An update from your Manager - May 2020
In this podcast we are joined by investment manager Hisashi Arakawa as he gives his perspective on today's situation in Japan and explains how this investment company has reacted and is preparing for the future.
Recorded on Tuesday 5th May 2020
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Interviewer: Welcome to the latest in our Aberdeen Standard podcast series where we catch up with our investment trust managers to try and gain some perspective on these complex market conditions. Today we are focusing on the Japanese market with the manager of the Aberdeen Japan Investment Trust, Hisashi Arakawa. Welcome Hisashi. Could we start by looking at the Japanese experience of the virus - how severe has the lockdown been there for example, and are there any early clues as to the economic impact?
Hisashi Arakawa: Yes, the number of COVID-19 cases has been relatively contained in Japan which probably explains why the Japanese market has been relatively resilient compared to elsewhere in the world. But as the number of infection cases was not falling, Japan went into a soft lockdown last month. Now what this means is that people are encouraged to stay at home but they're not legally required to do so. I live in central Tokyo and my personal experience is that streets are relatively quiet except for a few places such as supermarkets and drugstores. But the outlook is highly uncertain as there are mounting concerns of an economic downturn. There are fiscal and monetary stimulus that will help to support global economy. But in my view the more important factor is how quickly infection can be contained and economic activities restored.
Interviewer: Okay, and what stimulus packages have they put in place in Japan? I mean, obviously monetary policy was already very loose.
Hisashi Arakawa: Yes, so the diet has just passed the supplementary budget equivalent to 240 billion US dollars. Now this is the largest ever such budget in history and includes 900 US dollars cash hand out in Japan. Separately the Bank of Japan, they raised its limits to buy government bonds, corporate bonds, and ETF and these are designed to support liquidity in the market.
Interviewer: The real headline grabbing piece of news was the postponement of the Olympics. To what extent will there be a knock on effect from that on the economy and on individual companies?
Hisashi Arakawa: As you say the postponement of the Olympics is not ideal, but its impact is probably milder compared to the full cancellation of such event. Activity such as advertising and hotels were inevitably affected more, but the portfolio's exposure to these sectors is relatively limited.
Interviewer: Okay, are there any notable areas within the portfolio that have proved vulnerable or by contrast particularly resilient? I know that quality and resilience is a particular focus for you, but how does that balance out in the portfolio?
Hisashi Arakawa: I think companies such as resorts and conference room operators within the portfolio are being affected more obviously as people stay at home. Another area is consumption of more discretionary type of goods, such as pianos has been affected more. But, we have actually reduced the trust exposure to these areas, to a more comfortable level earlier on when we saw the infection spread from China to elsewhere in the world. In times of uncertainty like these, companies with a stable cash flow, stronger balance sheet, and better access to liquidity have fared better. As you rightly point out, this is the case for the majority of the holdings in the Trust. We also invest in companies with global operations. They could begin to see recovery in their end demand as governments around the world gradually restart their economies.
Interviewer: Markets have moved a long way. Have you found any opportunity in this environment, maybe where share prices have come down to a level that stocks now look attractive? And if so, in what kind of areas?
Hisashi Arakawa: Yes, the market sell off during the first three months of the year enabled us to initiate six companies, which is higher activity than usual. These are companies with quality businesses we liked, but held off from buying the past due to rich valuations. As the valuation became more attractive, we took the opportunity to initiate these companies. We uses proceeds from lower conviction names that we exited or took profits from other stocks that did well. New stocks include Advanced Media, which is a pioneer in speech recognition software. They help automate the writing of minutes for example. Another one is Nihon M&A Centre, a financial boutique that helps ageing SME owners with succession issues sell their businesses.
Interviewer: Presumably you're in regular contact with the companies in your portfolio. What kind of feedback are you getting from them? Are they confident that they can bounce back after this or do they see a more enduring problem as a result of the outbreak?
Hisashi Arakawa: We’ve been speaking to the holdings individually to check that they have the liquidity and resources to survive this difficult time. Given the uncertainty of the economic impact, not just first order effects of the pandemic but also second or third, we’re in fact encouraged to hear that the companies held at doing what they can. For example, Elecom which is a consumer electronics peripherals company is saying that they've been working hard on switching suppliers to make sure that they don't run out of product. They are also using different modes of transport to get the product shipped. On the demand side they are working on providing the work from home equipment such as web cameras and headphones, and they are seeing a surge in demand. The other day I saw a long queue of workers trying to buy such goods at an electronic store. It's just one example of businesses that trust holdings possess. We also hold other companies that are seeing a rise in demand whether remote work, e-commerce, or the sale of essentials. These include NEC Networks & System Integration and Otsuka Corp that help set up remote work systems in companies. We also hold Sansan which is a cloud based business contact management software provider. Next month they will introduce an online based business card exchange service.
Interviewer: What about Japanese valuations? How do they look relative to their global peers? My sense is that they were -- Japan, the Japanese market looked relatively cheap even going into this crisis.
Hisashi Arakawa: Yes, as you point out the Japanese market is priced at a discount to many other developed markets around the world. But it’s not such a straightforward comparison because it also depends on the types of sectors that comprise these markets. But what I can say is that it’s times like these that present opportunities for bottom up stock pickers like us, because those quality businesses get sold off along with the rest of the market. For example, there are some small and mid cap names that have been sold off indiscriminately and appear more attractive at this point in time.
Interviewer: Okay, and what about on the dividend side? Obviously, in the UK market there’s been a lot of high profile dividend cuts. Are you seeing a similar issue in Japanese markets? I know the board increased the dividend last year. Is that likely to be more difficult to do this year as payouts from investee companies have been cut?
Hisashi Arakawa: Given the uncertainty, there will inevitably be some cut to dividends. However, our holdings certainly have strong balance sheets and business stability that will enable them to pay stable or rising dividends. They've endured similar disruptions in the past. What’s also encouraging is to see positive changes in our invested companies’ attitudes towards capital efficiency. These include Okinawa Cellular Telephone and real estate developer Daibiru that announced their first ever share buyback recently. We view this as a positive outcome of our engagement efforts over a number of years. They've also raised dividends for the financial year just ended.
Interviewer: Okay so part of a wider sort of improvement in governance. What about the trust current position on gearing?
Hisashi Arakawa: Gearing enables us to buy more high conviction stocks, especially when valuations have become more attractive for some names in times like this. At the same time it's not easy to time leverage so it’s been kept between 5% to 15% to cope with market volatility.
Interviewer: Okay, and finally these are clearly unsettling times for investors. Markets have dropped a long way. What would you say to clients to give them comfort?
Hisashi Arakawa: We don't expect a strong rebound in fundamentals in the very near term. But what gives us comfort in these times of uncertainty is that our holdings in the Aberdeen Japan Investment Trust generally have strong balance sheets, sustainable cash flows, good access to liquidity, business flexibility, and tried and tested management team to endure the difficult operating environment. They are also well positioned to recover quickly as economies restart around the world because many of them are world class companies with diversified operations across the world.
Interviewer: Okay, that's great. Thank you Hisashi for those insights today and thank you to our listeners for tuning in. You can find out more about the Trust at www.aberdeenjapan.co.uk and do look out for future episodes, many thanks.
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