FSSA IM Portfolio Manager Sophia Li: Mythbusting in Japan – 5 Reasons Why Investors are Missing Out on Investment Opportunities
Investment commentary on Japan, 5 reasons why investors are missing out on investment opportunities by FSSA IM Portfolio Manager Sophia Li (August 2021):
FSSA Investment Managers (FSSA IM) is an autonomous team within First Sentier Investors. FSSA IM are bottom-up investors, using fundamental research and analysis to construct high-conviction portfolios, conducting more than a thousand direct company meetings a year, seeking to identify high quality companies that they can invest in for the long term. FSSA IM manages $37.2 billion globally (31/3/21).
Mythbusting in Japan: 5 reasons why investors are missing out on investment opportunities
Some investors are missing out on growth opportunities in Japan due to a reliance on myths about the Olympic-host nation, according to FSSA Investment Managers.
In a recent investor update, FSSA Investment Managers Portfolio Manager, Sophia Li outlined 5 reasons why Japan is often misunderstood by those outside the country.
1. Ageing population
“There is a view that an ageing population means the country is not experiencing growth. However, while Japan’s nominal GDP has grown by just 9% since 1994, total corporate profit was up by 140% in USD terms by the end of March 2020. The growth is there – you just need to know how to find it.”
2. Lack of analyst coverage
Three quarter (3/4) of the investable companies in Japan have either one analyst or no analysts covering them.
“Skilled investment managers can identify specific sectors and companies that underpin the market’s growth and share the gains with their clients. Japan stocks are under-researched despite a large investment universe, and this allows investors to uncover ‘hidden gems’ that aren’t well-understood by the market.
3. Technology deficiencies
Another misconception is that Japan is falling behind on technology. In fact, Japan has commanded a 40% market share of triadic patent families, and has been consistently No.1 since 2005, followed by the US (27%) and Germany (10%) by the end of 2017.
“Japan is still a leader in innovation-led sectors like factory automation and semi-conductor technology. There are also many quality companies in software-as-a-service, medical devices and digital solutions, which form a significant part of our portfolio.”
4. Macroeconomic impacts
Investors who have been disappointed in Japan in the past have often based their decisions on macroeconomic themes or one-off events like the current Olympic Games. In reality, investors need to look at particular growth drivers.
“We do not predict macro events, because our investment approach – as bottom-up stock selectors – seeks to identify companies that are in charge of their own destiny. While Japan consistently defies convention, we select only the companies that we believe can thrive, regardless of the country’s economic challenges. Qualities like a dominant market share in a niche industry is more important to us.”
5. Limited trade capabilities
The perception that Japan is simply an export economy is not correct. Exports only accounted for 18% of GDP, vs. 40% for Korea and 47% for Germany.
“Japan has a very healthy domestic market as well as strong inward investment. More than 90% of its current account surplus comes from interest and dividend income from overseas markets, while China generates more than 100% and Korea more than 80% from net trade value. Investors need to look at the numbers behind the Japan story to see the real opportunities.”
In conclusion, Japan offers a good opportunity for bottom-up active investors to generate alpha and there are plenty of information asymmetry and hidden gems for investors to discover.
This is an investment commentary on Japan, why investors are missing out on investment opportunities by FSSA IM Portfolio Manager Sophia Li (August 2021).
FSSA Investment Managers (FSSA IM) is an autonomous team within First Sentier Investors with dedicated investment professionals in Hong Kong, Singapore, Tokyo and Edinburgh. FSSA IM are bottom-up investors, using fundamental research and analysis to construct high-conviction portfolios. They conduct more than a thousand direct company meetings a year, seeking to identify high quality companies that they can invest in for the long term. As responsible, long-term shareholders, FSSA IM have integrated ESG analysis into their investment process and engage extensively on environmental, labour and governance issues. As at 31 March 2021, FSSA IM manages US$37.2 billion on behalf of clients globally.
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