Investing in Japan: is it worth buying in the Olympic host country?

It has been a difficult year for Japan. After some initial success in containing the pandemic, the vaccine rollout has lagged and now the capital Tokyo is in a fourth state of emergency, just as the Olympics kick off.

British investors have largely neglected Japanese equities. Data from the Investment Association shows that investors have £25.4 billion in Japanese equity funds, including £1.3 billion in Japanese funds for smaller companies. This equates to just 2.8 percent of all IA member firm equity funds.

While the Olympics may not provide much-needed boost to the economy, the emergence of a new generation of companies presents some attractive opportunities for investors.

The Olympics haven’t given Japan’s economy much-needed boost, but ongoing structural changes make Japan a good opportunity for investors

Unpopular Olympics unlikely to boost economy

The Olympics were widely regarded as an opportunity for Japan to boost its economy: It invested at least $15.4 billion in hosting the event, with an estimated $3 billion additional spent by private companies.

“The first Olympics business opportunities were in the construction and infrastructure sectors. However, the profits from those projects were long ago and were in fact lower than usual due to the rising demand for materials and labour,” said Taeko Setaishi, investment adviser to the Atlantis Japan Growth Fund.

Since then, the pandemic has lowered expectations for the Olympics, with a recent poll showing that more than 80 percent of the population is against the Tokyo Games.

A spate of coronavirus cases has strained the country’s healthcare system, forcing the city into a new state of emergency.

Setaishi notes that this makes it very difficult for companies affiliated with the Olympics to make money, with the most profitable residual revenue probably coming from broadcasters.

That said, there are plenty of reasons for investors to look to Japan to diversify their portfolio.

Potential for income growth

This week, the Nikkei plunged to its lowest level in six months, following a grueling couple of months for the stock market.

While the slow rollout of vaccines has led Japanese companies to follow suit with their global counterparts, some analysts predict the market will look fairly valued compared to other stock markets that are looking increasingly expensive by comparison.

‘A growing realization that the Japanese market is cheap by international standards will not diminish its attractiveness in the short term. We have a long way to go before any aspect of the Japanese market is fully appreciated,” said Paul ffolkes Davis, president of Rising Sun Management, advisor to Nippon Active Value Fund.

Of the 2,000 companies in the Tokyo Price Stock Index (TOPIX), more than half of the components are covered by no more than one sell-side analyst, according to JP Morgan, which can lead to price inefficiencies.

Still, forecasted earnings growth for Japanese companies is healthy: consensus estimates that earnings per share for companies in TOPIX will grow 28.1 percent this year and 11.8 percent in 2022 as exports pick up.

Another reason to consider Japanese equities is the potential for income growth, especially as companies begin to recover from the worst of the pandemic.

“As Japan is one of the most cyclical and open markets – highly dependent on the health of the global economy – we believe it will be a major beneficiary of the global recovery.

“Certainly, the rapid economic recovery seen in China, Japan’s main trading partner, represents a significant tailwind,” said Archie Ciganer, portfolio manager for the T. Rowe Price Japanese Equity Fund.

In addition, the Japanese government’s relentless focus on corporate governance reform could further boost returns.

In the past, companies have built up a reputation for sitting on piles of money and not being shareholder friendly. Since the introduction of a series of measures in 2014 and 2015, there has been a shift towards larger dividend payments and share buybacks.

Jason Tilney, CEO of Tilney, notes that while the Japanese market is not the best performing market at 2.2 percent, “it is still above global stock prices, which are currently yielding 2 percent, and the direction of travel is encouraging.”

PERFORMANCE OF SPECIALIST TRUSTS
Company Name AIC sector NAV (£) Total assets Net assets Discount/Premium (%) 5 year dividend growth (%) Dividend Yield (%) 1 year
Share price total return (%)
3yrs
Share price total return (%)
5 years
Share price total return (%)
10 years
Share price total return (%)
Aberdeen Japan Japan 7.97432 115,881,793 104,689,662 -12.85 28.99 2.16 15.26 25.70 55.32 164.75
Baillie Gifford Japan Japan 10.29496 1113.476.220 971.105.062 -1.31 0.44 29.86 24.48 112.11 418.86
CC Japan Income and Growth Japan 1.56319 251.994,690 210.60.082 -9.96 3.27 21.12 -1.02 43.58
Marry Japan Japan 2.4043 395,784,040 312.263.256 -8.08 0.00 24.44 45.34 125.69 267.97
JPMorgan Japanese Japan 6.73529 123.012.1755 106.7522.064 -7.65 12.74 0.82 17.50 43.96 102.51 298.45
Schroder Japan Growth Japan 2.38049 330,272,197 290.760.255 -13.04 19.63 2.37 24.35 8.95 52.13 159.81
Atlantis Japan Growth Japanese smaller companies 2.7937 116,761,490 116,761,490 -9.80 3.60 19.19 26.26 79.02 221.55
AVI Japan Opportunity Japanese smaller companies 1.12428 168,115.479 148.821.470 2.29 1.13 7.66
Baillie Gifford Shin Nippon Japanese smaller companies 2.34314 794.207.128 733,993.901 1.15 0.00 24.22 23.12 110.64 601.32
JPMorgan Japan Small Cap Growth & Income Japanese smaller companies 5.41004 322,381,314 294,902,861 -6.65 4.34 16.57 31.00 95.40 287.85
Nippon active value Japanese smaller companies 1.2591 129.687.301 129.687.301 -6.68 0.72 9.30 pm
Source: AIC/Morningstar. Data as of July 19

How to invest in Japanese stocks

For investors who already own a global equity fund, you will likely have exposure to Japanese companies. But for savers drawn to opportunities in Japan, there are a number of specialized Japanese funds to add to your portfolio.

There are promising areas of structural growth, particularly in digitization, and investors may want to consider investing in funds targeting smaller, growing companies.

Despite being an advanced industrial economy, many companies in Japan have been slow to digitize and adopt new technologies. However, the pandemic has made Japanese consumers and businesses aware of the benefits of digitalization,” said Eiji Saito, investment manager at JP Morgan Japan Small Cap Growth and Income.

The trust provides exposure to high-growth smaller companies and outperformed the benchmark – S&P Japan SmallCap Net Return Index by 20.7 percentage points in the year to March 31, 2021. quarterly dividend of four percent of the NAV.

Baillie Gifford Japanese Fund, managed by Matthew Brett, tops Bestinvest’s list of rated funds. It invests in a concentrated portfolio of larger, growing companies and its largest stake is in Softbank, which invests in energy, technology and financial companies.

Other holdings include FANUC, which specializes in automation and robotics, and online retailer Rakuten.

Jason Hollands recommends JP Morgan Japanese IT for mutual fund enthusiasts. It invests in companies of all sizes that focus in particular on high-growth sectors such as fintech and robotics. The main holding company is Keyence, which develops automation sensors, barcode readers, laser markers and vision systems.

For investors looking for a passive tracker, there is: Fidelity Index Japan Fund which tracks the MSCI Japan Index for an ongoing charge of 0.1 percent on its P shares. The index consists of 272 companies, including Toyota, Sony, Keyence and Softbank.

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