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Investing in Japan: Is it worth buying into the Olympics host nation?


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

UK investors have largely neglected Japanese equities. Data from the Investment Association reveals investors hold £25.4billion in Japanese equity funds, including £1.3billion in Japanese Smaller Companies funds. This is equivalent to just 2.8 per cent of all equity funds from IA member firms.

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

The Olympics has not provided the well-needed boost to the Japanese economy but ongoing structural changes means Japan could be a good opportunity for investors

The Olympics has not provided the well-needed boost to the Japanese economy but ongoing structural changes means Japan could be a good opportunity for investors

Unpopular Olympics unlikely to boost the economy

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

‘The initial Olympics-related business opportunities were in the construction and infrastructure sectors. However, profits from those projects have long since been booked, and in fact were lower than usual owing to soaring demand for materials and labour,’ says Taeko Setaishi, investment adviser to the Atlantis Japan Growth Fund.

Since then the pandemic has lowered expectations for the Olympics, and a recent poll reveals over 80 per cent of the population oppose the Tokyo games.

A surge in coronavirus cases has put pressure on the country’s healthcare system, forcing the city into another state of emergency.

Setaishi notes this makes it very difficult for companies associated with the Olympics to cash in, with the most profitable remaining revenue probably in 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 dropped to its lowest level in six months, after a bruising few months for the stock market. 

While the slow vaccine rollout has seen Japanese companies trail their global counterparts, some analysts predict the market looks reasonably valued compared to other stock markets which are looking increasingly expensive in comparison.

‘An increasing recognition that, by international standards, the Japanese market is cheap, will not detract from its attraction in the short term. We have a long way to go before any aspect of the Japanese market is fully valued,’ says Paul ffolkes Davis, chairman of Rising Sun Management, adviser to Nippon Active Value Fund.

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

Yet forecast earnings growth for Japanese companies is healthy: consensus estimates project earnings per share for companies in TOPIX to grow by 28.1 per cent this year and 11.8 per cent in 2022 as exports pick up again.

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

‘Given Japan is one of the most cyclical and open markets – highly levered to the health of the global economy – we believe it will be a major beneficiary of the global recovery. 

‘Certainly, the rapid economic recovery evident in China, Japan’s major trading partner, represents a significant tailwind,’ says Archie Ciganer, portfolio manager of the T. Rowe Price Japanese Equity Fund.

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

Companies in the past gained a reputation for sitting on piles of cash and not being shareholder friendly. Since the introduction of a raft measures in 2014 and 2015 there has been a shift towards larger dividend payouts and share buybacks.

Jason Tilney, managing director of Tilney, notes that while the Japanese market is not the highest yielding market at 2.2 per cent ‘this does put it above global equities overall which currently yield 2 per cent and the direction of travel is encouraging.’ 

PERFORMANCE OF SPECIALIST TRUSTS 
Company name AIC sector NAV (£)  Total assets  Net assets  Discount/Premium (%)  5 yr dividend growth (%)  Dividend yield (%)  1 yr 
Share price total return (%) 
3yr 
Share price total return (%) 
5yr
Share price total return (%) 
10yr 
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 & Growth  Japan  1.56319  251,994,690  210,610,082  -9.96    3.27  21.12  -1.02  43.58   
Fidelity 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  21.30       
Source: AIC/Morningstar. Data as of 19 July

How to invest in Japanese equities

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

There are promising areas of structural growth, particularly in digitisation, and investors may want to consider investing in funds focused on smaller, growth companies.

‘Despite being an advanced industrial economy, many businesses in Japan have been slow to digitalise and adopt new technologies. However, the pandemic has awakened Japanese consumers and companies to the benefits of digitalisation,’ says Eiji Saito, investment manager of JP Morgan Japan Small Cap Growth and Income.

The trust provides exposure to fast-growing smaller companies and has outperformed the benchmark – S&P Japan SmallCap Net Return Index – by 20.7 percentage points in the year to 31 March 2021. It has provided a net asset value return of 42.4 per cent while maintaining a quarterly dividend four per cent of NAV.

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

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

Jason Hollands recommends JP Morgan Japanese IT for fans of investment trusts. It invests companies of all sizes which a particularly focus on high growth sectors like fintech and robotics. Its top holding is Keyence, which develops automation sensors, bar code 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 a 0.1 per cent ongoing charge on its P shares. The index is comprised of 272 companies, including Toyota, Sony, Keyence and Softbank.

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