Multi-Manager

On the road: Japan trip

We recently spent a week in Japan – one of the regular research trips we do each year
September 2018

Risk Disclaimer 

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

 

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

We recently spent a week in Japan – one of the regular research trips we do each year to get real on-the-ground insights into what’s going on in the economies and markets where we invest.

Value matters?

We met with a broad spectrum of fund managers and it was those with a value bias that offered a particularly interesting perspective this time round. Japanese value managers, in common with their value peers globally, have had a tough time relative to growth focused strategies over the past couple of years. Interestingly, everyone we met with felt that the growth (momentum) vs value conundrum in the market appears stretched but all are reluctant to call the peak in this trend. To us it is clear that there is a good relative opportunity building within the market and that fundamentally, most companies are in rude health. The exception is that there is some evidence suggesting that certain businesses are starting to be affected by the clouds surrounding US and global trade. As a result, some are beginning to delay spending on capital expenditure and are seeing some demand slow down, although this is very stock and industry specific. There is a decent chance that if we see a thawing in trade tensions Japanese value stocks would likely stage a sharp recovery. In the interim however, investors will likely continue to prefer the perceived relative safe haven of defensive and quality stocks – almost regardless of valuation.

 

Perspectives on the labour market

We heard some interesting comments suggesting that the continued tightness in the labour market is forcing company management to change their behaviour – whether through M&A, accelerating technology spend to improve productivity or looking more globally in their recruitment efforts. We heard from Ken Maeda of Schroders and the team at Four Seasons that company management teams are actively trying to improve productivity in the face of a continued labour shortage.

Having met with a labour outsourcing company later in the week, it seems that there is definite tightness in the labour market with a job to applicant ratio of 1:1 for some large cap companies, compared to medium and small cap companies who are seeing a ratio of 6:1. The historic attraction for graduates to want the safety of working for one of the Japanese behemoth firms still looks as though it is alive and well. For managers of smaller companies this means they have to look at alternative ways of improving productivity within their business.

 

Risk Disclaimer 

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

 

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

The historic attraction for graduates to want the safety of working for one of the Japanese behemoth firms still looks as though it is alive and well.
Dividend culture becoming entrenched

One of the key takeaways from our trip was hearing that there is continued pressure from Japanese institutional investors and the Government Pension Investment Fund (GPIF) for companies to increase their pay-out ratio. It is still (on average) lingering at the 30% level (excluding buy backs). However, the gross pay-out ratio level (including buy backs) is high by Japanese standards and this includes a certain amount of cyclicality, with markets and earnings being high. If we see a setback in global growth and heightened volatility in markets, this could slip in the short term although investors in Japan believe that the trend is entrenched. With so many companies in Japan with large amounts of cash on their balance sheets, the ability to return more cash to shareholders is certainly there and the will of companies is slowly improving. We should remember that this is Japan however, and the conservative culture is deeply entrenched as is the lack of will to change too dramatically lest they make a mistake!

 

One of the key takeaways from our trip was hearing that there is continued pressure from Japanese institutional investors and the Government Pension Investment Fund (GPIF) for companies to increase their pay-out ratio.
Destination Japan

One of the trends we have seen over the past 5 years or so is the increase in inbound tourism to Japan, particularly from other Asian countries. According to asset manager Comgest, there are now more Asian visitors annually to Tokyo than there are residents in the city. Anecdotally, I can well believe this if the queues at the duty-free shops in Haneda airport are anything to go by. People were queuing out of the shops to take food, drink and souvenirs back home. I myself was looking forward to treating myself to a bottle of Japanese
whiskey only to find that all three duty-free shops had sold out of every bottle! Perhaps I’ll have more luck at our
next visit…