Firstly, my apologies for sending this note out somewhat late. I am going to use the rather flimsy excuse that the government policy actions of the past 120 days required a bit more reflection as to the impact on securities markets.
There are really three important events worth commenting on this quarter. The first, and by far the most important, are the developments in Japan. I must say, I have not thought about Japan much since the early 90’s – in fact, ignoring (or being underweight) Japanese securities was in itself was very profitable strategy for global fund managers. I started my career in this business by co-founding of a mutual fund company in the mid 80’s; our first product was an EAFE equity fund advised by a venerable UK money manager. Our offering closed in August of 1987 and we were fully invested by September 30th – and then the crash! However, much to our surprise, our little fund held up remarkably well – why? Because we had 60%+ of our capital invested in Japan. The Japanese, out of immense pride borne on an incredible bull market, would not be subject to the vagaries of the Dow Jones’ of the world – they refused to go down much. That would turn out to be great for our sales the next few years until the Japanese property and equity markets crashed in 1989 and along with them, the glorified Japanese business model. Since then much has been made of the “lost decades” and the policy mistakes of Japanese officials. None other than Fed Chairman Ben Bernanke published a paper back in 1999 entitled “Japanese Monetary Policy: a Case of Self-Induced Paralysis?” estimating that the Japanese economy underperformed its potential by more than 30%! Milton Friedman called it inept monetary policy.
Enter Prime Minister Shinzo Abe, for a second time, and the highly touted “Abenomics” revolution in November of last year. While undoubtedly there are many who believe this will be another “Kozuimi” moment where the sizzle fades into a bureaucratic quagmire, some of the best investment minds on Japan are optimistic on a real turnaround. As George Philips notes, Abenomics involves three policy pillars:
- Unprecedented monetary policy via quantitative easing (via not only outright debt purchases but also equity indices).
- Fiscal spending programs.
- Structural reforms.