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Video: What lies ahead for post COVID-19 Japan?
Japan has been overlooked by global investors, due to macro headwinds such as an ageing population and anaemic GDP growth. Japan is also only considered as part of a global asset allocation strategy; or sometimes as a macro trade due to the misperception of its high cyclicality. However, in our view, Japan offers a deep investment universe of high quality companies that generate sustainable growth. Find out more in this interview with Sophia Li, the portfolio manager who launched FSSA IM’s dedicated Japan strategy in 2015.
Strategists often argue that Japan is perhaps the most cyclical market amongst the major global economies, with profits highly correlated to global trade. We disagree. It is true that many of the large index constituents are companies with high overseas exposure or are highly sensitive to forex fluctuations. However, in our view, Japan’s economy is actually very defensive and mainly driven by domestic demand. Japan’s exports account for less than 20% of GDP — far lower than that of Germany or South Korea where more than 40% of GDP is derived from exports. Another misconception about Japan is that the ageing population and prolonged deflationary environment means that there are few quality companies that can deliver high growth and returns. We disagree with that notion too. Especially from a bottom-up perspective, our view is that Japan has a deep investment universe with many high-quality companies that are focused on delivering sustainable growth and returns and are uncorrelated to the global macro environment.
Learn about investing in Asia Pacific equities with FSSA IM today. Our APAC funds invest in high quality companies that outperform over the long term.
Video: A land of economic stagnation and rising opportunities
In our last client update in February 2021, we discussed the reasons we resisted the temptation to switch into pure cyclicals and so-called “value” stocks1 — even though we had anticipated a sector rotation in the market (the TOPIX subsequently peaked in March 2021). When there is a rise in inflation from very depressed levels it usually favours value and cyclicality, as pricing power returns to sectors that had been under pressure, no matter how temporary the effect. As such, since the Covid vaccine breakthrough last November, a number of lagging sectors, such as mining, commodities, shipping and banks, enjoyed a strong rally to which our Japan strategy had virtually no exposure. Given the commoditised nature of these businesses, and their less attractive outlook and long-term growth sustainability compared to the companies in our portfolio, it is hard to call investments in these securities anything more than a macro trade. Nevertheless, not owning them does not mean that the FSSA Japan Equity strategy is not positioned for the global recovery that is being supported by rising vaccination rates and economic re-openings.
Despite the perception that there is no growth in Japan, our core portfolio holdings have been able to adapt and grow despite economic headwinds, and have delivered sustainable earnings growth and attractive shareholder returns. In this update we aim to address some of the most common investor concerns about Japan equities and highlight the opportunities for sustainable growth in this market.
Learn about investing in global emerging market equities with FSSA IM. Our GEM funds invest in high quality companies that outperform over the long term.
Looking back over 2020, a challenging year for many reasons, there were two key investment decisions that helped the performance of the FSSA Japan Equity strategy. Firstly, in the early days of the pandemic we started to identify companies that might benefit from the acceleration of secular investment trends. The 2011 Tōhoku earthquake taught us that significant external events can change consumer behaviour– even against the backdrop of Japan’s conservative society norms. The longer such catastrophes continue, the more structurally embedded the new behaviour becomes.
2018 was a challenging year for Japanese equities. While we usually prefer to talk about the companies we own rather than comment on the market or the economy, it was interesting to note that 85% of trades last year was on auto-pilot, controlled by machines, CTAs and quant funds.
Once again, 2021 was a year full of surprises and challenges, with ongoing Covid disruptions and China turning from a global outperformer to underperformer. The Chinese government’s policy crackdowns, especially in the internet, education and property sectors, were sudden and dramatic. Meanwhile, inflation globally has moved from “transitory” to an ongoing threat to stability, coercing central banks like the US Federal Reserve to tighten from record levels of money supply, with its dampening effect being felt on correspondingly high stock prices. Fed tightening will likely affect Hong Kong markets as well, given the city’s currency and interest rates linkage to the US. Over the past year, the Hang Seng Index has underperformed the Shanghai Composite by nearly 20 percentage points, mostly in the second half of 2021 as US inflation heated up, and the premium of A-shares over H-shares widened for large companies listed in both markets. The year ahead also looks like a mixed picture — China is turning more accommodative in its policies but new Covid variants and persistent inflation remain key risks. The question on many investors’ minds is whether China can claw back its strong performance of previous years, which seems fitting as we enter the year of the tiger in the Chinese horoscope.
Last quarter I visited infrastructure companies in Tokyo, Osaka and Nagoya. The trip included visits to ten corporate head offices and three site tours. This paper seeks to share some of the key findings from my meetings with Japanese passenger rail and utility companies.
Mutations, it would seem, are not unique to the virus. Starting with some housekeeping, we always end our letters seeking feedback from our regular readers. Two common points we have received is that our letters are generally too long and the semi-annual schedule we have adhered to in the past is too infrequent. Therefore, we are pleased to implement a change in the format and cadence of our communications. In this new version, our letters will focus on portfolio updates and brief thoughts on pertinent topics. Moreover, we aim to write on a quarterly basis. This, we hope, will be more suited to the wishes of regular readers. Since our last update, the initial public offering (IPO) frenzy we have observed for the past 12-18 months has continued unabated. This is especially true in India where there have been around 100 IPOs so far this year. These newly-listed entities have raised a combined USD 12bn from investors and yet only 20 of them reported a net profit of more than USD 10m! Undoubtedly, some of these companies will grow into their valuations and, in hindsight, a few might even seem like bargains today. However, the asymmetry of information in any IPO process means that new shareholders are at a disadvantage. Many IPO prospects often fail to answer the following question convincingly: why would a knowledgeable seller, sell part of their business to a less-knowledgeable, non-strategic buyer?
The Sustainable Finance Disclosure Regulation (SFDR) for the European Union Mandates the disclosure of the Principal Adverse Impacts (PAI) that investment decisions have on sustainability factors.
The Sustainable Finance Disclosure Regulation (SFDR) requires asset managers to report on up to 20 Principal Adverse Impact (PAI) indicators. PAIs are the negative impacts caused by a firm or an asset on the environment and society.
This article focuses on three of the PAIs related to Biodiversity Areas, Emissions to Water, and Hazardous and Radioactive Waste. Each PAI provides details about the measures, some of the challenges related to them, and how investors may use the information they provide.
We examine the characteristics and trend of a well-known measure of quality - Profitability. Firstly, we discuss some of the reasons why it is a useful measure and why it might be persistent through time. It is a strong contributor to alpha, both on the long and short sides.
From report writing and gathering information to the more technical side of pattern recognition and natural language processing, David Walsh, Head of Investment at RQI Investors recently joined Ausbiz to highlight how AI will affect wealth and investment management.
Given its size and influence, China remains a key investment destination despite ongoing trade disputes and diplomatic tensions with the US and Australia. With a GDP equivalent to around 70% of the United States, many global portfolios continue to feature Chinese equities. Against this background, Martin Lau, Managing Partner at FSSA Investment Managers, provides five insights into the current and future trends shaping the Chinese economy.
The China equity market includes a myriad of share classes, each with distinct characteristics.
In our last client update, written through the depths of Covid-despair, we observed that real life and the world of markets are seldom so intimately entwined. With markets swinging violently to the downside on a riptide of fear, it was clear even then that activity was being driven by short-term anxiety rather than a real evaluation of Asia’s longer-term value-accretion prospects.
We believe financial markets, critical to society’s ability to function, are under threat. For too long, it has been widely accepted that short-term performance, growth, risks and financial returns should be maximised at the expense of environmental and social outcomes.
What will 2021 look like for China? 2021 will be a year of recovery. This is not surprising given last year’s economic downturn. If vaccines are being rolled out gradually during the year, we believe the economy will recover, especially those sectors that have been hit hard like travel. Hong Kong’s travel sector declined by 99.9% last year so there really isn’t much room left to decline.
The cascading impacts of climate change and society’s overexploitation of the land and sea is giving rise to unprecedented devastation of nature and biodiversity. In the last 50 years, there has been a devastating 69% drop in wildlife populations[1]. The unfolding crisis is risking the very foundations of our economy, society and life itself, impacting humankind’s food security and access to clean water and air.
In April 2019, we published an article titled ‘China’s Inclusion in the Bloomberg Barclay’s Global Aggregate Index’ where we discussed the implications of such a move. Just a year later and a lot has changed in the world and some of the points made in the research piece last year are worth revisiting.
All of us have been brutally confronted by a new reality in the last few months. It has certainly been crude, with financial markets swinging around on a riptide of greed and fear, as we the participants have vacillated between elation and despair. It is not surprising. Life and the world of markets are seldom so intimately entwined.
In September 2023, I met more than 30 global listed infrastructure companies and stakeholders from the UK, Europe and China. The following travel diary summarises my impressions and findings from these meetings.
The advent of Artificial Intelligence (AI) is affecting ever expanding fields of human activity. And the way we invest is no exception. It’s never been more timely for investors, advisors and investment managers to take deep stock of the impacts, real and potential, of AI, so we can better prepare to manage them – whether by leveraging opportunities, managing new risks or, more likely, both.
We are entering a new era. The year 2024 will be unpredictable and clouded by many uncertainties. It will be marked by geopolitical risks, the ongoing taming of the inflation beast, and how the US Presidential election will impact markets.
Though Covid hasn’t yet finished with us, the markets have finished with Covid. In real life, there is still plenty of misery to go around, but in our opinion things have seldom been better for investors. Optimism has served us well, as the money-printing presses have rolled to counter the “unprecedented” threat. In investment, perhaps it is better to be a stupid optimist than a clever pessimist. And, we believe markets do indeed go up most of the time.
All of us have been brutally confronted by a new reality in the last few months. It has certainly been crude, with financial markets swinging around on a riptide of greed and fear, as we the participants have vacillated between elation and despair. It is not surprising. Life and the world of markets are seldom so intimately entwined.
Public policy support for infrastructure investment to remain strong globally, especially for the replacement of aged infrastructure assets and buildout of renewables. Utilities are in the midst of a multi-decade structural growth story. But higher capex needs to be managed in the context of affordability, reliability and sustainability. Earnings likely to be more resilient than global equities, albeit growth tempered by higher debt costs and increased regulatory and political risks. We expect the asset class to deliver mid-single digit EBITDA, EPS and DPS1 growth over the next two years despite a potentially challenging economic backdrop.
Global listed infrastructure underperformed in 2023 owing to rising interest rates and a shift away from defensive assets. Relative valuations are now at compelling levels. Infrastructure assets are expected to see earnings growth in 2024 and beyond, aided by structural growth drivers.
After decades of flat electricity demand for US utilities, the industry is now seeing unprecedented demand as growth in data centers / AI, electrification, onshoring and electric vehicles outweighs energy efficiency gains. One utility executive stated: “Seeing all these customers wanting 24/7 load and willing to pay for it – it is every utility’s dream”.
We recently spent several weeks in the US visiting listed infrastructure management teams, regulators, politicians, industry associations and conducting asset tours. The following paper provides an overview of our findings.
Over the last decade the electricity sector has been at the forefront of decarbonisation, ahead of transport, industry and agriculture.
The energy crisis in Europe has boosted global demand for LNG. Global listed infrastructure companies pioneered the US LNG industry, investing US$50 billion since 2010. The energy crisis is providing an opportunity for LNG to secure its role as a transition fuel. With reliability and security of supply increasingly front of mind, US LNG exporters stand to gain market share, underpinning a further US$50 billion of investment over the next decade. An increased need for natural gas infrastructure will also benefit the broader North American midstream sector.
This paper asserts that macro towers will remain at the heart of a modern, mobile data communications network despite the continual development of new technologies.
We crossed six US states meeting over 70 infrastructure management teams as well as customers and suppliers at three conferences. We visited three corporate head offices, several regulators and toured the country’s largest nuclear power plant.
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