Faced with market volatility, institutional investors often turn their backs on the most obvious long-term winners. Instead, they stick to perceived safe havens with positive short-term earnings outlooks, or more stable segments of the market that do not necessarily offer high earnings expectations.
In our opinion, this creates opportunities for long-term investors like us.
We always ensure to take a step back and identify attractive stocks in the context of long-term structural trends. Rising purchasing power in emerging countries is one of the trends generating investment ideas and the growth of tourism in Japan is but one of the outcomes.
When we walk through Tokyo’s Ginza shopping district, we often overhear conversations in a wide variety of languages. This makes us pause to consider how significantly the city has changed over the past few years – the transformation that Tokyo is undergoing is remarkable. Inbound tourists reached almost 20 million in 2015 (19.7 million visitors) – the target the Japanese government had set for 2020. The numbers have in fact more than tripled from a mere 6.2 million in 2011. Chinese tourists are driving the surge, but significant inflows are also coming from other Asian countries where visa requirements have been relaxed.
With the rising Japanese yen, the media has recently highlighted a temporary slowdown in tourism spending, but we are not concerned – in our view, this is only the beginning of Japan’s tourism boom. Currently, only 6% of the Chinese population is said to hold passports and we expect this number to increase. Japan’s 20 million visitors in 2015 represent merely a quarter of France’s tourist numbers (#1 tourist destination globally). Tourist spending in Japan contributed only 0.6% of GDP in 2015, compared with 1.9% in France. which suggests the potential for Japan’s economy if visitor numbers continue to increase. With the conclusion of Rio, all eyes are now falling on Tokyo in anticipation of the 2020 Olympics, further fueling travel interest.
The Japanese government is actively supporting this. After a landslide victory in the upper house election in July, Prime Minister Shinzo Abe announced 10.7 trillion yen (USD 104 billion) in new fiscal stimulus directly targeting infrastructure, such as expanding ports for cruise ships and upgrading international airport facilities. The government has also doubled the arrivals target for 2020 to 40 million, and 60 million by 2030.
Following the July election, approval ratings for Abe’s newly formed cabinet have ticked up and he is now said to be eyeing another term as head of the ruling Liberal Democratic Party. This would effectively extend his tenure as Prime Minister beyond the end of his second three-year term in September 2018 (current party rules only allow the head of the party to sit for two consecutive terms, for a total of six years). Strong and consistent leadership will help ensure political stability, which in turn should support the ambitious inbound tourism targets.
Any fluctuations in stocks caused by short-term earnings volatility or changes in investor expectations create opportunities – they might be caused by a temporary movement in exchange rates, inventory adjustments, unusual weather, or investor appetite driven by dynamics in capital markets. We believe many of these are less relevant since, in the end, it is sustainable earnings growth that determines stock prices in the long term.
Our goal is simple: we aim to look beyond short-term trends to capture capital gains for our clients from what we believe are the most obvious long-term winners.
Yuki Watanabe is senior fund manager of Nikko Asset Management’s Japan Focus Fund, and Junichi Takayama (pictured) is investment director.