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Don’t overlook Japan

Nicholas Price

Nicholas Price - Portfolio Manager, Fidelity Japan Trust PLC

Despite risks from slowing global trade and the threat from US-China tensions, investors should not overlook the opportunities in Japan. Indeed, while the outlook for equity returns has been tempered by cooling earnings growths, the significant compression that we saw in Japanese price-to-earnings ratios over the course of last year suggests that this has now largely been discounted.

Don’t overlook Japan

Looking ahead, we see a favourable risk/reward trade-off for investors in Japan over the mid to long-term with valuations testing historical lows in some parts of the market. The policy backdrop from the Bank of Japan remains benign and as we progress through the year we expect the authorities to deploy counter measures to mitigate the effects of the upcoming consumption tax hike in October. There is also encouraging signs of progress being made on structural reforms.

Domestic opportunities in Japan

Amid a slowdown in external demand, economic activity in Japan is likely to be sustained by domestic demand. In this environment Fidelity Japan Trust PLC is focused on growth-oriented mid and small-cap companies, with around 70% of the portfolio’s underlying revenue streams coming from domestic Japan.

The medium and smaller companies’ space continues to provide a wealth of under-researched investment opportunities in Japan with superior alpha-generating potential. In line with this approach, areas where I see investment potential in the coming year include:

  • Stable growth companies that can increase earnings as the global economy shifts from acceleration to stabilisation.
  • High quality services and machinery companies geared to structural growth trends, such as recruitment, MedTech and automation.
  • Under-researched companies with new and interesting business models, as well as selected unlisted opportunities which I can capitalise on given the trust’s closed-end structure.

    At the individual stock level, we currently see a number of opportunities to capitalise on unwarranted valuation discounts in these areas with the likes of Recruit (staffing/recruitment), Makita (power tools) and Keyence (factory-automation sensors) all high conviction holdings.

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Alpha: A measure of an investment’s performance compared to a benchmark, such as the S&P 500. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

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