Ian Cowie: four trusts to tap into ‘quietest bull market on earth’

Can a new prime minister really make a difference to reinvigorate a country’s economy and stock market? Well, yes they can, as this happy shareholder knows from personal experience where it really counts; in my self-invested personal pension (SIPP).

No, I am not the latest convert to Andy Burnham’s bandwagon for Manchester-based boosterism, although we could certainly do with a bit more of the North’s famously reliable rain down south these days. But the newish prime minister I have come to praise is Sanae Takaichi, Japan’s first female leader, who came to power last October with a radical plan to reverse decades of economic stagnation.

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Since then, the Tokyo stock market has soared and two of my investment trusts - including a long-term laggard - have followed suit. Baillie Gifford Shin Nippon Ord (LSE:BGS), a smaller companies specialist that languished at the bottom of the performance tables for years, has surged 24% higher, while a bigger companies fund, Schroder Japan Trust Ord (LSE:SJG), has done even better by delivering an eye-stretching  total return of 39% over the last year.

It might be the quietest bull market on this planet, but there are good reasons to believe it has further to go. Takaichi has combined tax cuts to ease the cost of living with fiscal stimulus in 17 key sectors including artificial intelligence (AI), semiconductors, biotechnology, shipbuilding, energy, and defence.

The aim is to reverse decades of deflation that followed the bursting of Japan’s stock market bubble when the blue-chip Nikkei 225 index briefly peaked at 38,915 in December 1989. Until then, Japan had shrugged off the 1987 stock market crashes in London and New York that marred my early years in the City and, absurdly, the grounds of the Imperial Palace in Tokyo were said to be worth more than all the real estate in California.

But subsequent efforts to protect Japanese banks and property developers from the consequences of that boom and bust had the unintended effect of delaying recovery. The Nikkei was still trading below 9,000 - or less than a quarter of its peak valuation - more than 20 years later in 2012.

Then the second term of Japan’s youngest prime minister, Shinzo Abe, saw corporate reforms and monetary easing stimulate gradual growth before he was assassinated in 2022. But the upward economic trend proved resilient and the Nikkei surged past its 1989 record in early 2024, climbing through 40,000 to trade above 66,000 this week.

Takaichi says she intends to continue fiscal stimulus and tax cuts that became known as “Abenomics” and are now sometimes dubbed “Sanaenomics”. It’s early days yet but weakening the yen is boosting exports, while some inflation is welcome after decades of deflation and might even boost nominal tax receipts.

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Coming down from the clouds of macroeconomics to stock market specifics, Schroder Japan Trust’s top holdings include several big businesses that are benefiting from their exports becoming more competitively priced. These include the electronics giants Hitachi and Mitsubishi, which make digital systems, green energy grids and data storage tools among many other things, including trains. Fanuc, which is a global leader in industrial automation, robotics, and computer numerical control (CNC) systems is another big winner from a weaker yen.

The combined effect has been to enable Schroder Japan to deliver total returns of 209% over the last decade; 125% over the last five years; and, as mentioned earlier, 47% over the last year when it was top in its sector.

Better still for income-seekers, this £432 million fund also yields 3.3% quarterly dividends, which have risen by an annualised rate of 18% over the last five years. Even so, the shares continue to be priced at a discount of nearly 9% below their net asset value (NAV).

CC Japan Income & Growth Ord (LSE:CCJI) is also worth considering as it is its sector leader over the medium and long term, having delivered total returns of 206% and 120% over the decade and five years, followed by 39% over the last year. It yields 2.1% dividend income, rising by 5.1% per annum and is priced 6.3% below NAV.

Meanwhile, the medium and smaller companies specialist Baillie Gifford Shin Nippon - which means “New Japan” - has not done so well but is recovering strongly after years of weakness. As you might expect with foreign smaller companies, none of its top 10 assets is a household name in Britain and a portfolio of industrial, technology and consumer cyclical stocks struggled to deliver disappointing returns of 48% over the last decade and minus 27% over five years before bouncing back with 23% over the last year.

Dividend income is negligible at 0.4% with no sustained record of increases over five years. Not surprisingly, Baillie Gifford Shin Nippon shares are priced just over 10% below their NAV.

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Income-seekers focused on smaller Japanese companies funds might consider Nippon Active Value Ord (LSE:NAVF), which is the top yielder in this sector, paying 2.4% dividends that have soared by an eye-stretching 40% per annum over the last five years. After being launched in 2020, NAVF lacks a 10-year record but delivered total returns of 110% and 6.1% over five and one-year periods.

Perhaps inevitably, Takaichi is often compared to Britain’s former prime minister Margaret Thatcher for shaking up an establishment of sleepy salarymen. It remains to be seen whether the Tokyo firebrand can match Burnham’s success in making the Manchester buses run on time.

Here and now, the fourth-largest economy on this planet offers international investors an opportunity to diversify away from the currently all-conquering American stock market. As believers in Japanese exceptionalism discovered in 1989, a trend is only a trend until it stops.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS) and Schroder Japan Trust (SJG) as part of a globally diversified portfolio of investment trusts and other shares.