 up almost 20% from its October 2022 lows. Traders have been switching some of those positions into smaller names all month, and yesterday the benchmark small-cap index, the Russell 2000, rallied 1.78%

O Canada! Not only are Canadian wildfires making New York City's air quality the worst in the world and postponing baseball games, but its central bank ended its pause on benchmark interest rate hikes and raised policy rates by 0.25%. Recent data showed that the economy was too strong and inflation too high, as Canadians continued to spend like crazy.

..... ▷ The Bank of Canada first hiked rates in March 2022, the same month the US Federal Reserve first hiked, but unlike the Fed paused the hikes in January after 4.5% points of hikes to digest the impact on the economy. But on Wednesday, it ended what is now seen as a "hawkish pause." (Australia, which is similar in a number of ways to Canada, hiked for the 11th straight time earlier this week.)

Bob and Doug are spending too much money
- Image credit: SCTV / CBC TV via Tenor

O India! The Reserve Bank of India, its central bank, is expected to leave its key interest rate unchanged at 6.50% according to a Reuters poll of experts, having first paused its policy interest rate increases in April after a total of 2.5% was hiked since the start of the cycle in May 2022.

..... ▷ The RBI's medium-term inflation target is 4%, and even though April saw an 18-month low of 4.7% in April, economists don't see it at the target level for at least another two years. This period could also be a 'hawkish pause' (see above) rather than a 'dovish pause' from the RBI.

Uh-Oh, China! After a strong first-quarter economic performance led by services consumption and a backlog of export orders, China's exports shrank much faster than expected in May, a bad sign for China and indicating weak demand from the rest of the world, particularly the US and Europe. Imports into China fell by less than expected but continued to be weak, suggesting that the post-zero Covid economic recovery was brief and could well be over. Adding them up, the country’s monthly trade surplus was below forecast and hit a 13-month low.

..... ▷ Exports fell 7.5% compared to May the previous year, much worse than the 0.4% drop that experts were expecting and well off the (surprising at the time) growth rates of 14.8% and 8.5% in March and April. Market watchers seem to be playing the "bad news is good news" game with the worse things look domestically, the greater the chance that Beijing will respond with ever bigger measures to boost the economy, including a rumoured rate cut this week.

..... ▷ Stocks have already declined from their peaks and briefly hit bear market territory about a week ago, followed by a violent bump up last Friday. (Is it a dead cat bounce or not? Either way, prepare for endless "I-told-you-so"s from market experts in about a month.)

📖 MoneyFitt Explains

🎓️ Activist Investors

Activist investors seek to create value for fellow shareholders by forcing companies to take action to improve their financial performance and stock prices, including changes in management, selling assets, cutting costs, changing the capital structure (amount of borrowings), and generally increasing the efficiency and competitiveness of the company. (Sometimes cause-driven shareholders, such as climate activists, are also included, but that's a separate topic.)

Typically, activist investors aim to accumulate a substantial stake in a company, usually 5% or more, but sometimes even with a smaller stake of only 1% or 2%, an activist investor can exert influence if they have a known reputation, a compelling argument and an underperforming target.

However, some (including under-pressure management) argue that the short-term focus of such investors can be bad for the long-term health of the company, such as when selling assets, taking on lots of debt and slashing jobs hurts long-term growth and company culture.

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