Japan’s re-opening has already begun and the market is set for a series of blockbuster earnings over the next few quarters, according to FE Alpha Manager Richard Kaye.
Much like the UK stock market, which rallied as the economy re-opened and cash started flowing into businesses again, Japan could be on track to experience a similar phenomenon with a two-quarter delay.
At the end of September, Japan announced the end of its nationwide coronavirus emergency and lifted all restrictions. Before that, Japan’s vaccination rate lagged most of the other developed nations.
This has been somewhat reflected in the country’s stock market, which has lagged the other major regions year-to-date.
Performance of MSCI Japan v other major regions ytd
Source: FE Analytics
Kaye, who manages the £3.4bn Comgest Growth Japan fund, attributed the relative underperformance of Japan to other major regions to the lack of the re-opening benefit.
“That story ended roughly in the summer when Japan's vaccination rates started to accelerate,” he said.
As such, he expects the upcoming quarter in Japan will be “a monster quarter” for companies’ earnings.
“Physical traffic on the high street and the re-opening of restaurants, events and travel has started up again. What you experienced in the UK earlier this year, we're getting in Japan with a two-quarter lag.”
As such, he has positioned his fund to “disproportionately” benefit to the reopening.
He said: “We have a number of stocks that are directly geared to the story – Japan's largest stamp sushi restaurants, Japan's airport operator, Tokyo Disneyland and a number of other stores and operators that depend on physical traffic.”
However, many investors may still be about to miss out. Following the 1980s bull market burst, Japanese equities fell 82% over a span of 20 years and Kaye said investors have largely forgotten about the region as a whole, and favoured the growth of China and the rest of Asia instead.
But he argued that Japan is actually “the platform for investing in Asia”.
“The growth of Asia's economy, the growth of Asia’s consumer, Asia’s industry is supplied by Japan,” he said.
“It's Japanese consumer brands that Asian consumers increasingly are looking for, its Japanese technology that's powering a lot of the innovation of Asian industry.
“We’re called the Japan fund, maybe we should be called an Asia fund because a lot of our growth comes from Asia.”
Kaye also said the Japanese economy and the Japanese equity market are not as related to each other as most investors would perceive – meaning they don’t have the same baggage.
He said: “The GDP stories of Japan, the ageing society of Japan, even the political issues, don't really affect what Japanese companies if they are exposed outside of their own country.”
Investors who avoid Japan because they have negative perceptions over the country’s demographics or its sovereign debt situation, are ignoring the hidden opportunities that can lurk in Japanese markets, he added.
He contrasted this to the US equity market where investors don’t pay as much attention to the country’s GDP or demographic situation.
In Japan, investors are more actively concerned about these matters and can be discouraged by its poor demographics or GDP. However, he said this presents a "big opportunity" for investing in Japanese companies.
To add to this, Kaye said the Japanese stock market index captures “a lot of dinosaur industries”.
“The Japanese index has a large weighting in banks, which probably in a generation won't even exist as companies,” he said.
Mitsubishi UFJ Financial Group makes up one of the top-10 constituents of the MSCI Japan index. The largest constituent is car manufacturer Toyota Motor Corp.
Kaye continued: “It has a large weighting in automobile companies which have never covered their cost of capital. It has heavy machinery companies, real estate companies, shipping companies – which other advanced economies don't even have any more.
“Japan still has those and they are still big index weights.” This is why he believes the index is the “wrong thing to look at” when investing in Japan.
The Comgest Growth Japan fund has delivered a top-quartile total return of 71.7% over the past five years, compared to 37.8% from the average IA Japan peer and 29.7% from the TSE TOPIX index benchmark.
Performance of fund versus sector & benchmark over 5yrs
Source: FE Analytics
Richard Kaye manages the fund alongside FE Alpha Managers Chantana Ward and Makoto Egami.
It has an OCF of 0.9%.