Investors join sports fans on Japan bandwagon
It’s not just sports fans paying close attention to Japan, which is in the midst of hosting Asia’s first Rugby World Cup and gearing up for the Tokyo 2020 Olympic Games.
Mentioned: Rakuten Group Inc (4755), Nakano Refrigerators Co Ltd (6411), Fanuc Corp (6954), Fukuda Denshi Co Ltd (6960)
It’s not just sports fans paying close attention to Japan, which is in the midst of hosting Asia’s first Rugby World Cup and gearing up for the Tokyo 2020 Olympic Games.
As Japan's burgeoning e-commerce and digital payment segment shapes up, investors are also taking note.
Many of us have an idea of Japan, the third-largest economy in the world, as being very technologically advanced, home to household names like Toyota and Honda in the auto sector and investment giant SoftBank.
Yet the nation has been slow to adapt various developed market trends, including digital commerce, which now hold considerable investor appeal because of rapid growth in the segment.
Nicholas Weindling, a UK-based portfolio manager and Japan specialist at asset manager JP Morgan, notes Japan has begun to embrace cashless payments and online advertising, shopping and dating.
"Companies in these areas are slowly picked up by the markets and creating long-term opportunities," Weindling says. “As investors, we should think about where things are going, not where we have come from."
Slower online adoption
Around 35 per cent of all consumer electronics sales in the US were online transactions in 2019, and Morningstar analyst Johannes Faul expects Australia's online sales in this category to top 40 per cent by 2023, with companies like Amazon and JB HiFi flourishing. By contrast, only around 8 per cent of all purchases in Japan are online transactions.
But the country is approaching a tipping point, with banks reducing their automatic teller machine inventories 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. In October, sales tax in the country will be hiked to 10 per cent 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 per cent share of the global market in its field while SMC enjoy a third of the global market in pneumatic equipment.
JP Morgan backs a number of these names, with 31 per cent of assets in the manager's Japanese Investment Trust invested in tech companies and a further 23 per cent 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 per cent 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.
Indeed, Japan’s second quarter economic growth has been revised down from 1.8 per cent to 1.3 per cent 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 of another UK-based fund AVI Japan Opportunity Trust, believes 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 per cent over six months.
Another UK-based fund, Baillie Gifford Japan Trust, has a 25 per cent portfolio weighting to Japanese technology companies including Fanuc, Sony, and e-commerce site Rakuten.
Having delivered annualised returns of almost 18 per cent over five years, fund portfolio manager Matthew Brett says investors avoiding the region "are missing out on a market where a number of global leading businesses are listed."