Little more than three weeks have passed since the Nikkei 225 eclipsed the 20,000-point mark, yet despite Japanese stocks having grown 15% in 2015, investor scepticism over the Japan’s long-term prospects remains.
Concerns based on subjects ranging from rising oil prices and corporate cash hoarding to the declining population and previous false dawns are rearing their heads again – with so many potential banana skins, how does one go about investing in the world’s third-largest economy?
“It is about companies that are expanding their business overseas,” says Amaki, manager of the Matthews Japan Fund.
“Rather than making products in Japan and selling them elsewhere, it is about building up local operations in the markets where the consumers are. In my portfolio an aggregate of 50% of the holdings’ revenue comes from outside of Japan – a lot of the companies have moved their production bases overseas and are doing business locally and serving local consumers.”
Appetite for consumption
The largest slice of Amaki’s portfolio is invested in the industrials sector, which represents a 25% portion and 5.6% overweight and is geared towards capitalising on the rising wage brackets seen in China and other Asian countries.
“Most of the industrial companies I own are in the automation space,” he explained. “Wages are rising across Asia, and, particularly in China, a lot of the younger generation want to work in services rather than factories.
“A lot of manufacturers are having to pay more to hire and retain employees – with wages in China going up 50-60% in the past seven years there is suddenly a need for robotics to keep up productivity.”
Wage growth also plays a part in Amaki’s biggest overweight, consumer staples, a 14.5% allocation – equating to 7.6% above benchmark – that seeks to make the most of population growth and rising middle class income.
“The biggest positions are in companies that sell baby products, primarily in China, but also India and other areas in south-east Asia. Japanese brands are perceived in Asia to be better quality, and as middle Asian incomes rise consumers are starting to reach for quality.
“Seven years ago the Japanese products would have been too expensive for most Asian households, that is no longer the case.”
Trimming back
However, while Amaki is optimistic on the prospects for Asian consumer spending, he is cooler on the outlook for the discretionary side, where he has recently cut back his allocation to an 8.7% underweight.
“A lot of the big names in my consumer discretionary holdings are Japanese car companies,” he explained, referring to his shares in Toyota, Mazda, Isuzu and Mitsubishi.
“However, I have taken off a lot of my car manufacturing positions because most of the weak yen cycle is done. Also, the US growth market is doing well but has hit historical sales highs, so we cannot expect much more incremental growth there.
“The Chinese market is still growing but slowing down, while Europe and Japan have been quite stagnant. Toyota is my biggest position [at 3.3% of the portfolio] and is a different story – we are expecting a lot of profitability improvement through their New Global Architecture programme. But we are not bullish on the car industry as a whole.”
It is, however, in financials, where he has a 9% underweight accounting for 9.5% of his portfolio that he is most negative.
“Banks do not have a lot of pricing power in Japan,” he explained. “There is a lot of competition between the banks for deposits and loan yields are very low.
“Insurance companies have much better pricing power – 15 years ago there more than a dozen listed non-life insurers in Japan, and now there are three that have more than 90% of the market share. Over the past four years, Japanese insurance rates have been raised every year, which is the kind of pricing power I look for.”
