Not just big in Japan: Investing in the next generation of Japanese ideasContributor Nicholas Weindling
Playing host to the Rugby World Cup and with preparations for the 2020 Olympics well underway, the eyes of the world are on Japan. While the direct return on investment from hosting such large scale sporting events is arguable, the halo effect for the host nation can provide a real economic boost.
And while the surge of tourists attending these two events will be temporary, the growing influx of people taking advantage of Japan opening its doors to the rest of the world is a truly structural phenomenon: between 2012 and 2018 annual visitors to the country increased from 8 million to 31 million (in 2020 the Olympics could help that figure top 40 million1). Whether so-called Abenomics are wholly responsible for this transformation, its significance is undeniable and offers real opportunities for the informed investor.
From hotels and haute cuisine to cosmetics and haute couture
While the first phase of growth in tourism offered strong opportunities for investors in the travel and hospitality sectors, we see the focus now changing. It’s certainly true that Tokyo is enjoying a luxury hotel boom ahead of the Olympics2, while visitors to the Japanese capital can dine in more Michelin-starred restaurants than they would in Paris3. But perhaps more importantly, tourists are returning not only with full bellies and suitcases full of souvenirs but with burgeoning loyalties for Japanese brands.
It’s not too outlandish to suggest that Japan is on the cusp of experiencing something of a ‘Cool Britannia’ moment. Aside from the growing global ubiquity of Japanese food, for visitors from elsewhere in Asia, Japan is seen as being high-class, aspirational and, yes, cool. For these increasingly discerning consumers, Japan is a byword for safety, quality and reliability. That delivers rising names like cosmetic company Shiseido and clothes manufacturer Fast Retailing (owner of the widely popular Uniqlo brand) a potentially huge and as-yet largely untapped market.
It’s not too outlandish to suggest that Japan is on the cusp of experiencing something of a ‘Cool Britannia’ moment
Shiseido specialises in functional skincare products like moisturising lotions and anti-wrinkle creams. This focus is well-aligned with regional spending habits: while about 30% of European and American consumers’ cosmetics budgets go on skincare, in Japan that figure is around 70%. Meanwhile, although spending on cosmetics per individual is still small in China, on average 80% of total cosmetics budgets there go on skincare, and overall spending on cosmetics is increasing by 10% per annum. A common place to see Chinese visitors to Japan is in the drug store, buying medicine, baby products and cosmetics. Having taken these products home with them, they will often go online to seek out their favoured brand when their supply runs out.
Fast Retailing’s Uniqlo brand may well be familiar to you, given that as of February this year there were 2,136 Uniqlo stores in 22 markets, with three more opening every week 4 (the brand’s latest new market is India, where it has just opened its first store5). Uniqlo is perhaps best known for its Heattech inner wear, of which the firm has sold well over 1 billion items, equivalent to eight times the total Japanese population. In June 2019, Uniqlo founder Tadashi Yanai was ranked as the 31st richest person in the world by Forbes, with an estimated net worth of US$29.4 billion6 . The firm continues to aim high, with stated ambitions to become the world’s number one brand7.
Niche dominance in tech
Consumer brands like Shiseido and Uniqlo may be the most visible of the next generation of Japanese companies but they are far from being the only rising stars in the Japanese investment universe. Other Japanese firms are market leaders in less glamorous but highly profitable and growing sectors. For example, M3 is already the number one medical portal for healthcare professionals in the UK as well as Japan, with ambitions to expand both in terms of geographic reach and range of services. Similarly, Keyence is a global leader in the manufacture of sensors for factory automation. With little in the way of meaningful competitors and enjoying significant profit margins, the firm is perfectly placed to be the primary beneficiary of the global trend for automated manufacturing.
Meanwhile, some highly investible Japanese brands are hiding in plain sight. Anyone who has changed jobs in the last few years is likely to be aware of online job search engine Indeed, while they may also be aware of its sister ratings site Glassdoor. As well as being the number one job site in Japan and the UK, Indeed is number one in the US, France and Germany. However, most will have been unaware that Indeed’s parent company Recruit is a Japanese-owned business. With the online world very much a winner-takes-all scenario - think of Google, Uber or Airbnb - Indeed’s position is already close to being unassailable, while monetisation of this asset, which receives over 200 million visits per month, remains at an early stage.
The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
Surprising room for growth
In the West we tend to think of Japan as a technologically advanced society, and there are certainly sectors like those mentioned above in which Japan leads the world. Yet it is actually the fact that Japan is behind the curve in certain areas such as internet shopping and cashless transactions which are other elements of the equation from an investment perspective. As it catches up with Europe and the US in these structural trends, Japanese firms are well-positioned to take advantage.
At the same time, Abenomics have helped create a much friendlier environment for investors: while five years ago we would have deliberately shied away from talking about dividend yield in relation to Japanese companies, changes to regulations around corporate governance have led to record buy backs and dividends.
The importance of selection
With untapped potential domestically and regionally and a strong foothold in important new sectors globally, the right Japanese equities offer huge potential for the long-term investor. However, this new landscape requires a fresh approach. Well-known names like Sony, Panasonic, Toyota, Honda and Nissan still make up a large percentage of the Japanese stock market, but their vulnerability to both cyclical and structural pressures makes them less attractive than in the past. Investors keen to capitalise on the opportunity offered by the new generation of Japanese big hitters should consider reducing their exposure to traditional manufacturing by moving away from blanket vehicles such as ETFs, focusing instead on those companies best positioned to make the most of emerging sectors and trends.
1 Source: The Wall Street Journal, as at 10th September 2019
2 Source: The Wall Street Journal, as at 10th September 2019
3 Source: CNN Travel, as at 28th November 2018
4 Source: South China Morning Post, as at 22nd September 2019
5 Source: India Retailing, as at 16th September 2019
6 Source: South China Morning Post, as at 22nd September 2019
7 Source: South China Morning Post, as at 22nd September 2019
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