Japan Managers Upbeat Despite GDP Fall

While a contraction in the economy may spark jitters among some investors, others are taking the opportunity to buy shares at cheaper valuations

Holly Black 16 May, 2018 | 2:46PM
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Michael Lindsell

Official figures show that the Japanese economy contracted for the first time in three years, but experts remain bullish on the region despite the setback.

The Japanese economy contracted in the first quarter of the year, the first decline since 2015. Data shows the economy shrunk by 0.2% in the first three months while growth for the final quarter of 2017 was revised down to an annualised 0.6% from 1.6%.

The fall is being attributed to a shrinking workforce in the country as an ageing population reduces its labour force. After eight consecutive quarters of growth, nervous investors now fear the economy could fall into recession. Japan is the only major economy in the world to start the year with an economic contraction.  But many professionals say there is still much to positive about.

Ben Yearsley, director at Shore Financial Planning, says: “We are in the sixth consecutive year of growing profits in Japan – the longest streak since World War II. Corporate governance is improving, dividends are growing and Japan could also benefit if tensions between North and South Korea ease off. Yet, despite all that, Japan remains one of the cheapest developed markets out there.”

Nicholas Price, portfolio manager at the Fidelity Japanese Values (FJV) trust agrees that company valuations remain attractive, especially considering the higher returns on equity being achieved. Businesses are making efforts to cut costs and restructure, and figures are also being helped by US tax cuts and an increase in company share buybacks.

But Price says being selective is crucial to success when investing in the country. He looks for stable, growth companies that can increase their earnings. He says: “Quality machinery and services companies geared to structural growth trends are prime examples. I am also focusing on under-researched companies with new and interesting business models, which can generate high levels of organic growth.” Top holdings within the trust include healthcare company Sysmex (6869) and Keyence (6861), which makes sensor products such as barcode readers.

Lindsell Buys Into Video Games Firm

And, while a contraction in the economy may spark jitters among some investors, others are taking the opportunity to buy shares at cheaper valuations. Michael Lindsell, manager of the Lindsell Train Japanese Equity fund, has started a new holding on leading video game publisher Square Enix (9684), whose share price is down 16% year to date.

The company owns popular gaming franchises such as Dragon Quest and Final Fantasy – the latter of which is among the top ten best-selling franchises in the world. Lindsell says the company’s balance sheet is “rock solid” but it currently trades on an enterprise valuation of just 1.7 x sales, compared with 5.1 x for rival Nintendo (7974) – which is the fund’s second largest holding – and 6.5 x for Electronic Arts (EA).

As well as selling video games software – which accounts for 77% of revenue – the company also makes money from operating 140 arcades across the country and developing arcade game machines, as well as the sale and licensing of comic books and merchandise.

The Morningstar Silver Rated fund has returned 12.4% over the past year and produced a 10-year annualised return of 11.3%. Morningstar analyst Peter Brunt says the fund is a very strong choice for investors looking for long-term exposure to the region. He says: “One of the fund’s main strengths lies in manager Michael Lindsell’s deep understanding of company strategies and his ability to see through the noise and buy and hold stocks that are best placed to defend their businesses over the long term.”

Also among the largest holdings in the fund are Mandom (4917), which makes men’s haircare products, and green tea specialist Ito Em.

Brunt also likes the Morningstar Gold Rated Schroder Tokyo fund, which has returned 12.3% over the past year and a 10-year annualised returned of 8.9%. Run by Andrew Rose since the 1980s, Brunt says the “quality of the group’s in-house research capability gives it an edge”. Top holdings in the fund, which has a large cap focus, include Toyota (7203), East Japan Railway (9020) and tyre company Bridgestone (5108) .

Price adds: “Fiscal and monetary policy remain supportive of growth in Japan, employment conditions are strong and there has been a pick up in wage growth. While forward guidance is typically cautious, valuations still look attractive.

“At this mature stage of the cycle, it is important to take a selective approach to stock picking that can capture the full range of investment opportunities across the market-cap spectrum.”




The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
East Japan Railway Co2,620.00 JPY-2.96Rating
Electronic Arts Inc136.36 USD-0.25Rating
Fidelity Japan Trust Ord174.00 GBX0.87Rating
Keyence Corp69,250.00 JPY-1.69Rating
Lindsell Train Japanese Eq A Yen Acc531.91 JPY-0.68Rating
Mandom Corp1,211.00 JPY-0.16
Nintendo Co Ltd8,545.00 JPY-1.50Rating
Schroder Tokyo Z Acc £1.43 GBP-0.76Rating
Square Enix Holdings Co Ltd4,611.00 JPY-2.68
Sysmex Corp2,605.00 JPY-1.10
Toyota Motor Corp3,209.00 JPY-1.38Rating

About Author

Holly Black  is Senior Editor, Morningstar.co.uk


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