This week’s Investment Q&A is with Elite Rated manager Sophia Li from the FSSA Japan Focus fund who discusses the driving forces behind the strong performance of the Japanese stock market this year. We hear about the influence and impact of foreign investors – particularly Warren Buffet – on the Japanese market and whether their growing confidence should serve a positive indicator for long-term investors.
(Recorded 20 September 2023)
Warren Buffet, the legendary investor, visited Japan earlier this year and has been investing in and increasing his Japanese holdings. Is this a good sign for long-term investors in Japan?
Yes indeed, Warren Buffet has increased his stake in the top five general trading houses in Japan. He started to invest in these companies in late 2020 when the global commodity price plunged and this year, he has simply been topping up his existing holdings.
Other good signs include some encouraging changes around corporate governance and also the attitude towards shareholders’ returns within corporate Japan. For example, earlier this year, Tokyo Stock Exchange encouraged all the listed companies in Japan to reconsider the importance of the cost of capital and also the efficiency of their balance sheet. And then all of them have been required to submit a medium-term strategy to talk about how they’re going to boost the overall valuation of their companies if they’re extremely cheap, and secondly, how they are going to improve their ROE. These are encouraging signs of change going forward.
GMO Payment Gateway, a cashless payment provider, is one of your key holdings yet only about a third of Japanese consumption is cashless at the moment – so, obviously a growth area. Tell us more.
The penetration in Japan for cashless payment is currently very low, as is e-commerce. For example, e-commerce penetration in Japan is only about 12%, while in other markets like China it’s 40%. Cashless payments even higher in other developed markets – over 60% – or, for example, in Korea, it’s close to 100%. So, we see change happening in Japan, albeit at a relatively slow pace, but we do think that it will accelerate.
As for GMO Payment Gateway itself, we like the company because they are the market leader with over 25% market share in online payment services. Plus, the company is also pushing the offline cashless payment. They have a strategic partnership with the largest credit card company, SMCC [Sumitomo Mitsui Card Company, Limited], which is a subsidiary of SMBC [Sumitomo Mitsui Banking Corporation] Financial Group to install the cutting edge, cashless payment terminals across all the major infrastructure in Japan. The company has a great track record. Their growth is not explosive, but they have been delivering more than 25% compound annual growth consistently in the past 15 years, and we think that this trend will continue.
One in ten people in Japan is now over 80 years old, so, there is a bit of a demographic headwind in Japan. What impact does this have on your companies?
Many countries in Asia are facing the issue of an ageing population. For example, the birth rate in China and South Korea now is even below the level in Japan. Actually, Japan has been a pioneer in terms of dealing with the ageing population which, in our view, presents investment opportunities for investors.
As regards the impact on our portfolio, firstly, we prefer companies that are able to expand their global exposure, basically their growth is not only driven by the domestic economy, but by the overall global economy. Secondly, factory automation, IT services and software are great tools for Japanese companies to boost their labour productivity. In our portfolio, we have invested in a number of these companies which have been growing at a much faster pace than the overall economy. Thirdly, we have also been actively looking for ideas which can offer services to help the ageing population in Japan.
For example, there is a strong need for the hospice services in Japan because of the medical budget constraints of the Japanese government. Therefore we invest in these hospice operators, which can take care of patients with chronic illness at more affordable costs. Other ideas include job placement companies, which help hospitals and area care facilities look for nurses and care workers. Overall, we don’t think that the ageing population issue is an obstacle in our path to finding the growth companies there.
In this interview, Sophia offers some fascinating facts that impact the Japanese markets, and the stock selection within it. She is particularly interesting when it comes to the topic of automation in Japan, and the impact that AI has had on Japan’s semiconductor industry, perhaps not in the way you might think.
You can listen to the full interview in Episode 285 of the ‘Investing on the go’ podcast series, with Sophia discussing all the points below.
- What are the drivers behind the strong performance of the Japanese economy
- What foreign investment into the region means for Japanese companies
- The influence of Warren Buffet on Japanese equities
- Is there an increase in dividends in the region?
- The growing adoption of a cashless system
- The demographic headwind in Japan
- Why an ageing population is an opportunity
- The fund’s exposure to automation, robotics and artificial intelligence
- The stylistic nature of the Japanese market
- What could make growth and quality come back into favour
