After many years of lackluster performance, Japan has returned to the limelight this year as the prospect of corporate governance reform, coupled with the end of yield-curve control (a bond-buying program with a cap on yields), potentially makes it a more exciting country in which to invest. With language barriers and limited disclosures relative to other markets, Louise Kernohan and I visited companies in Tokyo and the Kansai region to identify some of the underlying themes and potential investment ideas. Here are our key takeaways.
1. Inflation Is Gaining Traction
After many years of deflation, almost all the companies we met spoke of the need to navigate a more inflationary environment. Given an ageing population and intense competition for qualified workers, companies repeatedly mentioned wage growth. Inflationary pressure is also starting to divide consumer behavior. Luxury players are citing a benefit from price rises, with many consumers willing to pay more for quality. At the same time, discounters are profiting from increased downtrading and the greater adoption of private label alternatives. Against this backdrop, it is critical to identify companies that can innovate and adapt to changing consumer needs but which also have pricing power, so higher costs can be passed on.
2. The Role of China Is Changing and Cannot Be Underestimated
Historically, many Japanese companies have benefited from strong demand from China. However, it was clear that China’s recent macro weakness, coupled with policy shifts to more ‘Made in China’ products, is putting pressure on future growth prospects in Japan. But competition is on the rise, with market-share losses at the lower end of the market forcing Japanese companies to refine their focus both on quality and reliability and to extend into other markets, notably India and the US.
3. Corporate Governance Reform
It is rare to meet so many companies that have such large net cash balance sheets. This has meant that Japan’s capital efficiency has lagged that of its global peers for many years. However, this is set to change, with the Tokyo Stock Exchange now making companies more conscious of their cost of capital and share price. This was something that came up frequently in meetings, as we spoke about better shareholder return policies, optimization of cost structures and investing for growth.
Authors
Georgina Gregory
Portfolio manager, Global Opportunities team
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. MAR006274 Exp 06/2029 For additional Important Information, click on the link below.
Important information
For Institutional Clients Only. Issued by Newton Investment Management North America LLC ("NIMNA" or the "Firm"). NIMNA is a registered investment adviser with the US Securities and Exchange Commission ("SEC") and subsidiary of The Bank of New York Mellon Corporation ("BNY Mellon"). The Firm was established in 2021, comprised of equity and multi-asset teams from an affiliate, Mellon Investments Corporation. The Firm is part of the group of affiliated companies that individually or collectively provide investment advisory services under the brand "Newton" or "Newton Investment Management". Newton currently includes NIMNA and Newton Investment Management Ltd ("NIM") and Newton Investment Management Japan Limited ("NIMJ").
Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed.
Statements are current as of the date of the material only. Any forward-looking statements speak only as of the date they are made, and are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment and past performance is no indication of future performance.
Information about the indices shown here is provided to allow for comparison of the performance of the strategy to that of certain well-known and widely recognized indices. There is no representation that such index is an appropriate benchmark for such comparison.
This material (or any portion thereof) may not be copied or distributed without Newton’s prior written approval.
Comments