Can Japanese stocks add value to your portfolio? | Economic Times

Indian investors do not invest much into foreign assets. The combined assets across all mutual funds investing in foreign geographies is 2bn USD (~ Rs. 15,000 crs). Compare this with the size of the mutual fund industry, which is more than Rs. 31 Lakh crs and you get the picture. Investing in foreign assets offer several advantages – the first and foremost being the benefit of diversification. Very often, a foreign market may behave very differently from the domestic market, bringing in a different flavor to your investment. Late in 2012, the then Prime Minister of Japan, Shinzo Abe started implementing certain economic policies, aptly nicknamed as Abenomics. These policies, amongst other, involved increasing money supply in the Japanese economy, increasing government spending, corporate governance code and various other economic policies to make Japan competitive. Since then, the Japanese economy and stock markets have turned around. The stock markets have delivered 130% more returns than the Japanese Government Bond (JGB) during this time.Japan can be regarded as a ‘Value’ market, especially when compared to other developed markets like the US. The Price to Book (PB) ratio of Topix (one of Japanese stock market indices) is 1.4 vs PB ratio of S&P 500 of 4.3 (US index). Dividend Payout ratio is also very high in Japan – payout as a percentage of Net Income is about 40%, and if we add Buy Backs, the number would be 50%. Japan being a ‘value’ market may be of particular importance in the current context of the market, where globally ‘value’ investing is being preferred in the recent times.Lot of us are familiar about Japanese brands – known for their quality, many Japanese companies are world-class with not only exports around the globe, but also having manufacturing presence across the world. As a result of Abenomics and out of their own volition, Japanese corporates had been focused on Business Restructuring (Mergers & Acquisitions, Overseas Deals) and also have been embracing Corporate Governance Code, Stewardship Code and ESG practices (Environment, Social and Governance). Japan scores very high on competitiveness and innovation of companies, and in the Regulations and Taxation regime.Have a reasonable allocation to International FundsIf you have a global liability, it would make a lot of sense to invest for that part of the liability in that geography itself. For instance, if you want to send your daughter abroad, say to US, a good idea would be to invest into the US stocks rather than invest into Indian stocks, and later on convert into US Dollars. A developed market currency – be it US Dollar or Japanese Yen – is most likely to appreciate against an emerging market currency like India in the longer run. The currency appreciation would also add to the return. Japanese Yen, for instance, has appreciated by 12% against the Indian Rupee over the last three years.In my view, any investor should have 10-15% allocation to International Funds. Japan, especially now, should be part of your portfolio.(The author is the ED and CEO, Nippon India Mutual Fund.)