Expert: June-Yon Kim, Head of Japanese Equities at Lazard Asset Management Facilitator: Rupert Neville, Project Director
Headlines:
- Investment opportunity in Japanese equities - Multiple reasons were highlighted such as reset valuations, competitive currency, improved governance and shift from deflation to inflation that present an opportunity for Japanese stocks going forward.
- Overview of Japan's economy - Japan's demographics, with shrinking working age population but increased women's participation and outlook for wage growth and expectations that BOJ policy normalisation from negative rates would be gradual.
- Attractiveness for foreign investors - Whether foreign investors will allocate more capital to Japan given strong local returns, but note the currency impact. SMBC research suggests neutral weighting would imply 38% foreign ownership versus current 30-31%.
- Role of Bank of Japan policy - Gradual BOJ policy normalization from negative rates, which would be positive for stocks is expected. Suggested first step would be going from -0.10% to 0%, then to slightly positive.
- Outlook for domestic consumption stocks - Potential opportunity in domestic consumption stocks to benefit from wage growth and inflation tailwinds, though shrinking population was flagged.
- Differences between value and growth - Approach to investing in asymmetric opportunities rather than a rigid value or growth style, highlighting examples of both types of stocks that have done well.
- Individual stock discussions - Perspectives on owning various mega-cap Japanese stocks like Sony, Nintendo, Fast Retailing and Softbank, explaining rationale for holding or not holding them.
- Attribution of active manager performance - Attributing majority of alpha to single stock selection rather than sector allocation, with financials, value and growth as performance drivers over time.
Discussion:
The content covered multiple conversations between various individuals, likely at an investment conference.
The investment opportunity in Japanese equities - Speakers highlighted Japan's reset valuations, competitive currency, improved corporate governance, and shift from deflationary to inflationary environment as reasons for opportunity.
Overview of Japan's economy - Speakers discussed factors like Japan's aging demographics, women's participation in the workforce, the country's debt profile, and the potential for wage growth.
Attractiveness for foreign investors - Speakers debated whether foreign investors are likely to increase allocations to Japanese equities given strong local returns but currency headwinds.
Role of Bank of Japan policy - Speakers expect gradual normalisation of BOJ policy including a move from negative to positive interest rates, which would be positive for Japanese stocks.
Outlook for domestic consumption stocks - Speakers see potential opportunity for domestic consumption stocks to benefit from inflation and wage growth tailwinds.
Differences between value and growth investing in Japan - Speakers highlighted how both types of stocks have done well at different times and discuss their approach to investing in asymmetric opportunities
Key takeaways:
- Research the long-term outlook for Japanese wage growth as a potential catalyst for inflation
- Analyse Japanese companies with significant domestic consumer exposure as a potential opportunity
- Assess the outlook for yen stabilisation against other major currencies and the potential impact on foreign investment flows
- Model scenarios for a gradual normalisation path for Bank of Japan monetary policy and implications
- Re-evaluate existing value/growth style biases in light of insights on an asymmetric opportunity approach
- Consider initiating or increasing position sizes in Japanese financials on normalisation outlook
- Review governance reforms and analyse corporate leadership sentiment to identify companies embracing shareholder focus
- Research foreign investor ownership levels by market and model implications of a neutral weighting to Japan
