Discover the complexities of Japan’s investment landscape with Karen See, co-manager of the Baillie Gifford Japanese Income Growth fund, as the FundCalibre team discuss the market’s oscillation between growth and value stocks, the impact of the weakening yen, and the Tokyo Stock Exchange’s recent corporate governance reforms.
Why you should listen to the interview:
Just as investors are now asking whether the elastic has stretched too far for growth stocks in many other markets, they are also asking the opposite question in Japan. This interview makes a strong case for significant opportunity in the ‘growth’ parts of the Japanese market and robust opportunities today.
This interview was recorded on 16 July 2024. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
Continued confidence in SoftBank
“This one might be a bit controversial, but SoftBank is one that actually has done a huge amount of share buybacks over the last couple of years. And our core investment case in SoftBank is that we believe that Mr Song is actually one of the best capital allocators in Japan.
“Now, many people have opinions about SoftBank, and this is actually one of the reasons why there is a potential investment opportunity here because people tend to focus on a lot of his investment failures, whereas the successes don’t really make the headlines as prominently as his failures. So people kind of look at him and think, look at the WeWork and all these other things that he has failed. But then what has really made SoftBank in terms of the value creation is his bets on Alibaba and then he successfully sort of exited it and then kind of put money into AI.
“I mean, more recently ARM Holdings has driven SoftBank share price I think to probably one of its its heights since listing, again, this is because Mr Song has been very shroud in terms of thinking about the long term opportunity where to put capital. He’s such a true capital allocator.
“He understands when his business is undervalued and therefore he opportunistically does share buybacks, not because the head of Tokyo Stock Exchange comes out and tells him to do so, but because he believes that is the best way to use capital. And I think this is the kind of thinking that you want management to be having, not doing share buybacks just for the sake of doing so, but because that is the best way for allocating the capital because your business is undervalued.
“And I think some Japanese companies, they might still not be thinking about it from that perspective, but it’s more from the wanting to protect their reputation and not wanting to be kind of called out and name and shame and therefore doing it that way.”
A 25 trillion market
“If I were to pull up a graph for shareholder returns in terms of dividends and share buybacks over the last sort of 20-30 years, you would see a very steady sort of upward trend from sort of the bottom left to top right. Even though there would be a bit of an uplift sort of over the last couple of years because of the Tokyo Stock Exchange initiatives pushing that a lot harder. But this has been a long established trend.
“The total amount of say dividends paid out to shareholders, back to around 2011/2012, it’ll be under 10 trillion yen. Whereas if we look at sort of the last year or so, the amount being paid back to shareholders would be over 25 trillion yen. So that’s quite a magnitude of difference.”
Two key themes underlying the portfolio
“Automation and robotics are a key theme in our portfolio because we believe that actually going forward, the demand for robotics and also automation will only accelerate. The first reason for that is because if you look at Japan’s demographics, they just need more automation in order for the society to function. And that has actually helped some of these automation companies in Japan to flourish over time. When society as a whole doesn’t have this debate over ‘are they stealing our jobs,’ it’s much more easily and readily embracing of automation technology.
“Digital payment for example is another one of the investment themes in our portfolio. Whether it is looking at digital payment in terms of online digital payment or even just physically when you go to a shop, you are able to pay with a credit card, not having to walk around with a pile of cash anymore.
“An example of a company would be Z-Holdings. It has a subsidiary called PayPay, which is a QR code payment system. So if you think about when you go to your shop and you pay currently, you tend to have a thing that you can tap your phone or your contactless card. But actually for some of the smaller merchants that might still be quite expensive. So having just a QR code where you can ask the customer to scan with the mobile phone and are therefore able to transact that way is a easier lower hurdle in terms of adopting some of the digital payment methods. So PayPay is the leading player within that, pushing the digital payment story in Japan.”
What about the next 18 months?
“It’s very difficult to predict cycles generally, whatever cycle that might be. But there are things that don’t change. And those are the structural trends we see in Japan. We’ve touched on automation, digitalisation, opportunities that can be created by the labour shortage issue and demographic issues in Japan, those are not gonna go away. So these are the things that we continue to think very hard about to find investment opportunities over the long term.
“Japan as an asset class is also quite interesting because as it has demonstrated over the past 18 months, it’s driven by its own idiosyncratic drivers. It has its own stories. And so if you want to put something in the portfolio that’s a bit more uncorrelated to everything else, actually Japan is quite good place to look.”
Conclusion:
Karen provides an excellent and impassioned look at the Japanese markets from corporate reforms to how dividend payments have evolved over the past decade. She also provides a unique point of view on the sometimes controversial SoftBank and what she believes could be in store for investors over the next 18 months in the region.
