Overcoming past economic woes, Japanese stocks can offer a compelling way to tap into big global themes at attractive prices, says Chern-Yeh Kwok, Manager, Aberdeen Japan Investment Trust.
In the rush to capitalise on China’s rapid growth, investors have often neglected Japan. Yet, not only do Japanese companies benefit from China’s burgeoning economy, they’re plugged into many important global growth themes. Digitalisation, robotics and electric cars are just a few.
For years, Japanese companies have had to battle tough economic conditions. Consequently, they tend to be cautiously run with strong finances, allowing them to be resilient in a year like 2020.
The depth of Japan’s markets is also advantageous. Investors can pick from pharmaceutical and manufacturing giants, down to small component makers or specialist chemical groups. Specialist drugmaker Chugai is among those playing a part in fighting Covid-19.
Environmental sustainability is also a well-represented theme among Japanese companies. Aberdeen Japan Investment Trust holds Sanken, whose energy-saving chips improve efficiency from home electronics by as much as 30%. Similarly, MuRata makes components for electric vehicles, while Koito’s energy-saving headlamps reduce energy usage by 40% compared to conventional headlights.
Finding value
Chern-Yeh Kwok (pictured), Manager, Aberdeen Japan Investment Trust, sees Japan as a market packed with opportunities. He feels that valuations are still reasonable, even after recent strong performance. Commenting on how the Trust finds value and why engagement with the companies it holds is important, he says:
“First, it’s helpful to be based in Japan to allow us to better understand how these companies work. Equally, we believe it’s crucial to engage with companies to improve their governance and unlock value. Japanese companies have leaned towards caution, often hoarding huge cash balances and being conservative in outlook. But corporate governance is improving, and there are signs that companies are achieving a better balance.
“Our discussions with Kansai Paint are an example of effective engagement. This is a long-term holding for Aberdeen Japan Investment Trust, but we were concerned management were not focusing on returns for its investments. The Trust’s managers urged the company to restructure and focus on profitability, and after the company took remedial action, the company’s fundamentals – and its share price – have been resilient.”
A bright outlook
Chern-Yeh Kwok says: “We believe Japan will prove a rewarding place to invest for the coming economic recovery. Exports have rebounded – sectors like technology, autos and those linked to China are already seeing increasing demand. Strong earnings growth is forecast for 2021 across a range of cyclical sectors. Prime Minister Yoshihide Suga has pledged to continue with reforms such as deregulation, digitalisation and scrapping of red tape. Best of all, investors can participate in major global themes at a cheaper price they’d pay for comparable stocks elsewhere.”
