Looking for income? Then head to Japan

Investors in search of income have traditionally paid no attention to Japan. But that should soon change. After two decades of treading water the stockmarket is offering a relatively appealing yield. Last year the median dividend yield in Japan rose past its US equivalent. The latter is now around 1.5%, compared with just under 2% in Japan.

And there is plenty more where that came from. Dividend payout ratios are very low in Japan, where companies pay out less than 40% of their profits in dividends. In the US the figure is around 50%. In Switzerland it is 80% and in Britain it is more than 100%, so British firms are currently paying out more than they are making in profits, an unsustainable situation. It also bodes well that, having endured a deflationary recession of more than two decades, “Japanese corporate balance sheets are now the strongest in the world”, as MoneyWeek contributor Tim Price notes in a Price Value Partners report. Japanese firms have more net cash than listed businesses in any other country. The balance sheets of US companies, by contrast, are “groaning with years of accumulated debt”.

But Japan’s appeal extends beyond an income boost. Japanese companies are also buying back stocks in huge numbers: around ¥6trn in 2016. The Bank of Japan is hoovering up exchange-traded funds as part of its monetary-easing programme. The world’s biggest pension fund, Japan’s Government Pension Investment Fund, has raised its equity allocation target to 25%. Private investors are also piling in.

For the first time in years, Japanese stocks have strong domestic support, says Price – more than 5% of the free float of the broader market index, the Topix. With US fiscal expansion expected to underpin the dollar, and ongoing quantitative easing pointing to further yen weakness, earnings should also keep climbing. Japan remains a promising bet for 2017.

US-China trade war will hurt the Aussie

The Australian dollar has drifted from parity with the greenback to around A$1.30 in the past five years. China’s slowdown reduced demand for Australia’s industrial metals exports. Now the Aussie may encounter another China-related headwind: a trade war between the US and the Middle Kingdom instigated by the US president, Donald Trump. China is worth 30% of Australian exports, says Jennifer Hughes in the FT – as much as the next four trading partners (Japan, South Korea, India and the US) combined. It doesn’t help that Australian interest rates have fallen in the past few years, while US rates look set to climb. The five-year Australian government bond yield is only around 0.2% higher than its US counterpart’s, the smallest gap since 2000. The Australian dollar has barely declined, and it was impressively steady throughout 2016. But 2017 could be a different story.

India: one to tuck away

Jeffrey Gundlach of DoubleLine Capital is often referred to as a “bond king” for his record in the fixed-income market. So it’s interesting to see what he likes beyond bonds. Enter India, which is also a MoneyWeek favourite. 

You should think of India as a very long-term bet, he told the Barron’s Roundtable. Many investors are put off because it is “plagued by horrific regulations and cronyism. But that just means there is room for improvement.” Meanwhile, the demographics look compelling. Unlike much of Europe, Russia and China, it is in for “a massive increase in the labour force”, which implies rising economic output. It will be volatile, but “if you had recommended the Chinese stockmarket 35 years ago”, plenty of people would have turned down the opportunity.

To this we would add India’s strong presence in global service industries and gradual progress on structural reforms over the past two years under Prime Minister Narendra Modi. Our favourite India play, the Aberdeen New India investment trust (LSE: ANII), is on a 10% discount to net asset value. It’s one to tuck away.


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