Japan’s economic growth in the first quarter beat analyst expectations, rising by 2.1% against forecasts of a contraction of 0.2% for the period.
The surprise jump was prompted by imports into the country falling at a faster rate than exports, and increases the likelihood that prime minister Shinzo Abe’s long-awaited sale tax hike could be implemented later this year. The rise in sales tax from 8% to 10% was initially due to take effect in October 2015 but has been pushed out until further signs of a strengthening economy emerge.
However, despite this week’s figures one swallow doesn’t make a summer and the government might need to show a bit more patience if they want to avoid scaring Japanese shoppers into saving, not spending. After the tax was raised from 5% to 8% in April 2014, household spending and retail sales dropped enough to provoke a brief recession in the country.
But for the world’s third largest economy, internal consumption levies are only one subject giving policy makers a headache. While growth in domestic consumerism is the goal, the ongoing US-China trade war places Japan in a difficult position, with a foot in both camps in terms of its business relationships. With the two top economies at loggerheads, Japanese corporations have the unenviable task of having to deal with both trading partners, without seemingly taking sides.
Investors keen to see a resurgence in Japanese company performance are looking for signs of strong international sales as well as growth at home, drawing on the rich markets available to them in the US and China. Nintendo’s recent attempt at a tie-up with China’s Tencent gives a good vignette of the hurdles and opportunities for companies getting this strategy right.
In order for Nintendo to launch its much-loved Switch console in China, Tencent must seek regulatory approval at a time when Chinese authorities are concerned about the amount of time the nation’s children are spending playing games. There is also the relatively weak intellectual property protection in the Chinese market to tackle, as well as the fact that most gamers use PCs or mobile phones, not consoles. While the Switch has dominated gaming, selling over 34 million units worldwide since launch, it’s interesting to see just how difficult it can be to tap into China - however if they can manage it the opportunity open to Nintendo is massive.
Bridge-building with a top economy like this is certainly something investors like to see but it can work the other way. Healthcare policy proposals discussed by US Democrats recently led to a share price drop in Japanese pharma companies Astellas and Takeda, as roughly 30% of their high margin sales come from the US.
The key takeaway here is the importance of identifying companies in control of their own destiny and who are not vulnerable to rule changes in competing economies. Top-down investing strategies often fail to spot unique companies creating their own future and disrupting their markets. Looking firstly at companies’ propositions, analysing their balance sheets and focusing on their ability to deliver value is a much better use of investors’ time than predicting central bank, regulatory or governmental intervention.
One fund manager who looks to invest precisely in this manner is Matthew Brett, head of the Baillie Gifford Japanese Fund.
Brett begins by identifying firms he feels have the best long-term growth prospects in the Japanese market, in terms of competitive advantage and ability to produce higher returns over time. From there it’s a case of examining the track record of company management and working out a reasonable price to pay for the overall opportunity.
It is this tight, step-by-step methodology that has steered Brett towards building the fund’s holdings in robotics, internet-enabled technology and automation. Current names in the portfolio include Japanese technology conglomerate SoftBank, web hosting company GMO Internet and mechanical component supplier Misumi.
“We’re very excited about the scope for robotics,” says Brett, “It feels a bit like the internet did 15 years ago, where it’s relatively easy to see that robotics could be more significant than it is today. But we’re still at the early stages, moving away from robots being used to make cars in developed countries into the whole matrix of opportunity in new industries and moving outside of the developed countries.”
More on the Baillie Gifford Japanese Fund
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