World Markets Review
Portfolio manager Gerald Du Manoir has been investing in Japan for more than 20 years. Here he discusses the recent market changes that have altered his approach to whether — and where — to invest.
Matt Miller: Let’s talk a little bit more about Japan, since we’ve covered a little bit of Europe and the U.S. How do you feel about the outlook longer term? What’s the right way to think about Japan?
Gerald Du Manoir: When I started managing money in international equities, there was a great tradition. You were either invested in Japan or you were out of Japan. It was very much a decision that was driven by the attractiveness of the cyclicality of Japan as an entire market.
Things have dramatically changed, and they’ve changed for two reasons. One is because after the better part of 20 years of very poor demographics, a really challenging price situation — not just inflation or deflation, but the whole infrastructure of price formation being very challenged, a compression of price, if you will, in the system — Japan has had to reinvent itself. And companies have really bifurcated between companies that get it and reinvented themselves — both from an intellectual property or research-and-development point of view — and companies that don’t and have just really dwindled into remaining just a local operator.
And so we’ve actually found a lot of attractive companies in Japan. They tend to really fall, as I said, in a couple of categories. One [is] global franchises that own a technology, for example. So that could be found in automation. That can be found in some of the pharmaceutical companies. That can be found in the gaming companies, electronic gaming companies.
But it can also be found in discount retail. So if you’re the average consumer in Japan, now you’re so used to that price deflation that you’re constantly thinking about something cheaper tomorrow. Often we refer to [that in] the U.S. as “everyday low price.”
So you find very big discount retailers. Whether it be in furniture, in electronics, these kind of companies do extremely well. Internet — so everything related to electronic platform with very good logistics or access — has been booming. So companies like SoftBank are good examples of that. And then lastly, I think it’s important to understand that in Japan there is such a need for social harmonization that medical providers and medical care systems have been very attractive areas.
Now, what does that leave out? That leaves out some of the financial companies, which need the inflation to come back. That leaves out some of the more traditional retailers and traditional department stores. That also leaves out some of the real estate conglomerates that exist. And in that part, I think you need so much macro help that — for now at least — we remain a little bit skeptical.
Matt Miller: Are you finding opportunities in firms that are based in Japan but are really global? Or is it also companies where their revenues and profits are basically in Japan? Is it both?
Gerald Du Manoir: I think the attractiveness of Japanese companies [is] really idiosyncratic. So it’s almost case by case.
Matt Miller: Right.
Gerald Du Manoir: Even more so than a lot of other places in the world, it’s really important to look at each of the companies. There used to be a great series of conglomerates in Japan that were global companies selling to everybody. But those really haven’t evolved that well — the Mitsubishi Heavys, the IHIs as examples.
But if you actually look at the companies that have been able to increase their R&D and increase their intellectual property, they’ve really become global players. So Keihin, Murata, Nidec — all these are very traditional Japanese companies that have become global, not just in their mentality and the way they’re run, but in the kind of products they deliver to the end markets.
China has been a big destination of Japanese know-how, but it’s also gone into technologies in Taiwan, in the U.S.: semiconductor technology, auto technology — everything that has to do with very high intellectual property components. And those kinds of companies are actually trading at a premium and trading at a valuation that is much higher than the Japanese market. So the market has recognized the quality and the value of these companies.
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