While global markets have experienced a sharp rise in volatility due to banking sector concerns, Nicholas Price, portfolio manager of Fidelity Japan Trust PLC (LON:FJV), believes most Japanese companies are unlikely to see a significant direct impact. With these developments likely to slow the pace of US rate hikes and a recovery in the Chinese economy well underway, he discusses the stocks and sectors in Japan that he expects to attract and reward investors over the coming months.
The recent failure of Silicon Valley Bank (SVB) and Signature Bank and the subsequent spread of turmoil in the banking system from the US to Europe has created huge uncertainty in financial markets. Although Japanese stocks, centred on financials, have not been immune to the related sell-off and compression in valuations, we do not expect any major direct impact on Japanese companies.
At the portfolio level, there is no direct exposure to SVB (neither listed nor unlisted). In terms of the pre-IPO market, there is no explicit impact in Japan due to the domestic venture capital funded nature of the market, and there is still plenty of cash in the sector. As to secondary effects, we believe it is reasonable to think that there could be some impact on pricing and valuations.
Meanwhile, concerns about a recession in the US are diminishing expectations of imminent policy normalisation by the Bank of Japan (BoJ) under Governor Ueda. Private sector economists are scaling back their forecasts and pushing back the expected timing of any YCC revisions. Annual wage negotiations have surprised on the upside, but the BoJ is likely to err on the side of caution given the heightened external risks, particularly as political hurdles to any policy change will rise markedly in the event of financial turmoil in the US.
Finding opportunities amid uncertainty
As recent events have continued to hit investor sentiment and global markets, they have also resulted in lower expectations for Fed rate hikes, lower economic growth expectations and lower long-term rates.
Given that the rise in US interest rates is losing steam, the Chinese economy is recovering, and the manufacturing cycle appears to be bottoming out, we are starting to see opportunities in early tech cyclicals. Semiconductor and factory automation related names, including MISUMI Group, Tokyo Electron and Harmonic Drive Systems, are among our key active positions.
Meanwhile, Japanese retailers and consumer product companies that have a high earnings contribution from China stand to benefit from the country’s economic reopening and an accompanying recovery in consumption. Fast Retailing and Ryohin Keikaku, operators of the UNIQLO and MUJI brands respectively, and sportswear company Descente are key examples. Related to this, there is the prospect of a further recovery in inbound demand, including the eventual return of Chinese tourists to Japan, which will benefit urban retailers and various hospitality industries.
Idiosyncratic alpha
Beyond these beneficiaries of shifting macro trends, we would highlight that Japan continues to offer a wealth of under-researched mid and small-cap growth companies. As active managers based here on the ground in Tokyo, we have the opportunity not only to invest in established global leaders, but also to unearth less well-known companies, where lower levels of analyst coverage can often create some great mispriced opportunities.
Identifying under-covered companies with idiosyncratic sources of growth represent a potential source of differentiated returns for the portfolio. A case in point is Tsuburaya Fields, a digital content and game machine company that was added to the portfolio last July.
Although there are concerns over a further slowdown in the global economy, the sensitivity of growth stocks to monetary policy is set to decline, and the reopening of the domestic economy and the resumption of inbound demand should help to put a floor under mid/small-cap stocks. After value stocks outperformed in 2022, the relative earnings prospects of growth companies are more attractive and there is latent alpha to be capitalised upon within the mid/small-cap growth space.
Fidelity Japan Trust PLC (LON:FJV) aims to be the key investment of choice for those seeking Japanese companies exposure. The Trust has a ‘growth at reasonable price’ (GARP) investment style and approach – which involves identifying companies whose growth prospects are being under-appreciated or are not fully recognised by other investors.
Important information
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Fidelity Japan Trust PLC invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and the securities are often less liquid. Changes in currency exchange rates may affect the value of investments in overseas markets. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. This investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The latest annual reports, key information document (KID) and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0422/381431/ ISSCSO00117/NA
