What are your current views on the Japanese equity market? What are some of the potential opportunities in the market and what are the risks if any?
The stock market is currently in a difficult environment. The US Federal Reserve is intent on aggressive monetary tightening to fight a persistent inflation. With the Ukraine war seemingly being dragged out, the disruption to energy and commodities supplies that is driving up prices adds on to ‘bad’ inflation that is causing significant pain to emerging economies and cutting into consumers’ purchasing power globally. We are potentially in a period of stagflation, meaning high inflation with low economic growth.
The Japanese economy and companies have already been suffering from the disruption of COVID-19 to the global economy and supply chains since 2021, and is behind most other developed countries in trying to re-open its economy after dealing with the virus. Yet this delay may see Japan being one of the few countries to experience stronger economic growth this year compared to last year, with the economy finally re-opening and a large stimulus package expected to be implemented in 2022. With the weaker yen cushioning the negative impact from higher input costs and disrupted production, and domestic consumption potentially picking up this year, Japanese companies may be able to ride out the short-term downturn.
In the longer-term, Japan has seen structural improvement in corporate governance since Abenomics in 2013, with a strong emphasis on enhancing shareholder rights and returns. The valuation discount accorded by investors to the Japanese stock market relative to its peers should be significantly narrowed going forward.
Japanese companies have always been at the forefront in areas of labour-saving and energy-saving technologies. These include areas like factory automation and power semiconductors. In addition, they are historically strong in developing environmentally-friendly products. These technologies and products will take on more prominence as the world shifts toward the greater use of automation in greying societies and living with COVID-19, as well as greater awareness towards protecting our environment.
What are some of your preferred sectors, as well as the strategy to the consistent outperformance of the fund?
We focus on the longer-term fundamental outlook of companies, including the industry trend and the company’s competitive positioning. When the stock market becomes volatile from short-term factors, it creates opportunities for finding good investments at attractive prices. At other times, we adopt a disciplined approach to investing in companies with good growth at reasonable prices and constant monitoring of the critical factors driving profits of companies to ensure we are on top of the changing environment that may create opportunities or risk.
As LionGlobal Japan Growth Fund is a small-mid cap equities fund, compared to those familiar large-cap names, can you please share some examples of potential opportunities in small-mid cap names?
We think the mid-to-smaller cap companies may have more potential for share price appreciation as the company grows its profits. For ultra-large cap companies, there is less room to grow or the share price has reflected much of the growth.
For example, in the fast-growing Electric Vehicle (EV) market, we focus on companies that can ride on this growth by being suppliers of key components that enable the EV market. Fuji Electric supplies power semiconductors to the Toyota Group and is currently riding on the electrification trend. In a similar fashion, Denso is the Tier One supplier of electrical components to Toyota Motor and rides on the same trend. Both stocks are major holdings in the Fund.
2022 will be another year of changes, especially with the prolonging of Russian/Ukraine conflict resulting in global currencies facing tightening measures. However the apparent weakness of the Japanese Yen seems to suggest it has lost its status as safe haven currency, what is your view on USD/JPY outlook?
The Japanese Yen movement is affected by multiple factors, with different factors having stronger impact at different times. At this time, the rapid tightening of US monetary policy, including both reduction in Federal Reserve bond purchases and interest rate hikes, is sharply contrasting against the Bank of Japan’s continued loose monetary policy, including the yield curve control anchored around zero interest rates. As a result, the yield spread between the two countries’ bonds is widening sharply, causing the Japanese Yen to weaken against the USD.
The future direction of the currency is likely to depend on the changes in the stance of the central banks and the movement of the bond markets. Other factors like trade flows, investment funds flows and risk on/risk off trades may take a back seat for the time being.
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