Optimism about an imminent end to the coronavirus lockdowns and the announcement of substantial financial support packages has boosted value stocks worldwide, and Japan has been no exception. But in the land of the rising sun, the value rally already seems to have run out of steam. Richard Kaye, manager of the Comgest Growth Japan fund, knows why.
‘In Japan, you depend on two sectors for a serious value rally. These are banks and cars, but both of these sectors have structural problems. This makes them unattractive for large institutional investors, which are by far the most important players in the Japanese equity market,’ says Kaye.
The problems of Japanese banks are well-known, but Kaye also sees little prospect in car companies that have to deal with the risky transition to electric cars. ‘We would rather invest in suppliers, such as Nidec, the global market leader in batteries for electric cars. They have a big technological lead, and we expect most car companies to be dependent on their technology for at least the next 20 years.’
No inflation
In addition, Japan is likely to be just about the last country where inflation will ever pick up, a necessary ingredient for any long-term value rally. Investors have now also realised that a rise in global yield curves does not mean that inflation will rise structurally in Japan too. That’s why value stocks have been falling again in recent weeks, according to Kaye, who has noticed a pattern of short-lived value rallies in Japan, which occur once every few years. ‘On average, they last three or four weeks, after which prices fall again,’ he says.
Kaye therefore prefers to focus on growth companies ‘that are characterised by the fact that they are profiting from Japan’s ageing population, Asia’s growth or are [world] leaders in specific online, fintech or biotech submarkets.’
Softbank
Despite his decidedly negative outlook on the banking sector, Kaye does invest in it. With a 4.1% allocation, Softbank is also the second-largest position in his fund. But Softbank, of course, is not really a bank anymore, but primarily an investment fund. The company has been in the news in recent years mainly because of its large stakes in firms such as WeWork and Uber, and that did not always go well. In 2019, for example, the company had to write off billions on its investment in WeWork because it hadn’t realised that CEO Adam Neumann was making a mess of it. Last month, Softbank was again in the news because of the impending bankruptcy of Australian bank Greensill. https://www.cnbc.com/2021/03/08/greensill-capital-has-reportedly-filed-… This seems to indicate that top executive Masayoshi Son has learned little from the WeWork affair.
Nevertheless, Kaye retains faith in the company, as do many other investors. Softbank’s share price has more than doubled in the past year and reached an all-time high in early February (just before the Greensill affair broke). ‘Softbank is one of the most misunderstood stocks,’ asserts Kaye. ‘They invest not only in Uber and WeWork but in dozens of companies, and have built up an excellent track record over the years. They are particularly strong in identifying promising internet companies early on and in driving their development and growth. I’m sure Softbank will make mistakes again, but as long as the majority of its investments are successful, we don’t see a problem.’
Despite the fund’s name, Comgest Growth Japan does not only invest in outright growth companies. In fact, it has started investing more in so-called reopening trades in the past year. ‘This is not necessarily based on that idea specifically, but because the long-term profit outlook and predictability of these companies are positive.’ The two most striking examples are Japan Airport Terminal, which runs Tokyo’s two major airports, and Oriental Land, which runs Disneyland Tokyo. ‘In total, we now have six companies in our portfolio that are considered value companies by MSCI.’
Robeco parent Orix is among these. ‘Their main business is consulting, leasing and lending to SMEs. SMEs make up 80% of the Japanese economy, but there is little competition in the area of services to these companies,’ says Kaye. Moreover, it is mainly SMEs that will benefit from the historic economic support package recently announced by new Prime Minister Suga. ‘The support package consists mainly of tax subsidies to stimulate investments on the one hand, and financial support for the travel and hospitality sectors on the other. Again, these are mainly SMEs.’
Factbox
Comgest Growth Japan EUR I ACC
IE00BZ0RSN48
Ytd: -3.17% (Topix NR: 6.12%)
-1yr: 44.53% (29.23%, annualised)
-3yr: 14.19 (6.76%, annualised)
-5yr: 15.87 (9.48%, annualised)
Ervaring: Richard Kaye heeft 27 years of industry experience, 11 of which are with Comgest. He also worked for the Industrial Bank of Japan, Merrill Lynch and Wellington.
AuM Japan: EUR 5.0 billion (per 31-12-2020)
AuM Comgest: EUR 38.8 billion (per 31-12-2020)