Wee Ban Yew is a Portfolio Manager, Head of Japanese Equities and Lead Country Specialist for Japan at Lion Global Investors. He has 27 years of financial industry experience of which 23 years were spent covering Japanese equities.
Dawn Leong: Hello, everyone. Welcome to Let’s Talk Trends. I am Dawn, Content and Communications Lead of Lion Global Investors. Thank you so much for being with us here today. Joining us on this episode is Wee Ban Yew, our Head of Japan equities here at Lion Global Investors. He has over 20 years of experience in the fund management industry, managing Japanese equities. Recently, our LionGlobal Japan fund just won the best fund over ten years by the Refinitiv Lipper Fund Awards, Taiwan 2023.
Through the years, the fund has won numerous awards* for its outstanding performance. So I am really glad to have him on the show today to discuss his valuable insights on the Japan market. Welcome Ban Yew.
Wee Ban Yew: Thanks, Dawn for having me here. It is great to be here.
Dawn Leong: Let us kick it off with the most recent news that just came over the wire. Earlier this month, Warren Buffett has grabbed headlines by stating that the Berkshire Hathaway has increased its stake in Japan’s five major trading houses and potentially other Japanese companies, too. That has caused quite a stir in the market. What is your take on that?
Wee Ban Yew: I believe, when he started investing in Japan, it was in the middle of 2020, and I believe that when he invested in the trading houses, it was because he was bullish on commodities and resources. The trading houses have large investments in resources, as such energy, oil and gas, copper, and the steel trading commodities – they have indeed done well. So currently, the most recent news is he has added on to these positions and he was recently interviewed in Japan, and he has talked about potentially other stocks. He may have changed his view on Japan, we will have to wait and see.
Dawn Leong: There has been a return of value investing globally since late 2020, which coincides with Warren Buffet’s initial investment in Japan. This phenomenon is more evident now, on the back of rising inflation and the current high interest rate environment. This is interesting to me because Japan is very talked-about market regarding value stocks. We have high quality companies that are cash rich but are always trading below their intrinsic value. So, putting all that together, how do you think about the Japan market now against the current macroeconomic backdrop?
Wee Ban Yew: The rotation between value and growth cycles mean that certain stocks will outperform at certain times. For value stocks, the main period where they outperform is when they are coming out from an economic downturn. Yes, earnings are growing tremendously from a very low base, so these stocks typically outperform. But in general, because of the very low interest rate environment in the last 10 to 12 years, growth stocks have outperformed. During the pandemic, we had the lockdown of the real economy, with a simultaneous booming online economy. Therefore, there was a huge outperformance in related growth stocks. But thereafter as we return to normality, there has been a reversal and value stocks have come back. In particular, from 2020 onwards, we have inflation coming back as well and huge rise in interest rates, especially in the U.S. Banks have been the biggest beneficiaries. That said, there is currently another positive catalyst in Japan. Recently, the Tokyo Stock Exchange has requested companies whose price to book falls below 1 to explain and come up with a plan to improve their corporate value with a view to their cost of capital. In Japan, this has a particular significant context because in Japan, a lot of companies have many businesses. If as a whole they are profitable, the companies do not really do much about the non-performing parts. Another aspect of Japan is that there used to have a lot of cross holdings between companies in order to cement the relationship between companies. A lot of these cross holdings were not unwound throughout these years. That is why now, the stock exchange is saying no with a view to the cost of capital. Why? Because the cross holdings and these non-performing businesses hold up a lot of capital of your assets and not giving you a good return. While companies now are more aware about cost of capital, about governance, and about shareholder’s returns, there are some companies that are not fully committed. Therefore, this is like a mandate, prompter and/or catalyst for the companies to take action.
Dawn Leong: This is definitely a big positive catalyst as I believe in the past, investors have had some concerns regarding corporate governance. These corporate reforms are definitely stirring a lot of investors’ interest.
I wanted to talk a little about inflation. Japan has been in a persistent deflationary environment for a long period. We are indeed seeing a change now, especially with Japan’s inflation hitting a 41 year high in January 2023. On the back of that, do we think that the inflation is finally taking hold in Japan or do we think it is purely transitory? How does this impact the Japanese stock market if a reflationary rally takes shape?
Wee Ban Yew: Inflation has many aspects to it. Japan is one of the countries where inflation came back fairly late relative to other countries. One of the reasons is the government was subsidizing oil and grain. Therefore, the prices in Japan did not rise as fast. But by doing so, they are running huge trading account deficits. The central bank kept interest rates low and kept their QE (Quantitative Easing) while everyone else was hiking interest rates. That meant that the currency was weakening sharply. Therefore, this causes an even bigger deficit. Therefore, we have a bigger deficit and a declining currency right now, with the cost of imports becoming more expensive. Therefore, Japan is now facing a belated inflation push.
The other push of inflation in Japan is basically wages, due to a shortage of manpower. As we all know, the demographics in Japan are poor. The population and its workforce is declining. As the economy reopens and economic activity returns, we are seeing a shortage of labor. Even if the companies are feeling the pinch, they will still need to hike wages to keep their workers. These two aspects of inflation are coming back to Japan and as we can see now, it could be possibly sustainable in the short term.Consumers and corporates would have to prepare for more inflation going forward. Therefore, they may need to spend now rather than later. In the past, it has always been said that deflation is one of the causes of Japan, as both consumers and companies are saving more than spending as they believe that things may get cheaper one year down the road. This phenomenon may not happen going forward. In that regard, it may encourage the consumers to spend more, especially if wages are rising.
Dawn Leong: Well, this sounds positive for the Japanese stock market as you mentioned, taking into the macro conditions and country specific factors. Where do you think are the key opportunities in the Japanese stock market right now? What are some of the key sectors or companies that are on your radar?
Wee Ban Yew: As we mentioned, value could be something that you can look at. But you have to be careful when you are investing in value stocks because a company could be a value stock or cheap in valuations because the business is not doing well.
Dawn Leong: Cheap for a reason.
Wee Ban Yew: Yes, the industry could be in a structural decline. While it may be cheap, it could get cheaper. You do not want to be caught in the value trap. For us, we would rather look into companies that can generate growth in the longer-term. So, in general, for companies in Japan and even around the world, these are companies in technology, and automation. Automation and healthcare will always be needed, especially if you look at the declining demographics. Particularly, there are a lot of resources being put into pharmaceuticals. Consumer is coming back as well, especially inbound tourists, with the recovery of the economy. Before the pandemic, Japan had a plan to increase the tourist numbers to record levels, year after year. I think the plan will come back into play. Indeed, they have approved an integrated resort in Osaka. Furthermore, there could be a second one coming to attract the tourist dollar in the medium to long term.
Dawn Leong: What are some of the key risks and/or wild cards that in the medium to long term for Japan?
Wee Ban Yew: In Japan currently, on a macro basis and global basis, high interest rates are a risk. Two regional banks in US have gone bankrupt and you have seen Credit Suisse being taken over by UBS. A large part of it is due to the difficult environment, high interest rates and slowing economy. These are the same factors that will affect Japan as well. For Japan itself, another additional risk will be the stronger yen. Which is why we talk about the Bank of Japan (BOJ) potentially unwinding the ultra easy monetary policies.
However, the government has to bear in mind, if they allow bond yields to rise in Japan, one of the effects would be that the currency will strengthen. The biggest Japanese companies are exporters. They earn the export dollar, which means that a stronger yen will affect earnings. So, what it will mean is your earnings would decline in Japan and the stock market generally does not like earnings declines. So, that is one of the key risks.
Dawn Leong: Right, so just out of interest, as you mentioned, about the ultra easy monetary policy, there is a lot of talk in the markets that Japan may change the yield curve control or abandon the yield curve control, as you said. So, do you think that would actually happen in the short term especially with the new government? And how do we feel that it may affect the Japanese market in the year ahead?
Wee Ban Yew: The yield curve control and the negative interest rate policy were part of the previous Bank of Japan governor’s measures. This was to help anchor rates at very low levels to help the economy. So, now that the inflation has come back, wages have come back, and the rest of the world has seen rates rise. It is actually a good time to unwind, as the effect of raising rates will not be so clear or significant. Because when everywhere else the rates are high, it means that when Japan lifts its rates, Yen may strengthen, but not to a very large extent. One of the only issues would be credit cost rising.
When your interest rates start to rise, then certain companies may feel the pinch if they are overleveraged. While there are pros and cons, I feel that in general it might be a good time to lift these measures. The new Bank of Japan governor will have his first meeting this Friday (28th April 2023) as governor, and we will see what he says during the meeting and whether he takes any action.
*Please refer to our website for the full list of awards
Footnote: All data are sourced from Bloomberg and Lion Global Investors as at 25 April 2023 unless otherwise stated.
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