The country's companies aren't growing fast, but it's becoming a visual automation global leader
You don’t hear much about Japan in the investing world, but it’s time to look at again as there are gems to be had there if you pick well, according to one asset manager.
“Japan is, I think, a market that fits very well with active management. It’s not an easy market for a general investor to invest in an index fund, for example, because it’s not an economy that’s growing fast,” David Souccar, a portfolio manager and senior research analyst with Vontobel Quality Growth Boutique in Vontobel Holding AG told Wealth Professional.
Souccar said Japan’s economy is not growing fast because its population is aging, its economy is rather closed, and its corporations are behind in digitalization. Its governance is also not as shareholder-friendly as in North America or Europe, and the impact of activist shareholders is also limited because of Japan’s corporate bylaws.
“But the trend is going in the right direction,” he said. “It’s going rather slowly, but there have been improvements in the corporate governance regulations and companies are investing more in digitalization. There is also a degree of innovation in the domestic economy.”
Souccar said traditional Japanese corporations, such as Toyota or the auto suppliers, are not necessarily the best companies to invest in because they don’t grow very fast and don’t have high margins. He also wouldn’t recommend the banking system since its interest rates are low and it’s not the most efficient, so it’s hard to make money investing in Japan’s banks.
But, he said, the returns are there if you know what you’re doing and how to pick your spots.
“There are some unique opportunities,” said Souccar, noting that Vontobel, which has about $40 billion in assets under management, has identified four companies that fit its strategy of investing in great businesses and holding them for the long-run.
One is Keyence, a global leader in visual automation, which can be applied in many industries and whose uses are growing fast. Its technology is being used in beverage manufacturing plants to check label placement and in warehouses to identify if there’s enough product on the shelf to fulfill online orders. The company also hasn’t penetrated North America much, so has room to grow and also has its own sales force to grow it.
Vontobel also likes Hoya Corporation, which makes the special plastic technology used in developing semiconductors. It’s a global leader and also growing fast.
On the domestic side, Vontobel has identified Kobe Bussan as a market leader in low-cost supermarkets. It can overcome existing import restrictions to offer products at the lowest price in the market. So, it has a growing number of stores since the aging population, which includes a large number of price-sensitive retirees, supports it.
Finally, Vontobel likes OBIC, a mid-size market leader for corporate software systems that help with enterprise resource planning.
Souccar said Japan is still trying to recover from losing the innovative edge that it displayed in the 1970s and 1980s when a Sony Walkman was the brand of choice.
“That innovation that we saw then kind of faded away, and I think Japan kind of missed the boat in terms of the software revolution,” he said, noting it was good in manufacturing, but less in software evolution.
But, the country is aware of that and trying to change the picture. The government is making a big push to invest in the semiconductor supply chain, with some companies already beginning to pull ahead
Given Japan’s close relationship to the United States and proximity to China, however, there are risks as they sort out the tensions. One may play to its benefit since China also has a tense relationship with Taiwan and one of the Taiwan semiconductor businesses now is opening a subsidiary manufacturing plan in Japan.
Japan also has a highly educated, sophisticated, and hard-working labour force, which is attractive to companies.
“I’ve been working in Japan for the last decade,” said Souccar, “and personally, I see an improvement when I speak with the Japanese corporations. When I started, they didn’t even want to talk to me. Now, they want to have a dialogue. So, things are improving.”
He said Vontobel has gone from very little exposure to a large exposure in Japan in the past five years.
“It’s worth starting to pay attention to Japan,” he said. “But you need to do your homework and pick your spots.”