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May 2020 / INVESTMENT INSIGHTS

Japan Equity Outlook: Opportunities Amid Volatility

Despite a large sell off, Japan appears to have fared better than developed markets during the coronavirus epidemic

Key Insights

  • Despite a large sell off, Japan appears to have fared better than developed markets during the coronavirus epidemic, with fewer cases and economic disruption.
  • Corporate Japan is cash rich, which is providing the local market with some respite as investors are generally concerned about balance sheet risk.
  • We anticipate that investment opportunities will be provided by an acceleration in the trends that we are already seeing, such as the shift from offline to online in the form of e-commerce and factory automation.


Japanese equities sold off aggressively over the first quarter of 2020, along with global markets, as the coronavirus pandemic spread. Japan fared better than developed markets, however, and appears to have avoided the worst of the coronavirus so far, with fewer cases and disruption.
 

Swift and Decisive Policy Stimulus

The focus now is on the depth of the economic recession we are facing and the duration of the social restrictions to control the coronavirus. Encouragingly, policy stimulus has been swift and decisive. The Bank of Japan announced it would expand monetary stimulus with quantitative easing measures, including doubling the annual target of exchange-traded fund purchases, expanding commercial paper and real estate investment trust buying programs, and establishing a new lending facility.

The government plans a spending package equivalent to 15% of GDP to help cope with the fallout from the coronavirus, while it was debating much larger stimulus efforts near the end of the quarter. These measures should help soften the recession and buy time for companies and consumers facing near-term cash flow pressures. Corporate Japan is cash rich, which is providing the local market with some respite as investors are generally concerned about balance sheet risk.

Despite a large sell off, Japan appears to have fared better than developed markets during the coronavirus epidemic, with fewer cases and economic disruption.


Transforming Business Practices

Against this uncertain backdrop, an increasing number of Japanese companies are defying skeptics by transforming business practices and governance standards. We believe this can help corporate profit growth and generate improving shareholder returns. The volume of shareholder buybacks is increasing while merger and acquisition activity also shows promise.


Opportunities Provided by Shift from Offline to Online

Japan is more exposed to the global economic cycle than many markets, and will likely experience knock-on volatility in the near future. However, there is also significant potential upside when the global epidemic stops getting worse. We anticipate that long-term investment opportunities will be provided by an acceleration in the trends that we are already seeing, such as the shift from offline to online in the form of e-commerce and factory automation. We also see opportunities in companies with exposure to China, where the economy appears to be re-opening.

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Volatility and Recession
202005-1177460
RELATED FUND
SICAV
Class Q EUR
ISIN LU1127970256
Diversified all-cap portfolio offering exposure to typically 60-80 of our best growth ideas in Japan. We seek to buy durable companies where we believe we have an insight into the potential for rising shareholder value typically coming from structural changes or fundamental transformation.
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3YR Return
(Annualised)
11.75%
Fund Size
(EUR)
€1.9b

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