Whilst tech stocks have been among some of the biggest growth engines for the S&P 500 and are trading at high valuations, in Japan there is currently a tech downturn that has created a perfect entry point for investors, according to Fidelity International’s Nicholas Price (pictured). 
Price, manager of the Fidelity Japan Trust, said that if the pattern of previous down cycles is repeated, the technology sector is likely to bottom-out in the third or fourth quarter of the year having peaked in 2018.
“We’re already past the time where it’s now down past zero [returns and] into the negative, that’s where you often get the biggest performance [rally] in the stocks,” Price said.
“So, adding [tech] names has been the biggest sort of thematic change this year in the portfolio.”
Source: Fidelity International
One key element of this sector downturn, according to Price, is that – as can be seen from the graph above – it coincides with the start of the US-China trade war.
“There’s a temptation to think that those things are totally related, but they actually have a difference in a supply & demand cycles,” he said.
“So I think that, despite the macro and the uncertainty, you do get positivity. You can get down cycles going to up cycles, I think that’s probably the opportunity.”
Whilst the fund manager acknowledges that while the trade war is causing headwinds in some ways – largely with the supply and manufacturing route – it is not an obstacle for the tech sector’s rebound.
Source: Fidelity International
Price said that the 5G network is one area that should take off as the tech upswing begins and should be a more broad-based theme than simply a Japanese domestic market trend.
He explained: “Generally speaking about 5G, you get about 60 per cent increase in content, so most people will prefer [to buy] a new phone.
“So, you will start to lift up the demand cycle, I think, coming probably from the spring of 2020.
“I think we’ll see a quite a big sort of transition next year. And there’s some good beneficiaries in Japan.”
The Fidelity Japan Trust manager said one example of a beneficiary is Murata Japan – an electronics manufacturer that makes semiconductors for mobile phones – which will be “geared to certain extent to and into the next 5G cycle”.
Taking advantage of this trend and invest in companies at the trough of their cycle, Price said he has increased his positions in oversold semiconductor-related companies and component makers.
“When stocks start working, I tend to be naturally trimming them and then recycle them into new ideas, and I kind of do that consistently,” he explained. “If names start doing very well, and those names work next year, then I’ll be starting to you know, look for new ideas. So that’s an ongoing process.”
As such, he is focusing on companies that are “likely to be re-rated as internal change leads to a period of renewed growth”.
One example of a holding exhibiting the “steady, consistent growth” that he looks for is medical devices and digital technology specialist Olympus, the largest holding in the trust at 5.90 per cent.
Olympus and Yamaha stock performance over the past year
Source: Google Finance
Another top-10 holding and one of Price’s “consistent growers” is Yamaha Corporation at 4.90 per cent; the world’s largest manufacturer of pianos and other musical instruments.
“They get very impressive management focused on operating margin improvement and also have some interesting new products such as acoustic guitars, and Christie pianos,” the trust manager said.
“I have a mix of both. Some tech stocks, which are absolutely cyclical, have a lot of individual ideas from different sectors. Olympus is obviously medical, and Yamaha is more consumer products.”
Although largely positive about the future of Japanese markets, Price said he has of two primary concerns.
The first concern is the currency, as a strengthening yen could impact company earnings. The other concern that Price has is recent increase in VAT could potentially slow down the Japanese economy.
Nevertheless, he continues to find interesting opportunities in a market that is not as well-covered as other developed markets.
“There’s an opportunity to being on the ground to look for new ideas, to turn over the stones and to find some interesting ideas,” the trust manager concluded.
Price has been manager of the trust since January 2015 targeting long-term capital growth through bottom-up stock selection.
Performance of fund vs sector & benchmark under Price
Source: FE Analytics
The £266.8m Fidelity Japan Trust had returns of 119.44 per cent under Price, outperforming both the TOPIX benchmark (76.57 per cent) and the average IT Japan peer, which was up 81.69 per cent.
The trust is currently trading at a discount to net asset value (NAV) of 9.9 per cent, is 14 per cent geared, has ongoing charges of 1.06 per cent, according to data from the Association of Investment Companies (AIC).