A short update on Japan
In this podcast we are joined by Ben Morris, Senior Investment Specialist at Aberdeen Standard Investments. Here he provides a short update on Japan: an update on markets and why Japan still remains an important asset class, a look at how we invest in Japan and finally a brief outlook.
Recorded on Monday 26th October 2020.
Hello, my name is Ben Morris and I'm the Senior Equity Investment Specialist at Aberdeen Standard Investments and I'm delighted to share a short update on Japan. I'd like to cover three areas. Firstly an update on the market and why Japan still remains an important asset class. Secondly, how we invest at Aberdeen Standard Investments. And thirdly, and finally, a brief outlook.
So in terms of an update on the market, we've seen Japanese equities advance in the third quarter of this year on expectations of policy continuity after Yoshihide Suga succeeded Shinzo Abe as Prime Minister. In addition to maintaining fiscal and monetary stimulus Suga pledged to speed up structural reforms, promote digitalisation in the government and society as a whole. He has also aimed to consolidate small and medium sized enterprises and regional banking sectors to help optimise their operations. Similarly, he has pledged to promote more competition among mobile phone carriers to drive down prices and sentiment has generally lifted as regional authorities including the Tokyo Metropolitan Government that downgraded their COVID-19 alert levels as a result of the receding infection rate. And in addition, there was some general optimism that the US Federal Reserve's revamped approach to handling inflation would keep interest rates low, lower for an extended period of time. So with these sort of thoughts on the market in mind, it is worth reminding ourselves of the opportunity in Japanese equities. As you know, Japan is one of the largest single country markets in the world, around 7 or 8 per cent of MSCI world. With a similar number of companies as the US, we know that coverage is poor. It's probably the most under covered developed market in the world. And this really means that there are genuine opportunities for active managers. Secondly, investing in Japan is not only about investing in Japan, there are many high quality companies that are operating across the world, that just happen to be based in Japan. A key example of this would be Makita, the power tool manufacturer or Seismic, the medical equipment manufacturer. And thirdly, ESG. Historically, governance has been poor. We have seen numerous issues in the past around the likes of poisoned pills, weak controls, inefficient capital allocation. So really this is coming from a low base and the manager is looking at these characteristics and engaging with companies certainly provides an opportunity there.
So onto the second question, why Aberdeen Standard Investments and what's our approach. Our long term quality approach really is driven by fundamental in depth bottom up research with the ESG analysis fully embedded within that and we're seeking to uncover high quality Japanese companies that we can invest into for the long term. The team, on average, meets with about 150 Japanese corporates a year. And we do certainly benefit from our large experienced investment team across Asia. And actually the wider global equity research platform that we have, that we benefit from, helps us both in terms of coverage, but also cross checking investment opportunities. And being a long term, shareholder - long term investor - certainly does help the company engagement. And as we know, that engagement aspect really is supportive to managing those potential sort of governance risks. The outcome of this approach enables the team to construct portfolios, where you know, if you think about portfolio metrics, they are typically above average on a number of areas. Firstly, profitability. Our focus on expanding on strong economic notes and premium and high profit, operating profit margins than the broader index stands the portfolios in good stead. Secondly, dividend growth, looking for rising powers of growth and those that are growing faster than the index, strength of balance sheets and having strong balance sheets, low levels of net debt to equity and in many cases net cash, hugely supportive and offers up those high quality characteristics that you might expect. And thirdly, returns - having higher return on equity than the index. So, growth from these companies that we are investing in. And from these underlying companies that we've identified and invested into, we’re able to draw out several themes from that. So things like automation, smart initiatives, structural reform opportunities and technological and pharmaceutical innovation, would be some attractive areas that we’ve seen that are finding and have found companies that we invest in. These opportunities combined with attractive valuations for Japanese equities certainly give us a reason to consider an allocation.
And then finally, on to a brief outlook. Essentially, the medium term outlook is relatively hazy. We're seeing a fresh wave of coronavirus cases throughout the world. And this could certainly stifle the start of a recovery. We have seen some promise in terms of vaccines and definitely things like the timeline and the success of these treatments are still pretty unclear. And then we add on to that the uncertainty and the tensions a break between Washington and Beijing - finalising in the context of the US presidential election in early November. Certainly there are challenges, but we do believe that the solid fundamentals of the companies that we invest in to, combined with management agility should allow the recovery of these companies to occur faster than the broader market. And we may remain absolutely committed to our bottom up investment approach. And we have an emphasis, as we've discussed, on good quality companies at attractive valuations while actively engaging with their management to ensure robust levels of corporate governance and high standards of sustainability. Our holdings retain healthy balance sheets and generate strong cash flow. And it's you know - the management experience and the knowledge that we have of our company management who've been able to successfully navigate previous crises that give us more confidence in the valuable addition they can add to the portfolios. Thank you very much for your time today. And look forward to speaking with you again soon.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.