Focus on Asia – Japan, Land of the Rising Equities?

This week Investment Europe is focus on how different equities managers approach Japan’s markets. Today we speak with the Japanese equities team at Invesco.

Chief portfolio manager at Invesco Japan, Kunihiko Sugio says Japan is making “rapid progress” since the earthquake and tsunami that “temporarily crippled its economy.

“Economic momentum is picking up, inflation expectations are rising amid the Bank of Japan’s announcement of more quantitative easing, and companies are reforming.

“While the strong yen and the European crisis continue to pose challenges, Invesco’s investment professionals are quite positive about the long-term prospects for Japanese equities,” Sugio says.

“Japanese companies are becoming well-positioned to achieve a higher return on equity even with only a small increase in revenues,” he says.

On the macro front, Invesco believes the Japanese economy could grow
by 2% or more this year – more than than many other developed nations.

Investment Europe then put some questions to Andy Tidby (pictured), product manager for Japanese equities at Invesco.

What is total AuM you run in Japan equities?
As at 31 March 2012 the AUM of the Henley Japanese Equity Team was €1.2bn.

Is the product pan-Japan, or more focused on mid-caps or small-caps, for example?
We can invest across market cap sizes.

Could you describe your focus, and reasons behind taking this method – e.g. value, growth, momentum, GARP?
Our investment approach is centred on valuation. We believe that it is valuation that determines whether or not a company represents a good investment over a medium term timeframe and in this context we seek to exploit short-term market inefficiencies to invest in companies that we believe are undervalued relative to their earnings potential.

We use rigorous fundamental research, including frequent visits to Japan, to identify potential stocks for our funds and we invest on the basis of where we believe there to be absolute upside in a company’s share price.

Is there something inherent in the way Japan’s markets work that make this method more appropriate, or is it generally an approach your house favours broadly?
A focus on valuation is something that applies across Invesco Perpetual as a whole. A value approach has historically worked well in Japan but this is not the rationale for our investment philosophy.

Where are you finding most opportunities in Japan at present, whether in sectors, stocks specific or market cap segment?
We believe that in current market conditions there are a number of technology stocks in Japan that are attractively valued. Many of these companies experienced share price weakness in the second half of last year due to a widespread inventory correction caused by uncertainty surrounding end-demand for electronic goods.

As inventories were run down and new orders slowed, share prices fell back. We believed this would be a relatively short term issue and that demand would recover, so we reduced some of our financial positions to add to this area.

And the financial sector?

We remain overweight in financial sectors, namely in banks, brokers and real estate as again we see tangible value in specific companies within these areas. Profitability has recovered strongly among the banks, loan demand although still at low levels, is improving and the large banks that we hold are increasing their exposure to overseas markets, where they are able to selectively benefit from asset sales by European banks that are seeking to improve their balance sheets.

Why should investors feel Japan’s markets will not disappoint, if indeed this is the stereotype of the markets they have in their minds at present?
In our view Japanese equities as a whole are cheap, with even more compelling value at a company specific level.

Despite seeing significant improvement in terms of the economy and in corporate profits since the collapse of Lehman Brothers, Japanese stocks, as represented by the Topix index, are only fractionally above the lows hit back in the early part of 2009. This has also seen Japanese stocks underperform heavily relative to many other developed world markets, which we believe is unjustified on fundamental grounds.

Sentiment towards the Japanese equity market has suffered from the global macro-economic concerns that currently prevail, but in our view Japanese stocks have already discounted a lot of bad news, and so could be less vulnerable to downside risks compared to other markets, while also offering what we believe is significant upside should the global economy perform better than markets currently anticipate.

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