Tokio Marine Asset Management examines how the Chinese economy and Japanese corporates are moving on to their next phases of development and looks at ways to exploit disparities between market perception and reality.
Investors globally are concerned about the recent volatility in China and we wish to offer our view as a bottom-up local manager.
We have been asked by many investors about the impact of any potential deterioration in the Chinese economy on the Japanese stock market. Most people still believe that Japanese corporate performance strongly depends on Chinese industrial developments.
It may still be too early to draw a conclusion on this, but from our viewpoint, we don't believe that Japanese corporate fundamentals are as heavily influenced by events in China as most people fear.
For example, the number of Chinese visitors to Japan in August was over twice as high YOY, with Japanese corporates producing cosmetics, clothing and daily consumables achieving double-digit growth.
Additionally, in the auto sector, while sales fell for European and Korean carmakers in China for the first half of the year until August, the majority of Japanese makers managed to maintain positive growth.
If you consider the correlation between Japanese and Chinese stock markets up until now however, you may think that the situation would be much worse for Japanese corporates. So, why is it not?
Growing middle income class in Asia
We believe that one major reason for this is that China itself is moving on to the next stage of its development. Just like our brief that Japan is switching from a deflationary state to an inflationary one, China is switching from a high growth state to a more mature one, and there's a strong possibility that this is helping Japanese corporates.
In our view, China (excluding its large cities) along with other ASEAN countries is much like Japan used to be in the 1970s in terms of its development, as shown in the chart below.
Back then in Japan, there were two noticeable trends that became more apparent. The first was the slowing down of economic growth, and the second was the maturing of people's living standards (i.e. a growing middle income class).
While the sudden rise in the middle income class in Asia has been known for some time, we believe that the market may be underestimating the resilience of the demand of these people.
Despite the drastic fall in the Chinese stock market over the summer, the number of inbound tourists is still firm and this, we believe, is rooted in rising living standards.
Another important aspect of the increasing affluence in China is the impact it is having on consumer tastes; people are willing to pay a premium for better quality items and daily goods and services.
This, we believe, is giving rise to a new breed of exporters from Japan. While most would associate Japanese exporters with auto makers and consumer electronics companies, this new type of company is from traditionally domestic sectors, such as confectionary, foodstuffs and clothing.
This is where we believe that certain Japanese corporates with a firm foothold in China have a strong advantage.
Shift back to Japanese production
The approach of Japanese corporates with close business ties to China is also changing. We are now seeing manufacturers in particular shifting away from a 'local production for local consumption' model to one that involves amalgamating production facilities back in Japan.
The reason for this is two-fold: first, corporate managements are beginning to realise that they require the production flexibility to cope with fluctuations in demand across regions globally and secondly, they also realising that this is only possible with Japanese sites.
Domestic reinvestment is starting to outpace overseas investment (see chart below), highlighting this shift back towards Japanese production. Previously, Japanese corporates rushed into building factories in China in anticipation of a huge upsurge in demand but we feel that this phase is now over and that corporates are entering a new phase of readjustment. Certain companies in Japan look set to benefit from this revival in domestic CAPEX.
Possible buying opportunities
While the market consensus may be that the potential investment-led crunch in China will continue to weaken stock markets as a whole, we believe that this presents an ideal opportunity to buy certain stocks in Japan that will take advantage of the changes in both the Chinese economy and Japanese corporate behaviour discussed above.
As a locally based stock selector, we feel ideally placed to help clients pick these winning stocks in Japan.
Tokio Marine Asset Management is a Japan/Asia equity specialist with 30 years' market experience and approx. $48bn AUM (as at September 2015). The Focus strategy is a concentrated portfolio of 20-40 high conviction stocks using the best investment ideas of today. For more information about the strategy, please contact Business Development at Tokio Marine Asset Management (London) Ltd.
Email: [email protected]
Tel.: +44 (0)20 7280 8580
Website: www.tokiomarineam.co.uk
Disclaimer
Important Information: This document is intended to be for indicative purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This information is for professional investors only and is not suitable for retail investors. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Tokio Marine Asset Management does not warrant its accuracy. No responsibility can be accepted for errors of fact or opinion. Issued by Tokio Marine Asset Management (London) Limited, 20 Fenchurch Street, London, EC3M 3BY, UK. which is authorised and regulated by the Financial Conduct Authority. You may not copy, reproduce, recompile, decompile, disassemble, distribute, publish, display, modify, upload, transmit, or in any way exploit any part of the document.
