With teams from six continents currently competing for the Rugby World Cup in Japan, and with the Olympic Games being hosted there next year, Japan equity managers are looking through the universe of potential holdings to identify investment opportunities tied up in sports.
For investors, these events are having, and are likely to have, significant impact on the performance of companies across a range of sectors, according to comments from Katsunori Ogawa, chief portfolio manager at Sumitomo Mitsui Trust Asset Management (pictured).
Also impacting Japanese companies is the ongoing US-China trade dispute, which is being felt across balance sheets. In an email interview, Ogawa spoke to InvestmentEurope about his outlook for the asset class.
Q. How might the Rugby World Cup this year and Olympic Games next year impact the sorts of companies and sectors you look at in your strategy?
"Both the 2019 Rugby World Cup, which is currently ongoing (20 September - 2 November), and the 2020 Tokyo Olympic Games are set to have a significant impact on the Japanese economy, industries and corporations through three main channels. First, we forecast these events and rising inbound tourism to bolster demand in areas such as public transport (ie, rail and airlines), hotels and restaurants. For example, during the Rugby World Cup alone, we expect 600,000 tourist arrivals. This should cause the number of foreign visitors to Japan to rise by 2% YoY in 2019 (31.19 million people visited Japan in 2018.) Also, as the Rugby World Cup is being played in 12 cities across Japan, local economies will also benefit from strong demand for transportation, lodging, food and beverages. In addition, domestic consumption by Japanese consumers is forecast to surge for durable consumer goods such as 4K TVs.
"Second, as more tourists visit Japan to experience its culture, goods and services, and appreciate the quality and high level of service, we believe they will become repeat buyers or users of Japanese products after returning to their home countries, and are also more likely to visit Japan again. According to a survey conducted by the Japan Tourism Agency, consumption by inbound tourists amounted to a record-breaking ¥1.218 trillion (+13% YoY) in the April-June 2019 quarter with shopping being the largest component at 36.6% (+1.7% points YoY). Led by consumables including cosmetics, duty-free sales as a proportion of total sales at nationwide department stores have been strong, with Chinese tourists being the main buyers of high quality Japanese cosmetics. Additionally, we forecast that these sporting events will contribute to an increase in demand from Japanese people to join sport schools and clubs. For example, many in Japan have joined tennis schools after being inspired by Naomi Osaka's first grand slam title at the US Open last year. A similar phenomenon is expected to be seen for badminton or table tennis, where Japan has a good chance of winning medals at the Tokyo Olympic Games. Membership at athletic gyms, sports clubs and yoga classes has been growing, and jogging and other forms of light exercise have become popular. We expect this to have an effect on the demand of related goods and services.
"Last, these sporting events are an opportunity for Japan to promote its infrastructure. Japan's superior transportation system, cashless systems - which facilitate seamless payments for foreign tourists - and the use of multilingual display signs, exemplify Japan's reliable infrastructure. What's more, 5G technology, autonomous cars which will be used at the Tokyo Olympic Games facilities, and additional applications using the latest technology, will be on full display during the Rugby World Cup and Olympic Games and will serve to strengthen the image of Japan as a cutting-edge nation leading to more inbound tourists, creating a virtuous cycle.
"The Japanese government has announced a goal of 40 million inbound tourists for 2020 and 60 million for 2030. Should the current spat between Japan and South Korea continue, the 40 million target for 2020 may not be achieved. However, should relations between the two nations improve, the number is likely to hit the mark, and tourism will become a major pillar of Japan's growth strategy.
"Nonetheless, we believe that the current spotlight on Japan is not a one-off boom spurred by ongoing and upcoming sporting events, but rather part of a bigger trend which has seen increased interest and opportunities for investors."
Q. Are there any particular impacts felt by the companies and sectors you look at from the ongoing US/China trade spat?
"The intensification of the US-China trade dispute has led to uncertainty in the markets and the global economy. This has in turn led to the postponement of decision making by corporate management of major companies in Japan, and had a negative impact on capital expenditures and related sectors. Most notably, factory automation and semiconductor sectors have been hit hard as clients have pulled back on their CapEx spending. As such, we will undoubtedly begin to see the impact on their earnings."
"However, while it is difficult to predict the outcome of future US-China negotiations, areas such as electronics and machine tools appear to have hit a short term bottom and look to be headed for a cyclical recovery. For example, it has been 17 months since machine tool orders peaked in March 2018 and the average peak to trough period has been 18 months. In fact, the year-on-year rate of change hit a bottom in June 2019 (-38% YoY) but has been improving since then. We believe orders will hit bottom soon, and as they recover, the stock market should begin to discount higher earnings."
Q. What sorts of cash cushions are the companies you are looking at sitting on, what are their forward looking sales expectations, and what do such factors tell you about current valuations - are there good opportunities available that seem cheap against estimated intrinsic value?
"With tariffs by the US and China now in full effect and the global economy feeling their impact, there are only a few Japanese companies exposed to both countries that have announced optimistic sales forecasts."
"On the other hand, global monetary policy has been accommodative and we expect further stimulative measures by the US, China and Europe. Japanese stocks continue to trade at historically low valuations (eg, the current average PE ratio of 12x) and earnings growth in 2020 should be in the double-digits. There has also been increased awareness for corporate governance in Japan which has led to a more efficient capital use, including share buybacks and other forms of shareholder returns. In fact, 2019 has seen the largest amount of share buybacks in Japanese history, which reflects confidence by management in future earnings, low (attractive) valuations, and an abundance of cash. While the average ROE of Japanese companies still lags behind their US and European counterparts, we believe that the improvement in capital efficiency has yet to be fully reflected in their share valuations. Undoubtedly, current levels offer a buying opportunity for Japanese equities."
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