· Japanese companies are used to dealing with a tough backdrop and their natural caution served them well in 2020
· The Japanese market thrived amid widespread volatility last year, rising 16 percent
· Japanese companies reflect many of the most important growth themes in the post-Covid environment
In the rush to capitalise on China’s rapid growth, investors have often neglected Asia’s other dominant economy: Japan. Japanese companies are not only beneficiaries of Chinese growth but are plugged in to other key growth themes in the global economy – digitisation, robotics, electric cars, a rising middle class – yet they remain only lightly explored by investors.
Japanese companies are used to dealing with a tough backdrop. While Japan’s economic backdrop has improved in recent years through the “Abenomics” programme led by then prime minister Shinzo Abe, Japanese businesses have had to fight through a deflationary environment. They tend to be cautiously run, with strong balance sheets and prudent management as a result. This made them resilient in 2020 and meant that the Japanese market thrived amid widespread volatility, rising 16 per cent over the year.
The depth of the markets has also been a real advantage in this climate. Active managers could pick from pharmaceutical or manufacturing giants, right down to small cap components makers or specialist chemical groups. There have also been many ways to invest in significant global themes through the Japanese market: health and technology innovation, for example. Japanese companies have played their role in the fightback against Covid-19. Chugai, an R&D-focused drug maker that specialises in niche but difficult to treat conditions, has been involved in Covid drug trials.
Japanese companies have become a benchmark for quality, proving adept at using technology to improve quality at lower cost. This has made them the manufacturer of choice across the world, but particularly in China. The Aberdeen Japan Investment Trust holds companies such as Nippon Paint, which is currently the number one coatings group in China. It is currently benefitting from the widespread home improvement trend, but also looks set to benefit from infrastructure development across the region.
Environmental sustainability is also well-represented among Japanese companies. In the trust, we hold Sanken, which is a leading maker of energy-saving chips that can cut carbon dioxide emissions of household electronics by as much as 30 per cent. Murata makes components for electric cars, while Koito makes energy-saving headlamps for cars, which lower energy usage by 40 per cent compared to conventional headlights.
We find Japanese markets packed with opportunities for active investors, yet this opportunity is often poorly understood. Half of the market has no sell-side coverage, which means information is not widely available. Foreign investors have been net sellers of Japanese markets since 2015. The value in Japanese markets is often overlooked by global investors.
How do we find that value? To our mind, it is important to be local. Japanese corporate culture has its idiosyncrasies, and being able to talk to companies in Japanese, while understanding the etiquette and dynamics, is vitally important in making a judgement on a business. That said, many Japanese companies are global in their outlook – part of global supply chains and competing with international peers. As such, a local presence with a global platform drives the best results.
Equally, it is important to engage with companies to improve governance and release value. Governance has long been a sticking point for Japanese companies. They have historically been prone to excessive caution, have sat on huge cash balances, resisted value-adding merger and acquisition activity, and lack dynamism. There have been moves in recent years to improve governance and there are signs that companies are achieving a better balance. We actively engage with companies to try and improve their governance record.
Among our recent engagements is Kansai Paint, a long-term holding, but one where the management team had started to neglect customer engagement. We pushed the business to restructure and to focus more on profitability. This has been reflected in an improving share price. These engagements are vitally important in helping ensure that the value in a company is realised in the share price.
For the coming economic recovery we believe Japan should prove to be a good place for investors. Sectors such as technology, autos and those linked to China growth are already seeing improving demand. Japanese corporates are busy, exports have rebounded, and we see growing earnings across a range of cyclical sectors. At the same time, the new Prime Minister, Yoshihide Suga, has promised a continuation of Japan’s economic reforms and is driving areas such as digitisation.
Japan is an exciting market for active investors. Investors can take exposure to many important global themes at a fraction of the price they would pay in the US market. It is time for investors to cast aside some of their historic views on the Japanese market and discover the value to be found there.
Risk factors you should consider prior to investing:
· The value of investments and the income from them can fall and investors may get back less than the amount invested.
· Past performance is not a guide to future results.
· Investment in the Company may not be appropriate for investors who plan to withdraw their money within five years.
· The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the net asset value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
· The Company may accumulate investment positions that represent more than normal trading volumes, which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
· The Company may charge expenses to capital, which may erode the capital value of the investment.
· Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
· Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
· There is no guarantee that the market price of the Company’s shares will fully reflect their underlying NAV.
· As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices – the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
· Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends, and certain investors may be subject to further tax on dividends.
Other important information:
Issued by Aberdeen Asset Managers Limited, which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.
Chern-Yeh Kwok is manager at the Aberdeen Japan Investment Trust.