On Friday, Aberdeen Asset Management brought their European roadshow to Luxembourg, with Tokyo-investment manager for Equities-Asia, Keita Kubota, addressing the issue of Japan Equities to investment managers at the Hotel Place d'Armes in Luxembourg city centre.
Despite the recent volatility in Japanese equities, Japan remains one of the most compelling stock markets globally.
Historically, investment in Japan has been a risky and timid undertaking, as corporate transparency is hard to come by and disregard of outside shareholders is commonplace.
However, with the right approach, investment in Japan could see significant growth resulting from economic revitalisation and structural reform. Indeed, Japan’s central bank has just set interest rates below zero for the first time in history, in an attempt to stimulate its economy. Finding good companies in Japan is a challenge that needs to be handled carefully.
Keita Kubota explained that although markets continue to be volatile, there is much optimism for the Japanese economy; even though national debt is USD 70k per person, there is opposition to structural reforms and temporary workers make up almost 40% of the workforce.
Japan (USD 2,655 billion) has the second-largest stock market after the US (USD 17,918 billion), with the UK at USD 2,242 billion and China at USD 799 billion. On the other side, the market coverage is poor, particularly when compared to the US.
Japanese companies with significant global businesses include Fanuc, Daikin, Shimano, Sysmex and Makita, with Makita now relying on overseas markets for 84% of its revenues, Sysmex 82% and Daikin 74%.
Shareholders are now getting a better deal, thanks to a number of initiatives, including a code of corporate governance, the Japan Revitalisation Strategy, a Stewardship Code and the Ito Review. However, there is room for improvement, as many organisations are showing that they are compliant without really engaging.
While the macro side outlook may still be "gloomy", some companies are embracing change and should encourage others to follow.
Aberdeen Asset Management has 10 analysts focusing on Japan, with 6 based in Tokyo. Their Japanese equities make up 14% of their asset management business in Asia Aberdeen's approach is to first identify dood quality stocks, focusing on the company's fundamentals, then look at the price. Their policy is to hold investment for the long term. Japan experiences a lot of cross-shareholding, so Aberdeen invests time in examining management structures and schemes. Out of around 100 companies initially selected,
Aberdeen currently invests in 70, with the other 30 on their watch-list. Of the 70, around 45% of their revenues come from overseas.
Aberdeen's Top 10 companies in Japan in which it invests are classified as All Caps and account for 45% of their portfolio.
When adressing the issue of the cost of quality, he stressed that market valuations can be deceptive; the decision top invest should be made on the basis of predictability of earnings / cash-flow, rather than aspirational growth.
Keita Kubota also presented a performance summary of their Japanese equities, including the sector allocation, of which 27.7% is in the retail sector, 19.3% in industrials and 14.3% in financials. Regarding smaller companies the split included 24.8% consumer goods, 24.5% industrials and 16.3% financials.
Photo by Geoff Thompson: Keita Kubota
