Investment companies investing in Japan have performed strongly over the year to 31 August 2017, with the Japan and Japanese Smaller Companies sectors returning 17% and 27%, respectively, according to Morningstar data.
Over the longer term, the Japan sector is up 141% over 10 years, to 31 August 2017, while the Japanese Smaller Companies sector is up 121% over the same period.
The Association of Investment Companies (AIC) has canvassed leading Japanese equity fund managers to discuss how the snap elections will reflect on the political and economic outlook for Japan and find out which stocks and sectors they are backing.
Snap elections
On Monday 25 September, Japanese prime minister Shinzo Abe called for a snap election to take place in October, a year earlier than scheduled.
Japan’s economy continued to grow in the second quarter of 2017 and has now been on the rise for six consecutive quarters, which had not happened for 12 years.
Corporate profits have also entered a positive phase of the revision cycle, with economists expecting positive figures in the coming months.
Abenomics
Reports are of the view that Abe’s economic record will be a significant pillar of his campaign, along with his response to the growing crisis over North Korea.
“Heightened geopolitical tensions have contributed to a strengthening of Mr Abe’s domestic poll ratings, such that he has opted for snap election,” said Andrew Rose, manager of Schroder Japan Growth Fund.
“Valuations are relatively attractive and investors should continue to benefit from improving corporate governance, one of the main successes of Abenomics. Current indications are that he should win this handsomely, although, as we know, nothing is a given in politics.”
Nicholas Price, manager of the Fidelity Japanese Values fund, agrees that the current consensus view that Abe will win the election, although he anticipates the possibility of a reduced majority.
“While investors widely expect Abe to re-appoint Haruhiko Kuroda as Bank of Japan governor in April next year, a weakened majority could impact this scenario,” Price said.
“As a bottom-up stock picker, I prefer to look beyond near-term macro and political noise and focus on company fundamentals. However, Abe’s pledge to increase government spending on education could throw up some interesting investment opportunities.”
Opportunities await
According to Schroders’ Rose, some of the more attractive opportunities are to be found “in cyclical parts of the market such as machinery, auto-related companies and electronic component manufacturers”.
“Amongst domestic sectors, financials look undervalued and, selectively, we are also seeing opportunities in the retail sector,” Rose added.
At the same time, Fidelity’s Price said he is focusing on the mid-to-small cap equity space, which he sees as “a fertile hunting ground that offers a wealth of under-covered and under-researched names”.
“For example, there are almost 2,000 Japanese companies covered by less than five sell-side analysts compared with around 400 in the UK.”
With comparatively few analysts undertaking this level of research, in Price’s view the alpha-generating potential of smaller companies “can be much more significant than for large caps given the greater market inefficiencies”.
Lastly, Praveen Kumar, manager of Baillie Gifford Shin Nippon, somewhat summed up both his counterparts’ views to focus on cyclical stocks active in the retail space (Rose) and on the small and medium cap equity segment (Price).
Kumar identified his favourite hunting ground for stock ideas “is within what we classify as ‘online disruptors’”, or innovative and rapid growth businesses usually run by young and ambitious entrepreneurs.
“We are continuing to find these types of companies across a number of sectors in Japan. Additionally, we are seeing a number of investment opportunities emerge due to the ongoing labour shortage situation in Japan as well as within biotech where a number of companies are developing exciting and potentially world-leading therapies and drug discovery platforms.”
Half-year results
Baillie Gifford Shin Nippon said on Tuesday it outperformed its benchmark in the first half of 2017 as its net asset value rose.
At the end of the six months to 31 July, the firm’s net asset value per share was up to 669.6 pence compared to 577.4p at January 31, rising 16.0% compared to a 7.5% rise in the MSCI Japan Small Cap index.
The investment management company, which principally invests in small Japanese companies, said its top performers in the first half of 2017 were online businesses, especially those related to domestic consumption.
This included Japan’s leading online takeaway delivery service, Yume No Machi, which it said continues to grow at a fast pace as the online food delivery market evolves.
Another top performer was online fashion apparel website Start Today, which “continues to benefit from the rapid growth of e-commerce in Japan,” the firm said in a statement accompanying the results.
