Many investors are turning more attention this year to Japan than they have in previous years. Here are some reasons why Japan is looking more attractive in the current environment:
- Many of the companies in Japan are making medium to long-term growth plans – This will lead to EPS growth and thus to market price appreciation.
- Japan has struggled for decades to hit its Inflation target of 2% but has now accomplished it. This will enable Japan’s nominal GDP growth rate to approach the desirable 4% level, which will enable the expansion of wealth creation.
- Global companies have been moving towards Increased globalization after a period of tribalism – multinational companies have needed to adjust supply chains away from China, and Japan is benefitting. There is a deep reservoir of IP in Japan which makes Japan an attractive place to diversify global supply chains, e.g., in the semiconductor value chain.
- Close geopolitical alignment with G7 Nations – Principle and value alignment make Japan a favored partner.
- An aging population means rising healthcare and pension outlays in a low interest environment. – Pensions and sovereign-wealth assets must shore up their equity capital market allocations to meet projected returns in order to meet payout obligations to policyholders.
- Available capital, robust capital expenditure, especially for Growth Universe companies. Companies require capital to fuel growth.
- Japanese companies service domestic consumers where consumption is strong and on a consistent growth track – Personal consumption is 60% of Japan’s GDP and the primary driver of GDP growth.
- Japanese companies provide products and services to growing markets, such as greater Asia, where population growth is expanding rapidly. A growing marketplace is one of the key requirements for a long-term growth plan for companies.
With such a positive outlook for Japan, we expect to see its continued outperformance. We are especially excited about the quality growth segments in Japan and believe that they will be the best performers for the next 3-5 years. The Growth Universe is still trading at a lower multiple to forecast earnings than the rest of the market. Our portfolio is currently trading at a PER of just 12.8x, which is much lower than the overall market, and highlights the pockets of deeply undervalued yet powerful companies that are available today.
Yuki’s deep due diligence capability and coverage of all listed companies enables it to find attractive companies that others miss. One of these deeply undervalued companies is Okamura (7994), which sells furniture such as desks and chairs for domestic offices. In the past, their customer companies viewed investment in offices as a fixed business cost, but these companies now view this capital investment as a tool for improving productivity and acquiring new human resources following the COVID-19 work-from-home era to office attendance rate recovery, changing corporate awareness, and business is improving. In such an environment and compared to competitor companies, Okamura has been able to propose advanced products with excellent design capabilities, and the company continues to win orders from customers. Additionally, because they have acquired pricing power that allows them to pass on rising raw material prices in a timely manner, profitability is improving. For the next three years, we expect to see double-digit increases in EPS as well as an increase in sales as clients continue to transition to RTO and make office renovations.
From a broad perspective, we believe Japan’s market is in the process of rotating back to a growth bias. The catalyst has been a slowdown of the pace of rate hikes by central banks around the world. With the end of the rate-hike cycle in sight, investors are turning their attention back to fundamentals which are the drivers for returns over the long term. In this environment pure growth strategies will outperform.
Yuki’s two-step process identifies companies with the best growth qualities. With strong earnings growth momentum in place for the quality growth segment of the market (Yuki’s Growth Universe), Yuki believes that 20-25% annual appreciation can be achieved by the fund over the medium term even if the quality growth segment remains at current levels of 14x forecast earnings. Over most of the last 12 years, the quality growth segment has traded between 20-25x forecast earnings. Should the rerating of this segment occur as we expect over the medium term as central banks reach the end of their rate hike cycles, the appreciation for these companies will be even more dramatic.
Blue Lakes Advisors is partnering with the fund Yuki Rebounding Growth Fund.
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