Richard Kaye, Portfolio Manager of Comgest’s Japan Equity strategy, says Japan in 2022 could offer investors a bumper earnings year without any inflationary fears.
Japan’s recovery lagged other developed economies in 2021, but we believe 2022 promises changes for the better for the Japanese economy and investors in Japanese equities. Unlike the US, Japan promises a rebound without the rising inflation spooking markets elsewhere. In Japan, what you see is what you will get.
Earnings Rebound
Even if there are still uncertainties following news of the Covid-19 Omicron variant, 2022 seems set to be a very strong year for earnings growth for Japanese companies. Most Covid-19 restrictions have been lifted in Japan and as such investors should anticipate a strong recovery in the country, especially for companies likely to benefit from increased consumer spending and the return of tourists over the coming months. Of course, we cannot rule out additional waves of infection or other unexpected turns of events.
Companies likely to post big earnings growth1 include Japan Airport Terminal, which runs Haneda International Airport in Tokyo and Disneyland Tokyo (‘Oriental Land Corporation’) as tourist numbers increase. Domestic flight traffic has already recovered to 78% of pre-Covid-19 levels2 while international travel, which had been deregulated on 7 November, has been once again suspended for 30 days3 to assess the new Covid-19 Omicron variant. Overall, expectations are that foreign travel must be reinstated because the powerful Keidanren industrial lobby needs foreign workers to address Japan’s labour shortages.
Outdoor dining is also making a comeback. We believe that a key beneficiary here will be Sushiro, Japan’s largest sushi restaurant chain. Sushiro is also carrying out new store openings, including in metropolitan areas and overseas expansion, both of which should support steady earnings4.
Government stimulus measures are also on their way. The $878 stimulus cheques promised by Prime Minister Fumio Kishida should help discount retailers such as DonQuijote (‘Pan Pacific’) and Kobe Bussan, and a large budget has also been provided for the ‘GoTo’ domestic travel campaign so companies like Japan Air Terminal, Disneyland Tokyo and Orix (which operates a chain of hotels) should benefit from this.
What you see is what you get
2022 could be the year inflation really takes off. If so in our view Japan might prove a refuge. Japan’s lack of inflation since the 1990s, despite the central bank’s gargantuan liquidity programmes, reflects its aging population and diminishing propensity to consume. For global investors concerned about the gap between reported and real earnings if inflation is here to stay, we believe Japan offers a safe haven: what you see is what you get.
It’s still Abe’s Japan
In politics, Japan may have changed the captain but the ship is charting the same course. Shinzo Abe and his former deputy Mr. Taro Aso remain kingmakers, as leaders of the largest factions in the governing Liberal Democratic Party. This means their growth, deregulatory and corporate governance focus will continue, even if the front man of government is now Prime Minister Fumio Kishida.
The word which the Western press translates as ‘Redistribution’, which Prime Minister Fumio Kishida used a few times while campaigning, to the extent that it will even become policy, should lead to corporate tax incentives for wage hikes. Taxing the rich to pay the poor is not a common campaign platform or popular idea in Japan, although tax is already high in Japan because of a shared sense of social purpose.
Japanese companies servicing both consumer and industry needs in Asia
The Japanese equity market remains a very strong platform to supply the needs of emerging Asian consumers and industry because of Japan’s geographical, historical and cultural proximity – while avoiding the vicissitudes of the Asian markets stemming from regulatory change, liquidity, shorter listed history or corporate governance. For example, Pigeon, a Japanese company but China’s largest baby bottle provider, benefits from the growing number of Chinese mothers using powdered milk, while Kosé profits from the increased focus on skincare.
1 Source: Company forecasts
2 as at end of October 2021.
3 decision to suspend this was made by the Japanese government on 29 November 2021.
4 Source: Company forecasts
[Main image: sorasak-_UIN-pFfJ7c-unsplash]
