April 2024 Update

My earliest days in the City were during the Nikkei boom – everything was, as The Vapors sang in 1980, ‘Turning Japanese’. It was quite normal to have a sizeable allocation to Japanese equities within a portfolio since these ‘always go up’. Their stockmarket peaked at 39,000 at the end of 1989 and then fell into a precipitous decline reaching a low of 7,800 in 2003 and a new low of 7,200 in 2009. These were falls of 80% from the stockmarket of the world’s third largest economy.

I remember so many years where the bullish and crafty fund manager would state, with some fanfare that ‘this year is the year of the Japanese stockmarket’. It never was, until now. In March of this year, the market closed at a new all-time high of nearly 41,000 and has risen by over 40% in the past 12 months.

Two things have changed. The first, a concerted effort by the authorities to promote better use of capital by large listed Japanese companies; the second a hike in interest rates by the Bank of Japan – the first for seventeen years and the forth since the introduction of the zero interest rate policy in 1999 – and an important signal to markets that the BoJ are ending their policy to suppress interest rates. Both endeavours have been received well by investors – limited inflation has been the goal of Japan for many years.

For our less risk-averse investors we have maintained a small but significant allocation to Japan. We believe, also, that the reforms will have a lasting impact on the economy and that the market still has some way to run. I would add that I had the privilege to visit Japan earlier this year to gain a better understanding of the country. The picture on the front cover of your report shows some early blossom – the Sakura season is now in full swing. I missed it!

In my previous investment review, I wrote about the lacklustre recent past performance from investment markets (which should not have been a great surprise following the turmoil of the previous few years) but, more importantly, how we considered that a turning point was upon us.

Fortunately, I can remain in my day job because over the past six months most investment sectors and asset classes (property, being an exception) have grown in excess of inflation (the only way to create wealth) thus rewarding investors for the risks that they take. Indeed, in modern parlance, the last six months have been ‘well good’!

The principle drivers for the recent buoyant investment performance has been the reduction in the rate of inflation (prices are still rising, but more slowly) and the assumption that central banks, having reached peak interest rates midway through 2023, will start to cut rates in the second half of 2024.

This is, though, dependent on a continuation of favourable economic indicators. Thus, we are in a period where good news will be greeted with exuberance and bad news, despondency. Accordingly, we can look forward to a fair degree of fluctuation in asset values.

Despite the pessimistic news flow of rising and extended tensions in the Middle-East (leading to a rise in oil prices), the continuation of the war of attrition in Ukraine, growing wage inflation and high levels of government debt (particularly in China, France and Sweden), equity and bond valuations still reflect, in the main, good value.

It is worth noting that the UK has entered a recession, albeit ‘technical’. Such terminology does little to valuations in the UK which remain low compared to its peers. It is bargain territory. The ‘UK ISA’ announced in the budget and other measures should help to encourage investors to allocate a little more to the UK.

I consider that the next six months should be a period of consolidation for investment markets – they have moved a long way forward over the past six months and a pause for breath would not surprise me.

Andrew Longbon

For, and on behalf of, Longbon & Company

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