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.

Japan’s economy has documented its biggest drop on record, as the country’s virus-induced lockdown continues to feed through to the national balance sheet.

The world’s third largest economy saw its gross domestic product (GDP) decline by 7.8% in the second quarter, equating to 27.8% on an annualised basis. This situates the country’s recent malaise somewhere between worse-off regions like the US and Europe, and behind Asian neighbours South Korea and Taiwan.

The hierarchy here reflects distinct lockdown measures, with the latter two nations managing to control the virus spread without a widespread halt to business - in contrast with Japan’s nationwide state of emergency during April and May which ground economic activity to a halt.

Unsurprisingly, exports fell markedly as global trade slowed during the quarter but a pronounced drop in domestic consumption, which makes up more than 50% of the country’s economy, has been a major factor in the decline.

Already struggling going into the virus crisis, today’s data represents a third successive fall in quarterly GDP measures - the worst string of figures since 1955.

Are there any positives for investors?

Headlines like today’s can make it difficult for investors to buy into the idea of investing in Japan. A top-down view of the country over the past year has included a 10% sales tax hike for businesses to navigate, as well as typhoon Hagibis, so this morning’s data will not settle any nerves.

But, while the broader national economy is currently the focus, what instances like these often reveal is the dislocation between individual business sectors and their respective trajectories from here. Global technology has been one area to benefit massively from the lockdown world’s forced move further into online entertainment and work platforms. And while most of these firms lie in the US, Japan still leads the way in certain sides of the industry focused on the long term.

“We’re very excited about the scope for robotics,” says Matthew Brett, manager of the Baillie Gifford Japanese Fund - currently one of three Select 50 funds concentrating on Japan.

He explains: “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.”

Brett is confident that his focus on long-term structural changes driven by technology shifts holds more sway than near-term political decisions. For that reason, the fund is particularly heavy in companies ready to drive technological change, rather than support existing production and manufacturing methods.

And if the country’s economy starts to see a resurgence in post-virus consumer spending, another Select 50 fund might be attractive.

Michael Lindsell’s Lindsell Train Japanese Equity Fund currently has over 45% of the portfolio exposed to consumer franchises with media (25.1%) and pharmaceuticals (20.2%) the next most popular sectors. This follows the manager’s strategy of identifying products with consistent consumer audiences, often with global interest, as well as attracting attention in Japan. The company’s holding in Nintendo typifies the manager’s thinking.

The gaming company’s intellectual property in titles like Mario, Zelda and Pokémon is highly valued by Lindsell. In particular, the manager points to the opportunity open to Nintendo in the proliferation of both gaming content and further production of consoles, most notably the Switch.

In line with the firm’s other strategies, beverages feature among the portfolio’s top holdings in the form of probiotic drink Yakult and brewer Kirin.

And for investors seeing the current situation as a possible value play, the Man GLG Japan CoreAlpha Fund could help.

A markedly different style to that of Lindsell and Brett, manager Stephen Harker focuses on investing in large-cap value opportunities with a heavy contrarian slant. Harker believes cyclicality is a strong force at play within the Japanese market and so, looks to exploit low prices in unloved companies, selling after a significant positive uplift in price.

A lot of these companies operate globally and so, aren’t limited specifically to Japan’s demographics, most notably its ageing population. Examples in the fund include Toyota, Honda and Canon, with global networks, supply chains and end customers.

The manager aims to keep investors’ money 100% invested at all times, meaning companies going through a price rerating need to be sold in order to begin a position in a new overlooked opportunity.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. 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. 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.

Topics Covered

Funds; Japan; Volatility

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