Japan is one of those countries where contingency planning is a fact of life. Whether it’s to allow for wholly unpredictable shocks such as earthquakes or to prepare for the more cyclical and foreseeable natural or economic events, a tendency of both households and corporations to combine high savings rates with a conservative outlook can pay off during periods of market stress.
The systemic shock of the Covid-19 pandemic is certainly one of those periods, and this preparedness indicates that Japan is probably better placed to outperform than some other equity markets. Indeed, Japanese companies have traditionally relied on cash-rich balance sheets to carry them through difficult times, after having weathered a long period of post-bubble low economic growth as well as the more acute disruption caused by natural disasters. Indeed, many of these companies offer an attractive combination of innovation, sound governance and balance sheet resilience.
While there are question marks over the trajectory of economic growth and corporate earnings, there is now a clear preference among investors for companies that offer high sustainable growth, resilient business models and strong balance sheets. It may be too early to determine the impact of this pandemic on fundamental long-term structural trends that have emerged over the years, but quality companies with game-changing technologies and growing businesses should continue to reign.
Who is thriving during this crisis?
From cutting edge factory automation, medical equipment, online medical services, and specialised e-commerce companies that can benefit from the 'stay at home' economy, to consumer staples sectors such as Asia`s leading producers of personal hygiene and baby care products, many stocks in the portfolio are thriving. Investors are likely to be attracted by their sometimes unique strengths in a challenging business environment.
Keyence
The pandemic has given impetus for greater automation in many industries, as a post lockdown world could require companies to reduce human contact. Keyence is a global leader in factory automation and also carries substantial cash on its balance sheet. Specialising in products such as sensors and measuring instruments used in the automation of assembly lines, their expertise in providing customised solutions allows them to sustain high profit margins. Despite its conservative management style, Keyence employs a data-driven culture that allows the company to navigate through even the most challenging situations. With demand for factory automation likely to pick up, evidence suggests the company will take this opportunity to strengthen its capabilities and grow its business worldwide.
NIDEC – World’s largest precision motor manufacturer
Demand for NIDEC’s energy-efficient motors is expected to accelerate amid rising demand for robotics, energy-efficient appliances, data centres and electric vehicles. In the near term, given its production and customer base in China and disruption to global automobile production, NIDEC was initially hit hard by the Covid-19 outbreak. Charismatic founder and chairman, Shigenobu Nagamori views this pandemic as an opportunity to drive innovation by emphasising capital investment in growth areas such as 5G and traction motors for electric vehicles. He is also reviewing cost structures to raise the firm’s profitability. In general, Japanese founders such as Nagamori-san have been shown to exhibit strong leadership in the face of such crises, driving their companies to adapt to sudden changes. With an aligned interest with their shareholders, they are able to implement a decisive top-down management style, which in this environment is seen to be more effective than a more consensus-driven style of management. Studies show that in times of adversity, `owner-managed` companies in Japan have tended to outperform.
Sysmex – Haematology (blood testing)
Sysmex is a global leader in haematology (blood testing), which includes measuring and analysing the number, type and size of red, white and other blood cells, which can be used to check for infections and other diseases. With over 80 per cent of their revenues generated outside Japan, their clinical testing equipment is used extensively by clinical labs, hospitals and health systems in over 190 countries.
Initiatives targeting coronavirus: Sysmex have developed a new method to diagnose Covid-19, with a small immunoassay device that can diagnose coronavirus infections with high sensitivity within 20 minutes. This can be easily installed in smaller medical facilities, and would be a less costly method compared to PCR (Polymerase Chain Reaction), which requires several hours and substantially more expensive equipment.
M3 – Online medical platform
M3 runs online medical platforms that provide clinically useful content to over 6 million medical & healthcare professionals in Japan, the US, China, the UK, and other countries. Access to the portal site surged as medical professionals have begun to rely even more on this online platform, which has become a key part of the medical infrastructure during this pandemic. The pandemic has also accelerated the shift to digital platforms for pharmaceutical marketing, and M3 is in a strong position with a platform for pharmaceutical companies to deliver product information content to doctors. In China, the portal website designed for healthcare professionals has topped 3 million physician registrations and is expanding steadily.
While M3’s domestic market of Japan has been slow to adopt remote medical services, an era of social distancing means remote medical services are expected to play a pivotal role in healthcare. To protect front-line medical staff, the Japanese government launched an online health consultation service, which is run by a joint venture between M3 and social media company LINE. This service is available through the "LINE" app, which is one of the most widely used social media platforms in Japan with more than 80 million users. M3’s strength is in its network and database of doctors and the company plans to actively expand the number of practitioners who can provide online health consultation services.
Monotaro – e-commerce
Monotaro is a leading B2B e-commerce company specialising in MRO (maintenance, repair and operations) products in Japan, offering more than 18 million items to offices, manufacturers, car maintenance workshops and contractors. A beneficiary of the “stay-at-home” economy as more people have started to work remotely, the company has seen rapid growth in orders from individual retail customers. Its latest results announced in April, indicated a surge in orders from individual customers as a result of Covid-19.
Unicharm – Japan‘s leading producer of face masks and personal hygiene products
Unicharm has seen a surge in demand for products that have rapidly become household essentials, including high-quality face masks and antibacterial wet tissues. Strong demand for their products is likely to continue, and lower fuel prices will also contribute to lower production costs. Since the first case of Covid-19 was confirmed, Unicharm has increased production to meet a flood of orders for their products.
FANUC – Robotics
FANUC is the world’s leading manufacturer of industrial robots and has a strong balance sheet with no debt. FANUC robots are used widely in Amazon’s fulfilment centres. The company has recently developed new AI functions utilising machine learning to enable through equipment instructions. With high operating margins and exposure to Asian countries such as China, Korea and Taiwan, which are likely to merge from the current crisis sooner than the rest of the world. FANUC is looking to provide contactless solutions for COVID-19 such as testing and collecting samples on behalf of medical workers. In practice, this would reduce the risk of infection and the workload on medical personnel in medical facilities.
Shintaro Harada is chief portfolio manager for the Nomura Japan High Conviction Strategy. The views expressed above are his own and should not be taken as investment advice.