In a year of global uncertainty, investors seeking growth need to look beyond the usual suspects that make up international portfolios, and FSSA Investment Managers believes that carefully selected Japanese companies can provide strong upside for investors.
At the core of our Japan Equities strategy, and one of the things that has driven strong performance in the face of COVID-19, is a strong focus on quality companies with sustainable earnings growth. Japan is home to a number of dominant global franchises in niche industries and provides many opportunities to capture growth. However, the Japan market is characterised by a very low level of analyst coverage. This means it has the capacity to offer up more ‘hidden gems’ than other markets.
The FSSA team has identified a number of thematics that could underpin long-term growth – one of which is digital transformation and factory automation.
Despite being home to iconic electronics brands such as Sony and Nintendo, Japan lags many OECD countries in terms of productivity growth and digitisation.
This lack of technology adoption is a key focus for the newly appointed Japanese Prime Minister, Yoshihide Suga, who is pushing for more digital transformation of both government and business. One of the first items on his agenda is the creation of a “digital agency” to remedy the government’s technology gap. It is expected that this will also create tailwinds for the digitisation of other sectors in Japan.
This lag is apparent, for example, in the adoption of e-commerce and cashless payments, where Japan is well behind the US, UK, China and Korea.
This is creating opportunities for companies such as GMO Payment Gateway, the largest online payment processing company in Japan. There is plenty of room for GMO Payment to grow, as e-commerce penetration in Japan is only 7 per cent of retail sales. With more offline retailers and consumer brand companies launching e-commerce portals, the company is well positioned to capture the market, due to its extensive experience and track record in the payments industry. The emergence of cashless payment transactions could be another growth driver for GMO Payment.
There is also a significant opportunity for Japan to increase its market share of robotics and factory automation, where it is outshone by its neighbour Korea.
Keyence has a unique philosophy, with superior technology, innovative product design and a highly profitable business model. It also has room for overseas expansion, with only around half of its sales made overseas – compared with up to 80 per cent for some competitors. At the same time, it has a high-quality management team, which is a key focus of the FSSA team’s fundamental research.
By investing in quality companies that are supported by structural growth trends and key thematics, investors can gain access to diversification and Asian exposure with strong performance in both up and down markets.
Sophia Li, portfolio manager, FSSA Investment Managers
2020 was the year where long-term digital trends experienced a “Great Acceleration”. One of the most recognised long-term secular trends...