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Lagging Sectors Spell Opportunity in Japan

Japan's e-commerce and payments industries are playing catch-up and that creates opportunities for investors

Annalisa Esposito 1 October, 2019 | 1:33PM

japan

Many of us have an idea of Tokyo of being very technologically advanced – when we think of the third largest economy in the world (twice the size of the UK’s), it tends to be of big names such as Toyota and Honda in the auto sector, or investment giant SoftBank.

Yet the country is still lagging when it comes to some important developed market trends, such as e-commerce and digital payment. Nicholas Weindling, manager of the Bronze-Rated JPMorgan Japanese Investment Trust (JFJ), thinks these are the areas investors should be looking at because they are growing.

Indeed, Japan has started to move towards cashless payments, online advertisement, shopping and dating. “Companies in these areas are slowly picked up by the markets are creating long-term opportunities,” says Weindling. “As investors, we should think about where things are going, not where we have come from”.

Online Lagging

Compared to the UK, where e-commerce has ballooned in recent years and buyers are abandoning the high street in favour of online shopping, Japan is lagging behind – while in the UK around 30% of clothing is bought online, with companies such Asos and Amazon flourishing, in Japan only around 8% of purchases are made online.

Japan is also still a surprisingly cash-dominated society. In the UK more than half of transactions are cashless, in Japan 82% of the population still uses cash, according to figures released by its Ministry of Economy, Trade and Industry in 2018.

But the country is approaching a tipping point, with banks reducing their ATMs to cut costs and the Japanese government aiming to double e-money (contactless and online) transactions within the next eight years.

Prime Minister Shinzo Abe is leading the charge. This month sales tax in the country will be hiked to 10% in the hope of encouraging retailers to use more efficient digital transactions: after all. With the forthcoming 2020 Olympics in Tokyo, food retailers, restaurants and hotels are starting to recognise the need to accept non-cash payments.

Elsewhere, Japanese companies are also proving their mettle in other technological areas such as industrial robotics, semiconductors and machinery. Robotics firm Fanuc, for example, commands a 60% share of the global market in its field while SMC enjoy a third of the global market in pneumatic equipment.

Weinlding’s trust backs a number of these names, with 31% of assets invested in tech companies and a further 23% in industrials. Top holdings in the trust include sensor manufacturer Keyence and SoftBank. It also owns cosmetics company Shiseido and Uniqlo-owner Fast Retailing. The trust has delivered annualised returns of 16.8% over five years.

Stagnating Growth

Despite the headway being made in many sectors, many investors are still nervous about backing the region after a major recession in the 90s, followed by years of economic stagnation. Add in a rapidly ageing population and “job for life” mentality and it means wages have actually stagnated in recent years even despite the country being close to full employment, which has also weighed on economic growth.

japan index

Indeed, Japan’s second quarter economic growth has been revised down from 1.8% to 1.3% because of the impact of the US-China trade war. That has not been helped by a rally in the value of the Japanese Yen; seen as a safe haven at volatile times, the rise in the currency means the country’s exports look more expensive to international buyers and also dampens overseas profits when they are brought back onshore. There are fears that growth in the final three months of the year could even slip into negative territory.

But Joe Bauernfreund, manager at AVI Japan Opportunity Trust (AJOT), thinks that now could be an opportune time to invest in the region: “Such divergences in performance [between the Japanese and the world indexes] do not last forever. Investors ought to be looking for laggards and Japan is clearly one such laggard.”

The trust, which focuses on small and mid-cap companies, is set to benefit from a rise in household spending through holdings such as Nakano Refrigerators and from the ageing population through Fukuda Denshi, which makes critical care monitors used in hospitals. Launched this year, the trust is up 2% over six months.

Matthew Brett, manager at Bronze-rated Baillie Gifford Japan Trust (BGFD), agrees that investors avoiding the region are “missing out on amarket where a number of global leading businesses are listed”. The trust, which has delivered annualised returns of 17.8% over five years, has a quarter of its assets in technology companies including Fanuc, Sony, and e-commerce site Rakuten.

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.

About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk

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