Hisashi Arakawa, Chief Investment Officer, abrdn Japan Investment Trust PLC
– Japanese stocks sold off as Russia escalated tensions with Ukraine.
– Firms pass on rising input costs to their end customers.
– Recent earnings reports from the Japanese corporate sector have been buoyant.
Japanese stocks sold off as Russia escalated tensions with Ukraine. However, the country’s stock market outperformed the global average, with value stocks and smaller companies performing the best. The preference for value stocks is perhaps understandable given the evolution of interest rates and inflationary pressures. However, this has left many high-quality stocks looking like good value at a time when we believe quality characteristics such as pricing power and resilient balance sheets will be particularly important.
Inflation is a problem in Japan as the impact of soaring commodity prices puts pressure on corporate profitability. However, the price increases are relatively small compared to other developed markets around the world. Tokyo’s core consumer price index (CPI), which excludes fresh food but includes energy, rose 0.8% year-on-year in March. This figure is slightly higher than expected and is expected to rise as energy prices rise, but does not come close to the 6-7% increases seen in the UK and US. Meanwhile, the latest news suggests price increases are becoming more widespread: Starbucks Japan, for example, raised its standard drink prices by 22% and its coffee bean prices by 40% in mid -april ; this is the first time since 2006 that the company has raised the price of its coffee beans. With input prices continuing to rise, it will be important to invest in companies with pricing power – and a number of our invested holdings are determined to maintain profitability.
Meanwhile, Japan’s economy is finally, albeit gradually, reopening after continued waves of Covid-19 infections and concerns about the strain on its healthcare system. In its latest World Economic Outlook, the International Monetary Fund (IMF) expects Japan to grow 3.3% for the year, even though fourth-quarter GDP growth came in at 4.6 %. Japan’s quasi-state of emergency was lifted in 18 prefectures, including Tokyo and Osaka, towards the end of March. The country also eased its border controls from March, and the recall campaign launched last December had reached 41% of the population by the end of March.
Dynamic business sector
However, as always, it’s not the economy that’s interesting in Japan. It is useful to have a favorable context, but Japanese companies are very good at operating in difficult climates. Recent earnings reports for the Japanese corporate sector have been buoyant, with many companies reporting increases in profits and many announcing share buyback programs. Dividends were another area of strength.
Meanwhile, global investors have yet to re-enter Japanese markets. Although there are signs that global asset allocators are once again turning to the country, valuations are still attractive for Japan after a long period of disgrace. This is especially true when companies have resilient business models, strong balance sheets and structural improvements in governance, the natural hunting ground of abrn Japan Investment Trust.
In our view, Japanese companies are embedded in some of the most exciting global trends. For example, it is possible to find world-leading companies in the all-important semiconductor supply chain. Japan’s prominence in robotics is likely to be rewarded as factory automation becomes a growing priority to counter wage inflation.
Japanese automakers were early successful proponents of electric vehicles (EVs). Toyota Motor, for example, recently pledged to launch 30 different electric vehicle models by 2030, up from 15 previously. It hopes to sell 3.5 million battery-electric vehicles globally by 2030 and transform Lexus into an EV-only brand by 2035.
Prime Minister Kishida is a bold supporter of these trends. His proposal for a “new capitalism” rests on four key pillars: innovation – promoting Japan as a science and technology nation; The vision of Digital Garden City Nation – advancing Japan’s digital capabilities; tackling climate change – with a focus on clean energy and gradual decarbonization; and economic security – increased support for research and development of advanced technologies.
In our portfolio, we were already invested in Toyota, but more recently we have positions in Ibiden and Kohoku Kogyo. Ibiden is a manufacturer of packaging substrates that protect semiconductors. We expect rapid end-market growth and are encouraged by the improved business mix achieved in recent years, with reduced reliance on cyclical applications such as smartphones.
Kohoku Kogyo is the world’s leading manufacturer of key components used in underwater optical cables and automotive aluminum electrolytic capacitors. The company’s integrated production system and its ability to produce everything in-house, from raw materials to equipment, allows the company to maintain its moat. The president, from the founder’s family, wants to establish a third pillar of growth, building on the company’s existing technologies.
Companies with strong business models and management teams have coped and even thrived over the past couple of years, though that hasn’t always been reflected in stock prices. Along with structural improvements in governance in Japan, we remain convinced that these companies should perform well regardless of general economic conditions. Companies with good growth potential and competitive strength should have a noticeable advantage today.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Risk factors to consider before investing:
- The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested.
- Past performance is not indicative of future results.
- An investment in the Company may not be suitable for investors who plan to withdraw their contribution within 5 years.
- The Company may borrow to finance other investments (gearing). The use of gearing is likely to cause volatility in the net asset value (NAV), meaning that any movement in the value of the company’s assets will cause an amplified movement in the NAV.
- The Company may accumulate investment positions which represent higher than normal trading volumes, which may make it difficult to make investments and cause volatility in the market price of the Company’s shares.
- The Company may charge capital expenditure which may erode the capital value of the investment.
- Derivatives may be used, subject to the restrictions established for the Company, to manage risk and generate income. The derivatives market can be volatile and the risk of loss is above average.
- Exchange rate fluctuations will impact both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the shares of the Company will fully reflect their underlying net asset value.
- As with all stock market investments, the value of Company shares purchased will immediately decline by the difference between the bid and ask prices, the bid-ask spread. If trading volumes fall, the bid-ask spread may widen.
- Yields are estimated figures and may fluctuate, there is no guarantee that future dividends will equal or exceed historical dividends and some investors may be subject to additional dividend tax.
Other important information:
Issued by Aberdeen Asset Managers Limited which is authorized and regulated by the Financial Conduct Authority in the UK. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment fund should only be considered part of a balanced portfolio. Under no circumstances should this information be considered an offer or solicitation of investments.
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