2023 has been a historic year for Japan’s Nikkei 225 and TOPIX 500 indices, reaching their highest levels in more than 33 years. The third-largest stock market in the world has finally taken center stage, far outstripping the gains for the U.S. S&P 500 for the year in local currency terms (as of 11/13/23). Through October 2023 foreign investors have bought a net $22.8 billion in Japanese equities, a stark reversal from total year 2022 when foreigners sold a net $17.1 billion.(Dollar figures at average exchange rates.)
Yet for every optimistic investor flooding into Japan is an equally skeptical one, pointing to the era of “Abenomics”. Prime minister Shinzo Abe stood in front of the cameras in 2014, touting his ability to shake up the staid operations of Japanese companies. It was a tall order after years of economic malaise (following the 1980s bubble burst), as companies chaffed against employee raises or shareholder dividends. It wasn’t the sea change Abe predicted, with an economy that has barely grown in the past decade. But times are changing… and two reasons are at the core: 1) inflation and 2) corporate governance revamp.
As a value manager, Polaris looks for undervalued but fundamentally strong companies that are cornerstones within their respective industries. Japan has a wealth of technology and frontrunner firms that are among the best in the business; yet, the feeding frenzy in Japan has caused many stock multiples to re-rate. In other words, it might look expensive to invest in Japan right now unless you know where to look.
We watched Japanese trading houses for several years, subsequently investing in Marubeni and Itochu. In June 2023, Warren Buffet announced he will boost his ownership in trading companies up to 9.9%. The valuation of trading companies is much lower than the Japan market in general. Broadly diversified trading companies are exposed to 35% or more of the domestic economy, with the balance around the world and often tied to trade with the Japanese economy.
Digital transformation (DX) is another interesting space, as Japan has been comparatively slow to digitize its products/services/offerings or technology migration at the corporate level; we believe that IT consulting, implementation and hardware/software focused on this space has potential.
Another investment angle might include the spin-offs or remaining corporate entities following restructuring efforts, similar to what we have seen with Hitachi and Sony. In 2020 alone, Hitachi Capital was bought by Mitsubishi UFJ Lease, while Hitachi Metals and Hitachi Construction Machinery were projected to be spun-off. Finding good restructuring stories may be an opportunity for value investors to make money in Japan over time.
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