With Japan having one of the strongest balance sheets of any market globally, CAMRADATA’s latest whitepaper, Japan Equity explores the opportunities for investors as global economies start to emerge from the pandemic.
The whitepaper includes insight from firms including Asset Management One, Sparx, Tokio Marine Asset Management, Barclays Wealth Management & Investment, Psigma Investment Management and Stanhope Capital, who attended a virtual roundtable hosted by CAMRADATA in July.
The report highlights that with the pandemic accelerating digital transformation and the adoption of technology, Japan is at an interesting crossroads. Japanese tech companies are poised to benefit from a doubling in demand, but at the same time cannot afford to be complacent as China is rapidly closing the tech gap.
Natasha Silva, Managing Director, Client Relations, CAMRADATA said, “Whilst the pandemic is certainly not over from a societal perspective, from a stock market perspective – which tends to look six to nine months ahead – it is, particularly as the global economy shows signs of improvement.
“Japanese earnings are the most correlated to global industrial production of any region, so the prime time to own this market is when the economy is improving because the operating leverage is large and underestimated. Japan offers interesting return opportunities for investors.”
The CAMRADATA roundtable discussed how wealth managers allocate to the world’s third-largest economy and third-largest stock market and whether fund selectors preferred managers of Japanese equities to be based in Japan or at least understand Japanese culture and language. Some of the firms said they employ local portfolio managers but said this wasn’t necessarily crucial. Other discussions focused on ESG and how it is impacting investment decisions.
Key takeaway points were:
- Investor Relations teams at Japanese companies have come on leaps and bounds in the last eight to nine years but there is still a competitive advantage in understanding the language and culture when interpreting corporate reports.
- The managers on the panel were asked what distinguishing factors or metrics they used in gauging Japanese companies. One said their first criterion was favouritism, then, return on equity must be higher than the benchmark with a better ESG profile, adding more asset managers were trying to incorporate ESG now into their process, but it was not easy.
- Another sought top-line growth above and beyond the relevant industrial sector growth, e.g. companies growing faster than their peers. Second, targets must demonstrate operating profit margin. Thirdly, company management must be open to deep and sustained engagement.
- When it comes to finding the right ESG metrics, one panellist highlighted that broadly speaking, Japan is probably less well-understood by some clients than regions closer to home. Another said that companies with other regions, Japan offered less in terms of sustainability and less choice from a fund buyer’s perspective.
- Another panellist described ESG in Japan as the proverbial square peg in a round hole, saying that ESG was devised primarily in the West by shareholder capitalism.
- A final point on ESG was that if ESG was treated merely as a box-ticking exercise along the investment value chain, there was a risk that either economic returns or sustainability benefits may not materialise as expected. However, economic factors with a sufficiently long-term horizon would see the benefits of ESG come through.
- Summing up the prospects for Japan, one panellist said that Japan had been strong going into the crisis and with the Bank of Japan firmly at the pump to deliver steadfast easing, growth companies had been supported in a low-growth country.
- Another said certainly the choice of managers is not as big as for other geographies. And Japan doesn’t attract the flow of attention that other places receive. But being “a bit unloved” is not a bad thing for those with commitment.
- Japan continues to offer global investors opportunities to diversify portfolios, enhance risk return profiles while benefitting from good liquidity and improving market and corporate practice.
A final point was made on a very topical issue, that if investors are worried about inflation, then Japan is the place to be.
To download the ‘Japan Equity’ whitepaper click here