JPMorgan Japanese 17 August 2023
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan Japanese. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
JPMorgan Japanese (JFJ) invests in high-quality Japanese companies with strong growth prospects. The trust is managed by Nicholas Weindling and Miyako Urabe. They are based in Tokyo along with a large analyst team, which provides them with insights into the idiosyncratic growth opportunities available in the country, particularly in the under-researched small and mid-cap space.
Japan has been a popular pick for international investors this year, and Nicholas and Miyako share the optimism. The country is undergoing a cyclical upswing, unlike the West, with the domestic economy being boosted by the belated ending of pandemic restrictions in 2022 and modest consumer and wage inflation. The managers also highlight ongoing corporate governance reforms as a reason to be bullish about the country in the short and long term: in the short term these reforms are providing stock-specific opportunities, and in the long term they could present an avenue by which the historic valuation discount of the Japanese market versus its international peers is closed.
JFJ’s quality-growth bias worked against it in 2022 as the market fell, but in 2023 it has returned to form in a rising market (see Performance). In the long run, the quality-growth style of the managers has added value versus the index, and they argue that the long-term growth outlook for their portfolio hasn’t changed much overall, while valuations are more attractive. Despite the disruption of last year, turnover was low, with the managers viewing the sell-off as a re-rating of businesses performing well operationally and with good growth prospects.
JFJ’s shares trade on a discount of 8.4% at the time of writing, more-or-less in line with the five-year average of 7.3%.
Japan is a great place for stock pickers given how little analyst coverage it receives, particularly in the small and mid-cap space. This is likely due to it being an afterthought for many investors, with the typical investor underweight the country. We think the current optimism around the country could see this underweight close, which could provide strong technical support for the market. In the short term, the economy is looking stronger than the West, with inflation moderate and consumer activity growing. However, in the long-term, it is corporate governance reforms which are likely to be most significant. Business culture in Japan is rapidly changing, with companies becoming much more focussed on shareholder returns. This is slowly drawing back in foreign investors and could be a potential driver of a re-rating of the whole market, as well as providing opportunities for stock-specific gains in the meantime.
We think JFJ is an attractive way to invest in the exciting growth opportunities in Japan. The team is based on the ground in the country, which gives them insight into companies as well as economic and cultural trends. They have a good track record of adding value over the long term, even if 2022 was a rough year for their quality-growth style. The portfolio is full of companies that only Japan offers, such as the world leaders in robotics and companies profiting from Japan’s unique demographic challenges.
Bull
- Highly active approach increases the chance of outperformance
- Deep resources devoted to stock picking in an under-researched market
- Japanese equities look attractively valued, as does the currency
Bear
- Gearing can enhance losses on the downside
- Strong style bias and active approach may lead to periods of underperformance
- Investors take single-country political, currency and economic risk