‘End of the line for Japanese electricals’

‘End of the line for Japanese electricals’

Sony, Canon and other Japanese firms at centre of the Seventies and Eighties electronics revolution have ‘already lost in the global race’, according to a fund manager, who warned against funds that blindly follow these shares.

By Nicholas Weindlingm

8:00AM BST 15 Oct 2013

Stellar returns from Japan’s stock market after decades of malaise have got investors’ attention. This excitement is well founded. The aggressive economic reforms of ‘Abenomics’ – the economic policies implemented by Shinzō Abe, the current Prime Minister of Japan – are creating real structural change. Imagine if UK prices on everything from cars to clothes had gone down for years. You would always put off purchasing for a cheaper price tomorrow. That has been the Japanese reality until now. Under Abenomics, Japan is prompting consumers to buy today. This fuel for economic growth combined with what are still very low valuations translates to powerful opportunity in Japanese equities.However, for investors, things are not that simple. Those who would assume that mature, multinational corporate giants are the best ticket to strong returns would be wrong.

We do not own any of the companies that you traditionally think of when you think of Japan. Consider, for example, monolithic, blue chip companies such as Sony, which is #1 globally in camcorders or Canon, which is #1 globally in printers. These may remain well known on the world stage, but they have already lost in the global race. When you walked into John Lewis fifteen years ago, the consumer electronics section was overrun with Sony and Panasonic. Today these brands struggle to compete with Samsung and LG and any difference between them in quality is negligible.

In that respect, buying a Japan equity tracker fund will not help you play the nascent recovery. Skill in stock picking is needed to access emerging growth, especially because Japan is strong in unexpected places. An active manager on the ground in Tokyo can seek out tomorrow’s winners.

The best investments in Japan are not the biggest companies, but the ones poised at the cusp of demographic and consumer change. Think about the way you life your life now. How often do you snap a picture on your Smartphone rather than taking a separate camera? Do you use a mobile phone boarding pass to get on a plane?

Less and less of our daily lives involve printed paper. When was the last time you actually saw someone using a camcorder? Being a global leader in a product that is going extinct is little cause for celebration. Hence we own virtually none of Japan’s household names – no NEC, no Ricoh, no Toshiba, no Sharp, no Nikon.

E-commerce is an exciting source of investment opportunity. While the UK is actually the world leader in online retail (which now accounts for over 10pc of total retail sales), in Japan that figure is only 2pc. There should be no reason for that difference – on average, internet speeds are faster and logistics better in Japan. That gap will close and that is why we own the number one e-commerce company in Japan called Rakuten, which should benefit from rising consumer adoption of e-commerce.

Speaking of the great migration to digital, have you booked dinner reservations through a mobile phone app recently or scoured a restaurant review online? Of course. The same trends are at work in Japan and that is why we own Kakaku.com a leading price comparison and table booking website in Tokyo. The stock has outperformed the market by 92pc in the last year.

Greater Tokyo is by far the largest city in the world at a population of 35.6m and the average time for weekday commuters spent in transit exceeds 60 minutes. When you consider that the internet works on the underground in Tokyo, you get an idea of how prolific the use of smartphones has become. Commuters are playing games, surfing the web, shopping, texting and generally fueling the exponential potential for growth in e-commerce. That is why we own the company Cookpad, an online collective receipt website used by many Japanese to exchange cooking notes and ideas. The stock has outperformed the market by 98pc in the last year.

Meanwhile, Japan’s rapidly aging population is having profound implications on the modern retail economy as the elderly become a primary engine of consumption. Currently, the value of adult incontinence pad (nappy) market is larger than that for baby nappies. It represents a $1.4 billion-per-year industry growing at 6-10pc. We own a company called Unicharm that has over a 50pc market share in this area. Companies like Unicharm are also positioned expand in markets like China, where the one child policy will create a quickly aging society.

Whereas Japan has clearly lost the manufacturing edge in areas like consumer electronics, they are still a clear global leader is factory automation. Labour costs are on a rapid upwards march in China and many factories have to improve efficiencies in order to remain in business. Installing robots has become a popular solution and Japanese companies such as Fanuc and Keyence are the undisputed champions of the robot world.

The hunting ground of opportunity in Japan is full of unusual characters. Consider the incredible turnaround story of Hello Kitty. After languishing, the Sanrio franchise has rebounded to prominence, doubling operating profit margins during the last four years. The company’s recent acquisition of the classic UK Mr. Men character series puts them firmly on the shelf in the children’s department of Marks & Spencer. Hello Kitty figures can take on the characteristics of local culture and preference, fueling its success as a truly global phenomenon. Shares were up 106pc through end of September compared with a 38pc gain for the Topix index.

Tapping into the growth drivers in the Japanese market requires intimate knowledge and local perspective. Look beyond the traditional industrial giants for the opportunity to gain from Japan’s winning streak.

– Nicholas Weindlingm is lead portfolio manager of JPM Japan fund and JP Morgan Japanese Investment Trust.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: